TAXATION FORMATION 2 EXAMINATION - AUGUST 2010 NOTES: You are required to answer a total of five questions. Questions 1, 2, 3 and 4 are compulsory. You are also required to answer either Question 5 or 6. (If you provide answers to both Questions 5 and 6, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 5 or 6 will be marked.) TAXATION TABLES ARE PROVIDED TIME ALLOWED: 3 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - AUGUST 2010 Time Allowed: 3 hours, plus 10 minutes to read the paper. Answer Questions 1 to 4 and Question 5 OR 6. (Five questions in total to be attempted). 1. Barton Ltd. is a private Irish incorporated and resident company engaged in retailing of gearbox components at its factory in Sligo. The following information has been extracted from the financial statements of the company for the year ended 31 December 2009. Notes Turnover 21,850,000 Direct costs (1) (13,110,000) 8,740,000 Overheads (2) (5,462,500) Profit from operations 3,277,500 Financial costs (3) (465,000) Other income (4) 508,406 Net profit before taxation 3,320,906 The following additional information is available: 1. Direct costs are made up as follows: Materials 7,003,083 Labour 4,370,000 Light, heat and power 1,092,500 Consumables 364,167 Depreciation 280,250 13,110,000 2. Overheads include the following: Office salaries and wages 125,000 Director s remuneration (i) 305,000 Depreciation 12,060 Travel and entertainment (ii) 27,500 Legal expenses (iii) 16,000 Lease expenses (iv) 17,000 (i) (ii) This figure includes a sum of 30,000 accrued in relation to contributions to a Revenue approved pension scheme which was paid in March 2010. Travel and entertainment Airline and train fares together with hotel costs for attending household exhibitions 10,000 Entertaining suppliers 4,500 Entertaining customers 8,000 Staff Christmas party 2,500 Travelling to meet suppliers and customers 2,500 27,500 (iii) Legal expenses Pursuing bad debts 2,000 Renewal of leasehold interest on a retail shop 1,500 Defending product liability claim by a customer 3,500 Purchase of a new retail unit 9,000 16,000 (iv) Lease payments for financial controller s car 4,000 acquired for 21,500 on February 2007 Lease payments for managing director s car 7,500 acquired for 26,000 on May 2008 Van - acquired for 24,000 on 1 March 2008 5,500 17,000 Page 1
3. Financial costs comprise the following: Interest on loan to finance factory extension 320,000 Interest in working capital term loan 60,000 Interest on overdraft 20,000 Insurance premiums 65,000 465,000 4. Other income is made up as follows: (i) Bank interest on temporary cash surpluses (note (a)) 8,406 Rental income 25,000 (ii) Dividend income (note (b)) 75,000 (iii) Gain on disposals of land (note (c)) 400,000 508,406 Notes: (a) DIRT was not withheld on the bank interest. (b) (c) The dividend was received from Barton Sales Ltd. a wholly owned subsidiary company. The capital gain arose from a fortuitous sale of a plot of land, which the company had acquired some years ago with the intention of building a new factory. In the event, an extremely attractive offer for the land was received and accepted. The proceeds where then used to extend the existing factory. The gain is made up as follows: Proceeds (May 2009) 550,000 Less: Costs of disposal (5,000) 545,000 Cost (December 1995) 135,000 Legal fees, stamp duty etc. 10,000 (145,000) Gain 400,000 The current use value of the property is estimated to have been 25,000 in both December 1995 and May 2009. 