Taxation Republic of Ireland

Taxation Republic of Ireland Sample Paper 3 Questions and Suggested Solutions Updated for the Summer and Autumn 2015 Examinations Finance (No. 2) Act 2013

NOTES TO USERS ABOUT SAMPLE PAPERS Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see www.accountingtechniciansireland.ie) for a comprehensive list of examinable topics. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2014 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 2014. Sample Paper 3 Updated 2015 Examinations Page 2 of 20

INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY For candidates answering in accordance with the law and practice of the Republic of Ireland. In this examination paper the symbol may be understood and used by candidates in the Republic of Ireland to indicate the Euro. Candidates should answer the paper in accordance with the appropriate provisions up to and including the Finance Act 2014. The provisions of the Finance Act 2015 should be ignored. Allowances and rates of taxation, to be used by candidates, are set out in a separate booklet supplied with the examination paper. Answer ALL THREE questions from Section A. Answer ANY TWO of the three questions from Section B. If more than TWO questions are answered in section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labeled as appropriate e.g. s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. The following inserts are enclosed with the paper: Tax Reference Material Multiple choice Answer Sheet (Question 1)

SECTION A Answer ALL THREE questions in this section QUESTION 1 The following multiple choice question consists of TEN parts, each of which is followed by FOUR possible answers. There is ONLY ONE right answer in each part. Requirement Indicate the right answer to each of the following TEN parts. N.B. Each part carries 2 marks Total 20 Marks Candidates should answer this question by ticking the appropriate boxes on the special green answer sheet, which is supplied with the examination paper. [1] Sheila and Sam are married. Sheila reached the age of 65 on the 1 st July 2014 while Sam will not be 65 until the 1 st December 2015. For the 2014 tax year the age tax credit due to Sheila and Sam under joint assessment is:- (a) 245 (b) 325 (c) 400 (d) 490 [2] The due date for the submission of the 2014 Income Tax return is:- (a) 30 th September 2015 (b) 31 st October 2015 (c) 31 st December 2015 (d) None of the above [3] Sarah is married to Barry and they are both self employed. Sarah s assessable Case I income for 2014 is 46,500 while Barry s amounts to 21,000. If Sarah and Barry are jointly assessed for income tax purposes the 20% rate band applicable for 2014 is:- (a) 32,800 (b) 41,800 (c) 62,800 (d) 65,600 [4] After 31 st December each year an employer is required to complete all the year end documentation relating to the tax year just ended and give each employee a form:- (a) (b) (c) (d) P45 P46 P50 P60 Sample Paper 3 Updated 2015 Examinations Page 4 of 20

QUESTION 1 (Cont d.) [5] Jane earned 80,000 in the first 50 weeks of the 2014 tax year. In week 51 of the same year she earned 800. If Class A PRSI is applicable to Jane the total amount of PRSI payable to the Revenue for week 51 is:- (a) Nil (b) 26.92 (c) 32.00 (d) 118.00 [6] Samanta commenced employment with BTT Ltd. in week 23 of the 2014 tax year. Her previous employment ceased in week 4 of the 2014 tax year. Details extracted from the form P45 supplied by her previous employer shows weekly tax credits of 61.80 and weekly cut off point of 618.20. If Samanta earned 740 in week 23 of the 2014 tax year the PAYE deducted from her pay for that week would amount to:- (a) 173.58 (b) 148.00 (c) 111.78 (d) 303.40 [7] Simon commenced business as a builder s providers on the 1 st January 2014. In the year ended 31 st December, 2014 his turnover including VAT at 23% amounted to 460,000 and his closing receivables (debtors) were 26,200. If Simon accounts for VAT on a cash receipts basis the amount of VAT due on outputs for the year ended 31 st December, 2014 would amount to:- (a) 54,714 (b) 81,117 (c) 86,016 (d) 99,774 [8] Patrick, a VAT registered builder, has been asked to price the installation of a new oil fired cooker. The material to be used on the job will cost 4,000 excluding VAT at 23%. If Patrick charges 11,000 VAT inclusive to supply and install the cooker, the VAT included in the price charged will amount to:- (a) 1,308 (b) 1,485 (c) 2,057 (d) 2,530 [9] Ciara opened a restaurant in January 2014. Initially the turnover was expected to be 12,000 per month but in April 2014 Ciara was surprised to find that the turnover for the three months to the end of March fell short of expectations and amounted to 20,000. Ciara is confident that turnover will rise over the coming months and that her original estimate of turnover for the year will be proved right. In these circumstances Ciara is obliged to register for VAT with effect from:- (a) 1 st January 2014 (b) 1 st April 2014 (c) 1 st July 2014 (d) 1 st September 2014 [10] The cash receipts basis of accounting for VAT may be used by a person whose annual turnover is less than:- (a) 350,000 (b) 500,000 (c) 635,000 (d) None of the above Sample Paper 3 Updated 2015 Examinations Page 5 of 20