5. The written down values at 1 Jan 2009 were as follows:- Vans 120,000 (Original cost 160,000 15/4/07) Factory equipment 216,000 (Original cost 288,000 1/2/07) Factory buildings 400,000 All other Plant and Machinery is the subject of finance leases. The factory building was constructed in 2004 at a cost of 750,000. A grant of 250,000 was received from the IDA in respect of it. On 1 April 2009, the company purchased a building for 1,260,000 which was in use as an industrial building. The previous owner had claimed capital allowances on this building with effect from 1 April 2000. The claim was by reference to the construction expenditure incurred by him ( 960,000). On 1 February 2009, the company purchased a new cutting machine for 75,000 which was only put into use on 1 December 2009. The company has Case 1 losses carried forward from 2008 of 186,700. 6. The company also seeks advice in how much VAT may be reclaimed on the following future expenditure in 2010: (i) Purchase of a two new company cars with CO2 emissions of 200kg/m (category F) costing 25,000 each including VAT @ 21%. (ii) Purchase of a new van for 30,000 including VAT @ 21%. (iii) Diesel for van costing 55,000 including VAT @ 21%. (iv) The staff Christmas party will be held in December 2010 and the total bill is budgeted at 25,000 inclusive of VAT @ 21%. (v) During 2010 the company will have a major share issue to raise equity for the company and will incur legal fees totalling 100,000 plus VAT of 21%. (vi) In 2010 the company will build a new staff canteen costing 120,000 plus VAT of 13.5%. Page 2
REQUIRED: (a) Compute the corporation tax and capital gains tax liability of Barton Ltd. for the year ended 31 December 2009. (17 marks) (b) State the due dates for the payment of all tax liabilities computed. (2 marks) (c) Advise the company on the amount of VAT (if any) that can be reclaimed on each of the above future transactions 6 (i) to (vi) in 2010. (6 marks) [Total: 25 marks] Page 3
2. (a) Adams and Burke have been in partnership for several years in the firm Adams, Burke & Co. trading as general merchants and funeral directors. Accounts have been made up to 31 December each year and profits have been shared equally after charging partners salaries. Results of the firm in recent years have been as follows: Accounts for Year Ended 31 December 2008 are as follows: Case I adjusted profit 86,000 After charging partners salaries: Adams 24,000 Burke 20,000 Charles was admitted as a partner with effect from 1 October 2009 and the profit sharing ratio after partners salaries was changed to: Adams 35% Burke 35% Charles 30% Accounts for the year ended 31 December 2009 are as follows: Case I adjusted profit 120,000 After charging partner salaries: Adams 52,000 Burke 50,000 Charles 12,000 In addition the firm had the following capital allowances: 2008 15,000 2009 24,000 Charles is aged 25 and single. Prior to becoming a partner in Adams Burke & Co. he had been employed as a manager with the firm. His P45 at 30 September 2009 shows gross salary of 37,700 and PAYE deducted of 3,000. He pays interest of 2,500 per annum on a loan used to purchase his share in the partnership and 3,000 per annum to a Revenue approved self-employed pension scheme. REQUIRED: (i) Show the amounts of the final Schedule D Case II assessments on each partner for the years of assessment 2008 and 2009. (8 marks) (ii) Show the capital allowances available to each partner for the years of assessment 2008 and 2009. (3 marks) (iii) Compute the income tax payable by Charles for 2009. (Ignore PRSI/Levies). (4 marks) (b) The partnership had the following transactions for the four months ended 31 December 2009: Retail sales at standard rate 192,500 Food sales at zero rate 70,000 Funeral exempt sales 78,000 Retail purchases at standard rate 133,650 Food purchases at zero rate 17,200 Funeral purchases at standard rate 48,500 Purchased new motor car (CO2 emissions - category G) 20,000 Purchased second hand car 14,500 Rent of trade premises at standard rate 24,300 Light & heat at standard rate 12,150 All of the above amounts are inclusive of VAT where this is applicable. REQUIRED: Calculate the amount of VAT to be accounted for the Revenue for the four months ended 31 December 2009. Outline any assumptions made in the computation. (5 marks) [Total: 20 marks] Page 4