QUESTION 2 Peter has been in business for a number of years and is an electrical contractor. He has prepared accounts for the year ended 31 st December 2014 and these are reproduced below: Accounts for the year ended 31 st December 2014 Notes Sales... 595,456 Cost of sales... 441,690 Gross Profit... 153,766 Add Dividends received... 450 Interest earned... 230 Less Employee costs... (1) 68,358 Administrative costs... (2) 1,956 Bad debts... (3) 2,350 Repairs... (4) 7,210 Motor expenses... (5) 16,790 Advertising and promotion... (6) 5,100 Legal costs... (7) 1,880 Interest... (8) 985 Sundry expenses... (9) 6,300 Office light and heat... 1,200 Insurance... (10) 2,080 680 154,446 114,209 Net profit/(loss) 40,237 NOTES (1) Employee costs Drawings by Peter... 8,250 Wages paid to Peter s wife who is a book keeper for the business... 16,650 Staff wages... 37,498 Bonus to employees... 1,800 Christmas party for employees... 560 Preliminary tax payment for Peter... 3,600 68,358 The bonus to employees is the net amount after deduction of PAYE/PRSI and it was paid at the end of January 2015. The PAYE/PRSI deducted together with employers PRSI amounting to 1,250 in total was paid by Peter to the Revenue in February 2015 and is not included in the figures above. Sample Paper 3 Updated 2015 Examinations Page 6 of 20

QUESTION 2 (Cont d.) (2) Administrative costs Telephone... 1,340 Trade magazines... 256 Stationery... 360 1,956 Peter estimates that 30% of the telephone calls are his private calls. The cost of stationery includes 80 in respect of the purchase and postage of Christmas cards to customers. (3) Bad debts Bad debts written off... 2,500 Reduction in general bad debt provision... (800) Increase in specific bad debt provision... 560 Solicitor s letter to debtor regarding bad debts... 90 2,350 (4) Repairs Purchase of new telephone system... 1,560 Constructing new storage facility... 3,750 Repairs to office windows... 1,550 Repairs to office equipment... 350 7,210 (5) Motor expenses Parking fines... 230 Mileage paid to employees working away from base in accordance with civil service rates... 850 Van running costs... 3,850 Van depreciation... 3,200 Car expenses... 4,560 Car depreciation... 4,100 16,790 One of the employees has the use of the van for private purposes. It is estimated that his private mileage represents approximately 10% of the total miles travelled. The car is used by Peter and originally cost 30,000 when purchased new in 2009. Peter s private mileage amounts to 25% of the total miles travelled. (6) Advertising and promotion Gifts to customers at Christmas... 3,200 Diaries... 600 Radio advertising... 1,100 Advertising in local paper regarding sale of boat... 200 5,100 The Christmas gifts to customers were given to the top ten customers and the cost ranged from 200 to 600 each. Peter is convinced these gifts will help him to get repeat business from these customers. The diaries cost 8 each and contain details of Peter s business and his contact details. Peter considers this as a cost of advertising. Sample Paper 3 Updated 2015 Examinations Page 7 of 20

QUESTION 2 (Cont d.) (7) Legal costs Planning application for extension to business premises... 850 Unfair dismissal claim by employee... 320 Health and safety statement... 560 Contracts for employees... 150 1,880 (8) Interest Business bank overdraft... 150 Term loan for office extension... 560 Interest charged by suppliers... 75 Late payment of PAYE/PRSI/USC... 200 985 (9) Sundry expenses Goods taken by Peter for his own use... 900 Accountancy fees... 5,400 6,300 20% of the accountancy fees refer to the production of figures submitted to the bank as part of Peter s application for a home loan mortgage. (10) Insurance The total bills for the year amounted to 2,600. Peter deducted 20% from the bills on the basis that this amount relates to insurance for non business items. Requirement Compute Peter s Schedule D, Case I tax adjusted profits for the year ended 31 st December 2014. Total 20 Marks Sample Paper 3 Updated 2015 Examinations Page 8 of 20