3. John O Connor who is aged 58 decided to retire and take things easy. As a result he entered into the following transactions during 2009: (a) John owned 100% of O Connor Retail Ltd. The company operates a large retail business in the centre of Athlone. John was offered 795,000 for his business by Michael Aherne who is no relation to John. After some consideration John accepted the offer on 20 September 2009. The company has operated since June 1984 and John had worked full time for the company since that date. The market value of the business on the 20 September 2009 was as follows: Building 450,000 (cost 50,000 June 1984). Goodwill 140,000 (cost nil June 1984). Plant & machinery 55,000 (cost March 2002 90,000) Debtors 70,000 Stock 140,000 Creditors (60,000) Total Market value 795,000 When establishing the company John subscribed 20,000 for the shares in June 1984. (b) John purchased 50 acres of farmland on 22 December 1989 for 150,000. During the months June to September 1992 he spent 50,000 on land improvements. On 3 September 2009 he sold 15 acres for 200,000. The market value of the remaining land was 450,000. Legal and auctioneer s fees on disposal were 12,000. The farm was leased to a local farmer since purchase as John has no interest in farming. He has 25,000 losses carried forward from 2004 which are derived from the sale of development land. REQUIRED: (c) John sold an antique armchair for 900 in August 2009 which cost 3,500 in December 2004. (a) Outline the conditions to be satisfied for a shareholder to qualify for retirement relief on disposals of shares to persons other than a child. (6 marks) (b) Compute the capital gains tax payable by John on the disposal of his shares in September 2009. (4 marks) (c) Compute John s gain on the disposal of part of the farm land. (4 marks) (d) Compute the allowable loss on the disposal of the armchair. (2 marks) (e) Compute the total capital gains tax payable by John in 2009 and state the date of payment and date of submission of the return to Revenue. (4 marks) [Total: 20 marks] Page 5
4. Jim Power, single, aged 42, has been employed by Bradley Ltd. for 16 years and 9 months. He was made redundant on the 1 September 2009. You are given the following information. 1. Jim received as part of his redundancy package Pay in lieu of notice 4,065 Company car market value 15,000 Ex gratia payment 37,000 Statutory redundancy 5,000 2. Jim s salary for the period 1 January 2009 to 31 August 2009 was 30,000 and benefit in kind of 4,000. PAYE paid on this income amounted to 4,000. 3. On the 1 November 2009 Jim obtained new employment and received a salary of 7,000 with PAYE deducted of 1,800. 4. Jim s salary was pensionable under a Revenue approved pension scheme. Jim contributed 3,000 to the pension fund in 2009. The actuarial value of this lump sum entitlement on the 1 September 2009 was 20,000. 5. Jim s salary and benefit in kind for the tax years 2006 to 2008 was as follows: Salary BIK Tax payable 2008 29,000 3,000 4,800 2007 27,000 2,800 4,116 2006 21,000 2,800 2,720 6. On 1 May 2009, Jim bought an apartment to rent out to tenants. He borrowed most of the money at a fixed rate of 5%. The interest from 1 May to 31 December 2009 was 8,000. The apartment needed some painting which was completed in June 2009 at a cost of 850. On the 1 July 2009, he advertised for a tenant, which costed 125. The apartment was rented out from 1 August 2009 at a monthly rent of 600. He registered the property with the PRTB on the 15 August 2009. REQUIRED: (a) Explain how the pay in lieu of notice is treated for tax purposes, stating any assumptions you think necessary. (2 marks) (b) Compute the tax free element of the termination payment paid to Jim. (5 marks) (c) Compute Mr. Power s Case V income (if any) for 2009. (4 marks) (d) Compute Jim s final income tax liability for the tax year 2009 (Ignore PRSI/Levies). (9 marks) [Total: 20 marks] Page 6
Answer either Question 5 OR Question 6. 5. (a) The Managing Director of Richmond Ltd. is looking at the possibility of the company diversifying into other activities and has asked as to whether expenditure on the following would be classified as plant for tax purposes; (i) (ii) (iii) (iv) (v) Swimming pool in a caravan park; Building in which a retail trade is carried on; Deep pit poultry house; Coat racks used in a drapery shop; Movable office partitions which are not permanently fixed to the premises. REQUIRED: In the case of any four of the specific items mentioned in (i) to (v) above, state, giving reasons, whether the expenditure would be regarded as having been incurred on plant for tax purposes. (8 marks) (b) Richmond Ltd. has recently engaged Larry Farrelly, a Computer Specialist, to improve its computer operations. Larry graduated from Trinity College in May 2009 and was immediately offered a job by Richmond Ltd. He is paid 700 per week and the terms of his contract obliges him to be available at the premises of Richmond Ltd. between 9am-5pm each day. He does a small amount of work at home but must ask the company s permission to take on any other duties. REQUIRED: The company is concerned that it may have a PAYE/PRSI exposure on payments to Larry. Set out the tests for determining if an individual is employed or self-employed and give your opinion on the status of Larry in this regards. (7 marks). [Total: 15 marks] 6. Zac Quinn has called to your office for advice in relation to the following: (a) In relation to the rights issues of shares, explain how the purchase of rights issues and the sale of rights are treated for CGT purposes. (4 marks) (b) Outline briefly the two thirds rule as applied to VAT. (4 marks) (c) Explain qualifying voluntary disclosure as it applies to a Revenue audit. (4 marks) (d) Outline how trading losses incurred by a company are utilised. (3 marks) REQUIRED: Write a letter to Zac explaining briefly the above issues. [Total: 15 Marks] END OF PAPER Page 7
SUGGESTED SOLUTIONS BARTON LTD. THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND TAXATION FORMATION 2 EXAMINATION - AUGUST 2010 (a) Corporation Tax Computation for year ended 31 December 2009 Net profit per accounts 3,320,906 Add: Deprecation 292,310 Pension contributions (i) 30,000 Travel and entertainment (ii) 12,500 Legal expenses (iii) 9,000 Lease payments (iv) 577 344,387 Deduct: Other income 508,406 Capital allowances (v) 145,375 (653,781) Schedule D Case 1 income 3,011,512 Less: Case I losses C/F (186,700) 2,824,812 Schedule D Case 111 income 8,406 Schedule D Case V income 25,000 Total income 2,858,218 Corporation tax Case I 2,824,812 x 12.5% 353,101 Case III, V 33,406 x 25% 8,352 Total Corporation tax 361,453 Capital Gains Tax 2009 Net Proceeds (2009) 545,000 Cost - Current use value (95/96) 25,000 Portion of cost: 10,000 x 25,000 1,852 135,000 26,852 Indexation 1.277 (34,290) Development value 110,000 Portion of cost (10,000-1,852) 8,148 (118,148) Chargeable gain 392,562 Capital gains tax @ 25% 98,140 (b) Payment dates (i) Corporation Tax At least 45% of the liability must be paid on the 21 June 2009 and 45% on the 21 November 2009 by way of preliminary tax. Alternatively the company may opt to pay 50% on each of the above dates of the tax liability of the preceding accounting period. The balance is due within one month of the issue of the notice of assessment. (ii) Capital Gains Tax At least 100% of the liability must be paid on or before 15 December 2009. Page 8