QUESTION 3 Terry owns a paint shop and he has asked you to prepare the VAT return for the November/December 2014 period. You have extracted the following details from the records of the business: Cash Book Terry supplies paint to cash and credit customers. Total receipts are recorded in the cash book and are analysed as follows: Months Credit Customers Cash Sales Total Receipts (Debtors) November/December... 74,950 80,720 155,670 Terry informs you that wages and sundry expenses are paid in cash and the balance is lodged to the business bank account. Details for the relevant months are as follows: November/December Wages... 9,150 Sundry Expenses... 1,760 Bank Lodgments... 144,760 Total Receipts 155,670 On checking these records you discover the following: A number of credit customers lodged money direct to Terry s bank account by electronic transfer. These lodgments totaled 10,500 in November/December and were not recorded in the cash book. Following discussions with Terry you discover that he has been taking 1,200 per month as a wage in cash. This cash was taken from cash sales and has not been recorded in the cash book. The lodgments per the cash book fail to agree with the lodgments per the bank statements. Terry tells you he made a mistake in December and omitted two lodgments totaling 6,500 from the cash book. The source of this cash is from cash sales. A cheque received from a cash customer on the 29 th November for 650 has shown up in the December bank statement as a bounced cheque. Terry tells you that the cheque was re-lodged in January and has cleared the bank. Sales Book Terry issues invoices to credit customers only and these are recorded in the sales book. Details for the two months are as follows: Months 23% VAT Total November/December... 75,900 17,457 93,357 Sample Paper 3 Updated 2015 Examinations Page 9 of 20

QUESTION 3 (Cont d.) Purchases Book Months Total Resale Not for Not for Not for VAT 23% Resale Resale Resale 23% 13.5% Zero % Nov/Dec 89,289 67,900 2,900 1,000 1,070 16,419 On examining the purchases book you discover: Imports of paint from the UK in November costing 8,000 have been omitted. A credit note was received from a supplier in December for 1,722 VAT inclusive at 23%. Terry did not know how to treat this item and has not recorded it in the purchases book. Requirement Calculate the VAT payable for the November/December 2014 period assuming: (a) the cash receipts basis applies (b) the invoice basis applies. Total 20 Marks Sample Paper 3 Updated 2015 Examinations Page 10 of 20

SECTION B Answer TWO of the three questions in section B QUESTION 4 You have been asked to manage the payroll system of RPB Ltd. Details regarding two employees of the company are as follows: Peter Mallon Peter has been employed by RPB Ltd. for a number of years. He is paid on a monthly basis and the following details are relevant for the month of October 2014. Salary per month... 2,000.00 Less: Contribution to pension fund per month... 200.00... 1,800.00 The following details are relevant for the 2014 tax year: Monthly cut off point... 2,880.00 Monthly tax credit... 312.50 Cumulative Basis applies In the nine months to September 2014 Peter earned 26,630 net of pension contributions amounting to 3,370. Fiona Walsh Fiona has been employed by RPB Ltd. for a number of years. She is paid on a monthly basis and the following details are relevant: Salary per month... 3,200.00 RPB Ltd. provided Fiona with a company car for the whole of the 2014 tax year. The assessable benefit in kind in respect of this car is 9,000 for the 2014 tax year. Fiona purchased a new house as her principal private residence during 2014. She had difficulty in financing the deposit payable on the house and on the 1 st January 2014 RPB Ltd. provided her with an interest free loan of 75,000. This loan was fully repaid by Fiona on the 28 th February 2015. The following details are relevant for the 2014 tax year: Monthly cut off point... 2,750.00 Monthly tax credit... 324.00 Month 1 basis applies The normal rates of USC apply. A month 1 basis also applies to the calculation of USC. Requirement (a) Compute Peter s take home pay for the month of October 2014. (b) Compute Fiona s take home pay for the month of October 2014. 10 Marks 10 Marks Total 20 Marks Sample Paper 3 Updated 2015 Examinations Page 11 of 20

QUESTION 5 Shirley and Patrick have been married for a number of years. Shirley is aged 39 while Patrick is aged 41 years. Details of their respective incomes and outgoings are as follows: Shirley Income Shirley is a self employed chiropodist for a number of years. Tax adjusted profits per accounts are as follows: Year ended 31 st January 2013... 38,000 Year ended 31 st January 2014... 43,000 Year ended 31 st January 2015... 56,000 In the year ended 31 st December 2014 Shirley earned deposit interest with BIG Bank Plc. of 147.50 net of deposit interest retention tax at 41%. In March 2014 Shirley received a dividend of 374.40 in respect of shares held in RTQ Plc. This dividend was in respect of the year ended 31 st December 2013. In March 2015 Shirley received a dividend from RTQ Plc. of 416.00 in respect of the year ended 31 st December 2014. Both dividends received were paid net of dividend withholding tax at 20%. In November 2014 Shirley purchased a house for letting. She had difficulty finding a suitable tenant and eventually on the 1 st March 2014 she let the premises for the first time at a rent of 1,200 per month. The rent is payable on the first day of each month. Outgoings Shirley contributes 1,000 per month to a Revenue approved pension fund. Patrick Income Patrick is an employee of AXY Ltd. His salary for the year ended 31 st December 2014 amounted to 30,000. In addition to the salary Patrick was paid a bonus based on sales achieved. In February 2014 he received a bonus for the year ended 31 st December 2013 of 1,350 and in February 2015 he received 1,500 for the year ended 31 st December 2014. PAYE deducted in 2014 amounted to 3,400. Sample Paper 3 Updated 2015 Examinations Page 12 of 20

QUESTION 5 (Cont d.) Patrick is obliged to use his own car while travelling on behalf of AXY Ltd. In 2014 he travelled a total of 60,000 kilometers and 20% of these were for private purposes. Patrick keeps a record of the motor expenses incurred by him and following discussions with his employer he received a payment in respect of business travel in accordance with Civil Service rates. The amount due was paid monthly and amounted to 13,440 in total for 2014. Patrick submitted a claim form to his employer each month detailing the customers he called to and the distance travelled each day for business purposes. Requirement Prepare income tax computations for 2014 in respect Shirley and Patrick on the basis that single assessment applies. Total 20 Marks N.B. For the purposes of answering this question ignore PRSI and the USC QUESTION 6 [a] Mary has been a self employed hairdresser for a number of years and on the 30 th November 2014 she retired from business. Accounts have been prepared and the tax adjusted profits are as follows: Year ended 31 May 2012... 29,280 Year ended 31 May 2013... 27,600 Year ended 31 May 2014... 30,600 Period to 30 November 2014 (cessation).. 11,100 Calculate the assessable Schedule D Case 1 income for Mary for the 2012, 2013 and 2014 tax years. 10 Marks (a) Write a brief note on the purpose and content of the Revenue form P45. 5 Marks (b) Write a brief note on the one parent family tax credit. 5 Marks Total 20 Marks Sample Paper 3 Updated 2015 Examinations Page 13 of 20

These solutions have been amended for the 2015 Examinations Solution to question 1 [1] D [2] B [3] C [4] D [5] D [6] C [7] B [8] A [9] A [10] D Sample Paper 3 Updated 2015 Examinations Page 14 of 20

Solution to question 2 Peter Net Profit 40,237 Add backs Drawings by Peter 8,250 Preliminary tax payment for Peter 3,600 PAYE/PRSI -1,250 Personal telephone calls 30% * 1,340 402 Reduction in general bad debts provision -800 Purchase of new telephone system 1,560 Constructing new storage facility 3,750 Parking fines 230 Van depreciation 3,200 Car depreciation 4,100 Car expenses - private 25% * 4,560 1,140 Customer gifts 3,200 Interest on loan for extension to office - Advertising in local paper regarding sale of boat 200 Planning application for extension to business premises 850 Late payment of PAYE/PRSI 200 Goods taken by Peter for his own use 900 Accountancy 5,400 * 20% 1,080 Insurance for non-business items - Deductions Interest earned 230 Dividends received 450 30,612 680 Schedule D Case I - tax adjusted profits 70,169 Sample Paper 3 Updated 2015 Examinations Page 15 of 20

Solution to question 3 Formatted: Font: 14 pt Formatted: Font: 11 pt Cash Receipts Basis Invoice Basis Cash received From Credit Customers 74,950 Invoices Issued 93,357 Cash sales 80,720 Cash sales 80,720 Electronic Transfer 10,500 Wages paid in cash 2,400 Wages paid in cash 2,400 Lodgments omitted 6,500 Lodgments omitted 6,500 Bounced Cheque -650 Bounced Cheque -650 Total receipts 174,420 Total 182,327 Vat on receipts 32,615 Vat 34,094 Imports 8,000*23% 1,840 Imports 8,000*23% 1,840 34,455 35,934 Purchases Book VAT 16,419 Purchases Book Imports 8,000*23% 1,840 Credit Note -322 17,937 17,937 Cash receipts basis VAT due 16,518 Invoice basis VAT due 17,997 Sample Paper 3 Updated 2015 Examinations Page 16 of 20