(c) VAT issues (i) Purchase of company cars VAT is not reclaimed on motor cars where CO2 emissions exceed 195kg/m. (ii) Purchase of van VAT of 5,309 may be reclaimed (iii) Diesel for van VAT of 9,733 may be reclaimed (iv) Staff Christmas party VAT disallowed entertainment expense (v) Legal fees on share issue VAT of 21,500 reclaimable as the share issue is for the raising of capital (vi) New Staff canteen VAT of 16,200 reclaimable Notes (i) Pension contributions As the sum of 30,000 was not paid in the accounting period it is not an allowable deduction for this accounting period. (ii) Travel and entertainment - entertaining suppliers 4,500 - entertaining customers 8,000 12,500 (vii) Legal expenses Purchase of new retail unit 9,000 (iv) (v) Lease payments Finance director s car no addback Managing director s car 7,500 x 26,000 24,000 = 577 26,000 Van no addback Capital allowances Factory Factory Vans Equipment Equipment Total 12.5% 12.5% 12.5% Cost 160,000 288,000 --- 448,000 TWDV 01/01/09 120,000 216,000 --- 336,000 Additions --- --- 75,000 75,000 Wear and Tear (20,000) (36,000) ( 9,375) (65,375) 100,000 180,000 65,625 345,625 Factory buildings: Building purchased 2004: (i) Cost 750,000 Less: IDA grant ( 250,000) 500,000 IBAA - 500,000 at 4% 20,000 (ii) Building purchased on 1 April 2009 Restrict to original construction expenditure 960,000 Annual allowance - 960,000 (25 9) 60,000 Total IBAA = 20,000 + 60,000 = 80,000 Summary Wear and tear 65,375 IBAA 80,000 145,375 Page 9
SOLUTION 2 ADAMS, BURKE & CHARLES This question tested knowledge of partnership income tax. It involved the admission of a new partner and it required a computation of the final income tax liability of one of the partners. (a) (i) Schedule D Case II assessment Year Ended 31 December 2008 2009 Profit per accounts (to be shared) 86,000 120,000 Add: Partners salaries - Adams 24,000 52,000 - Burke 20,000 50,000 - Charles - 12,000 Schedule D Case II Income 130,000 234,000 Assessable as follows: 2008 - Year ended 31 December 2008 Adams Burke Total Salaries 24,000 20,000 44,000 Share of Balance Profit 43,000 43,000 86,000 67,000 63,000 130,000 2009 - Year ended 31 December 2009 Adams Burke Total Salaries 1/1/09 31/12/09 1/1/09 30/9/09 52,000 50,000 102,000 Share of Profit 120,000 x 9/12 x 50% each 45,000 45,000 90,000 1/10/09 31/12/09 Share of profit 120,000 x 3/12 x 35% each 10,500 10,500 21,000 107,500 105,500 213,000 The assessment on Charles is based on his share of the profits for the period 1 October 2009 to 31 December 2009. Period 1/10/09 to 31/12/09 Share of profits 3/12 x 120,000 x 30% 9,000 Period 1/10/09 to 31/12/09 Salary 3/12 x 48,000 12,000 21,000 (ii) Allocation of capital allowances This is based on the profit sharing ratio in the year of assessment rather than that in the basis period. 2008 Adams 7,500 Burke 7,500 15,000 2009 Adams Burke Charles Total 1/1/09 to 30/9/09 9/12 x 24,000 9,000 9,000-18,000 1/10/09 to 31/12/09 3/12 x 24,000 2,100 2,100 1,800 6,000 11,100 11,100 1,800 24,000 Page 10
(iii) Charles Income Tax 2009 Schedule D Case II Share of Partnership Profits 21,000 Capital Allowances (1,800) 19,200 Schedule E Salary 37,700 56,900 Charges: Interest relief (2,500) Retirement annuity premium (W1) (3,000) Statutory/Taxable income 51,400 Income Tax: 7,280 36,400 @ 20% 6,150 15,000 @ 41% 13,430 Less Tax Credits: Personal (1,830) PAYE (1,830) Less PAYE paid (3,000) Net Tax Payable: 6,770 W1 Pension contribution Relevant earnings 54,900 15% (max) 8,235 Restrict to amount paid 3,000 (b) Gross VAT Net SALES: Retail standard rate (21.5%) 192,500 34,064 158,436 Zero rate 70,000 0 70,000 Exempt 78,000 --- 78,000 PURCHASES: Retail standard rate (21.5%) 133,650 (23,650) 110,000 Zero rate 17,200 --- 17,200 Funeral exempt purchases (note 1) 48,500 --- 48,500 New car (note 2) 20,000 --- 20,000 Second hand car (note 2) 14,500 --- 14,500 Rent (note 3 ) 24,300 (2,223) Light & heat (note 4) 12,150 (1,112) VAT due for year 7,079 Notes: 1 Purchases for an exempt activity are not reclaimable. 2 Input credit is not available for cars where emissions exceed 195kg/m. 3. VAT on rent 24,300 x 21.5/121.5 = 4,300 Allocated on Sales basis 4,300 x 158,436 = 2,223 306,436 4. VAT on light & heat 12,150 x 21.5 /121.5 = 2,150 Allocated on sales basis 2,150 158,436 = 1,112 306,436 Page 11