Solution to question 4 Peter Mallon Oct Jan to Sept Salary 2,000.00 Pension 200.00 1,800.00 Jan to Sep 26,630.00 28,430.00 26,630 Taxable (2,880*10) 28,430 20% 5,686.00 (2,880*9) 25,920 20% 5,184.00 Tax credits (312.50*10) 3,125.00 710 41% 291.10 Tax due 2,561.00 5,475.10 Paid 2,662.60 Tax Credit Refund due (101.60) 312.50 x 9 2,812.50 2,662.60 PRSI Class AL (EE) 550 Nil 0.00 USC 1,450 4% 58.00 836.33 x 9 2% 150.54 2,000 58.00 498.33 x 9 4% 179.40 17,988.06 7% 1,259.16 30,000 1,589.10 Pay 1800.00 Tax refund +101.60 836.33x10 2% 167.27 PRSI - 58.00 498.33x10 4% 199.33 USC -83.23 18,653.40 7% 1,305.73 Take Home 1,760.37 32,000 1,672.33 Paid 1,589.10 83.23 Fiona Walsh BIK Car Monthly 9,000 Salary 3,200.00 Per month 750 BIK Car 750.00 BIK Loan BIK Loan 250.00 75,000 4% 3,000 4,200.00 Per month 250 Taxable 2,750 20% 550.00 PRSI EE Class A1 1,450 41% 594.50 4,200 1,144.50 4,200 4% 168.00 Tax credits 324.00 Tax due 820.50 Take home Pay 3,200.00 USC Tax 820.50 836.33 2% 16.73 PRSI EE 168.00 498.33 4% 19.93 USC 237.23 2,865.34 7% 200.57 Net wages 1,974.27 4,200.00 237.23 Sample Paper 3 Updated 2015 Examinations Page 17 of 20

Solution to question 5 Formatted: Font: 14 pt Formatted: Font: 11 pt Income Tax Computation 2014 Shirley Case 1 31 Jan 2014 43,000 Less RAP 20% 8,600 34,400 Case IV 147.50 X 100/59 250 Sch F 374.40 X 100/80 468 Case V 1,200 10 mths 12,000 47,118 Tax 32,800 20% 6,560.00 250 41% 102.50 14,068 41% 5,767.88 47,218 12,430.38 Tax credits Single 1650.00 DIRT 102.50 DWT 93.60 1,846.10 Tax due 10,584.28 Paid 12,000 Patrick Sch E Salary 30,000 Bonus 2014 1,500 31,500 Tax 31,500 20% 6,300 Tax credits Single 1,650 PAYE 1,650 3,300 3,000 Paid PAYE 3,400 Refund due -400 Sample Paper 3 Updated 2015 Examinations Page 18 of 20

Solution to question 6 (a) Schedule D Case I income 2014 Final year of assessment: profits from proceeding 1 st January to the date of cessation 1 st January to 30 th November 2014 11 months 5/12 x 30,600 = 12,750 Period to 30 Nov 14 = 11,100 23,850 2013 Penultimate year of assessment: accounting period of 12 months ending in the penultimate tax year Year ended 31 st May 2013 = 27,600 Inspector has the right to review the assessment of this tax year and compare it with the actual results of the penultimate tax year. Actual results of 2013 1 January 2013 to 31 Dec 2013 5/12 x 27,600 = 11,500 7/12 x 30,600 = 17,850 29,350 Assessment is revised to 29,350 Schedule D Case I income for 2012 29,280 Schedule D Case I income for 2013 29,350 Schedule D Case I income for 2014 23,850 Sample Paper 3 Updated 2015 Examinations Page 19 of 20

(b) Purpose and content of Revenue form P45 When an employee leaves employment or dies while in employment the employer is obliged to complete a form P45. It is possible to file form P45 using the Revenue Online Service (ROS). Form P45 contains details of pay, tax, USC, PRSI and LPT deducted to date employment ceases. It also contains information concerning the tax credits, standard rate cut off point and USC cut off points of the employee. (c) One parent family tax credit The one parent family tax credit for 2014 is 1,650. To qualify for the one parent family tax credit, an individual must satisfy the following conditions: - The individual (who may be a widow, widower, separated parent or unmarried person) must not be entitled to a married persons tax credit for the particular tax year in question; and The individual must have at least one child (under 18 years or if over 18 years, a child undergoing full-time education or vocational training, or an incapacitated child) who resides with him/her for the whole or part of the tax year. No relief is granted to an unmarried couple who are living together as man and wife. The tax credit is granted in addition to the incapacitated child tax credit, if applicable and remains constant at 1,650 irrespective of the number of dependent children that the taxpayer maintains. The tax credit is not affected by the amount of the child s income. Sample Paper 3 Updated 2015 Examinations Page 20 of 20