SOLUTION 3 JOHN O CONNOR (a) Retirement relief To qualify for retirement relief a shareholder must be aged 55 years and have owned the shares and be a working director for 10 years ending on date of disposal. Five of those years must be working on a full-time basis. The company must be unquoted, trading and qualify as a family company i.e. the shareholder must own 75% of the shares. While called retirement relief there is no necessity for the individual to retire. There is no annual exemption in the year the relief is claimed. Where the disposals are to persons other than a child there is no capital gains tax where the proceeds do not exceed 750,000. Where the proceeds exceed 750,000 marginal relief restricts the tax payable to 50% of the excess. (b) Sale of O Connor Retail Ltd Proceeds 795,000 Cost 20,000 x 1.819 ( 36,380) Gain 758,620 Capital gains tax at 25% 189,655 Less: Marginal relief (w1) (167,155) Capital gains tax payable 22,500 W1 Marginal relief restrict CGT to (795,000 750,000) x 50% = 22,500 (c) Compute gain on part disposal of farm Proceeds (2009) 200,000 Less: Costs of sale (12,000) Net Proceeds 188,000 Cost 150,000 x 200,000 46,154 200,000 + 450,000 Index (89/90) 1.503 (69,369) Enhancement 50,000 x 200,000 15,385 200,000 + 450,000 Index (91/92) 1.406 (21,631) Gain 97,000 (d) Allowable loss on armchair is calculated as follows: Deemed proceeds 2,540 Cost (3,500) Allowable loss (960) (e) Summary Gain on sale of land 97,000 Loss on development land C/F (20,000) Loss on armchair (960) Gain 76,040 No annual exemption retirement relief claimed 0 Capital gains tax at 25% 19,010 Add: capital gains tax on shares 22,500 CGT payable 41,510 The capital gains tax return forms part of the income tax return for 2009 and must be filed by 31 October 2010. Capital gains tax for 2009 must be paid as follows: Disposals between 1 January 2009 to 30 November 2009 payable by 15 December 2009. Disposals between 1 December 2009 to 31 December 2009 payable by 31 January 2010 To avoid interest on late payment the tax must amount to 100% of the final liability. Page 12
SOLUTION 4 JIM POWER (a) It is assumed that the pay in lieu of notice is not provided for in the employee s employment contract. Where it is not provided for in the employee s employment contract, it will not be treated as part of the termination payment and is taxable under normal Schedule E rules. (An alternative assumption is acceptable) (b) Tax-free termination payment (i) Basic exemption 10,160 + (765 x 16) 22,400 (ii) (iii) Increased basic exemption 10,160 + (765 x 16) + [(10,000 20,000)*] 22,400 * No increase due to pension lump sum exceeding 10,000 Standard Capital Superannuation Benefit 34,000 + 32,000 + 29,800 + (23,800 x 4/12) = 34,578 3 34,578 x 15-20,000 = 14,578 15 Maximum tax free payment is 22,400 The taxable element of the lump sum is as follows: Pay in lieu of notice* 4,065 Company car market value 15,000 Ex gratia payment 37,000 56,065 Exempt (22,400) Taxable 33,665 (c) Rental income Rental income 1,000 x 5 3,000 Less: Interest relief 6,000 x 5/8 x 75% (3,750) Advertising for tenant (125) Painting 0 Case V loss (875) Page 13
(d) Income Tax Computation Tax Year 2009 Schedule E salary Bradley Ltd. 30,000 - BIK - Bradley Ltd. 4,000 - salary new employment 7,000 - termination payment 33,665 Total income 74,665 Less: Pension contribution (3,000) Taxable income 71,665 Income tax Tax credits Tax paid 36,400 x 20% 7,280 35,265 x 41% 14,459 21,739 Single 1,830 PAYE 1,830 (3,660) PAYE Bradley Ltd. 4,000 - new employment 1,800 (5,800) Top slicing relief (w1) (9,226) Tax payable 3,053 W1 Top slicing relief A (P x T) I A = 33,665 x 41% = 13,802 P = 33,665 T = (4,800 + 4,116 + 2,720) = 11,636 I = (32,000 + 29,800 + 23,800) = 85,600 33,665 x 11,636 = 4,576 85,600 Relief = (13,802 4,576) = 9,226 Page 14
SOLUTION 5 - RICHMOND LTD (a) The term plant includes whatever apparatus is used by the businessman for carrying on his business, not stock-in-trade which he buys or makes for sale, but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in the business. (i) (ii) (iii) (iv) (v) Swimming pool in a caravan park In this case, the amenities of a caravan park included a swimming pool provided with an elaborate system for filtering and chlorinating the water. The cost incurred for excavating, concreting lining the pool and the surrounding terracing was held to be expenditure incurred on plant. The swimming pool was an apparatus used for the purpose of the trade. Building in which a retail trade is carried on. As the only function of this building/structure is the provision of shelter and the setting in which the trade is carried on the expenditure is not regarded as having been incurred on plant. Deep pit poultry house The provision of shelter provides a setting in which the trade was carried on, it was also the means by which the trade was carried on. The whole structure played an active part in carrying on the relevant trade. Coat racks in a drapery store Clearly these items are apparatuses used for the carrying on of the trade and therefore should be regarded as plant for corporation tax purposes. Moveable office partitions Moveable partitioning in an office building was plant as its function was not just merely confined to providing setting for the business. (b) Employed v. Self employed Revenue normally applies the following tests in determining if an individual is an employee. 1. Master servant relationship - Is a person told what to do and how to do it? Is the person s work and performance supervised closely. If so this points towards an employment. 2. Power of Delegation - If this exists it point towards an individual being regarded as self employed 3. Use of own office or tools - This points towards self employment 4. Capital at Risk - Points towards self employment 5. Ability to benefit from sound practice -Can the individual vary his/her charge out rate or take on other work when he/she requires. If so, it points towards self employment. 6. Integration - Close identity with one firm indicates an employment 7. Sundry: Holiday pay/sick pay/ member of a union or pension scheme - As Larry must ask for permission in order to take on other work, as he is paid a fixed rate of pay and works mainly in the offices of Apollo I would regard him, on balance, as being an employee. Page 15
SOLUTION 6 ZAC QUINN (a) Rights issues of shares Shares purchased under a rights issue are deemed to be enhancement expenditure in relation to the shares to which the rights attached. For the purposes of the FIFO rule, rights shares are deemed to be acquired at the same time as the shares to which they attach but for indexation purposes are treated as enhancement expenditure and indexed from the date acquired. A shareholder may not always take up the rights issue and may sell those shares to another individual. Such a disposal is deemed to be a part-disposal of the shares to which the rights attach. The part-disposal formula is: Original Cost x A A + B A = The proceeds is the cash received for the shares; B = The market value of the part remaining is the ex-rights price of the shares (b) (c) Two thirds rule Where a taxable supply involves the provision of a service and the supply of goods the rate of VAT applicable to the supply is based on whether the cost of the material supplied is greater or less than two-thirds of the total VAT exclusive cost. If the VAT exclusive cost for the parts is less than 2/3 of the total VAT exclusive cost, the 13.5% rate applies to the total cost and if greater than 2/3 the 21% rate applies to the entire cost. This rule has particular relevance to repair services and installations in buildings. Qualifying voluntary disclosure A qualifying voluntary disclosure is described under the Revenue s Code of Practice as a full disclosure accompanied by payment of taxes due. This entitles the taxpayer to significant mitigation of penalties. The disclosure may be unprompted i.e. made prior to audit notification or prompted i.e. made after receipt of audit notification. The benefits of qualifying disclosures are as follows: No publication. No prosecution will be initiated by Revenue. Penalties are reduced. A qualifying disclosure is made in writing prior to the audit commencing and must be accompanied by a signed statement to the effect that this is a full and true disclosure. A cheque covering the tax, interest and penalties must also be included. (d) Corporate trading losses Trade losses incurred by a company are offset against: Case 1 income of another trade of the current accounting period (if applicable) Case I income of the previous accounting period of the same length; Total profits in the current accounting period on a value basis Total profits in the previous accounting period of the same length as that in which the loss was incurred on a value basis Carried forward against future Case I income of the same trade. Page 16
Marking System Solution 1 Barton Ltd (a) Addbacks - 1 mark each 5marks Compute capital allowances - vans & factory equipment 1 mark - new factory 1 mark - purchase of factory 2 marks Offset Case I losses C/F 2 marks Compute corporation tax 2 marks Capital gains tax - Net proceeds 1 mark - current use value - 1 mark - Indexation - 1 mark - Calculate CGT - 1 mark (17 marks) (b) Payment dates CT - 1 mark - CGT - 1 mark (2 marks) (c) VAT issues (1 mark each) - 6 marks (6 marks) [Total: 25 marks] Solution 2 Adams, Burke & Charles (i) Assessment Adams & Burke (2 marks each) - 4 marks - Charles - 2 marks (6 marks) (ii) Capital allowances (1 mark each) - 3 marks (3 marks) (iii) Income tax computation - Share of partnership profits - 1 mark - Capital allowances - 1 mark - Interest relief - 1 mark - RAP - 1 mark - Compute income tax - 1 mark - Application of tax credits - 1 mark (6 marks) (b) VAT sales - 1 mark VAT purchases - 1 mark Disallow exempt purchases - 1 mark Light & heat apportion - 1 mark Assumptions listed - 1 mark (5 marks) [Total: 20 marks] Page 1
Solution 3 John O Connor (a) Retirement relief conditions - age 55-1 mark - no need to retire - 1 mark - Company family, trading, unquoted - 1 mark - 3rd party limit - 1 mark - Marginal relief - 1 mark - Explain marginal relief - 1 mark (6 marks) (b) (c) CGT computation Part disposal of farm - Proceeds - ½ mark - Indexed cost - 1 mark - No annual exemption - 1 mark - Apply marginal relief - 1marks - CGT payable - ½ mark (4 marks) - Net proceeds - 1 mark - Apply part disposal rules to cost - 1½ marks - Apply part disposal rules to enhancement 1½ marks (4 marks) (d) (e) Compute gain on armchair - Deemed proceeds - 1 mark - allowable loss - 1 mark 2 marks Compute total CGT summary - Deduct development losses C/F - 1 mark - Compute CGT on above - 1 mark - Date of payment - 1 mark - Date of submission - 1 mark 4 marks [Total: 20 marks] Solution 4 Jim Power (a) Depending on assumptions made - Not part of employment contract - 1 mark - Not part of termination payment - 1 mark OR - Part of employment contract - 1 mark - Part of termination income - 1 mark (2 marks) (b) - Basic exemption - 1 mark - Increased basic exemption - 1 mark - SCSB - 2 marks - Compute taxable element - 1 mark (5 marks) (c) - Rent income - 1 mark - Restrict interest relief - 1 mark - Deduct advertising expense - 1 mark - Disallow painting - 1 mark (4 marks) (d) - Salary & BIK Bradley Ltd - 1 mark - Salary new employment - 1 mark - Termination payment - 1 mark - Case V - 1 mark - Interest relief - 1 mark - Apply tax credits - 1 mark - Pension contribution - 1 mark - Compute top slicing relief - 2 marks (9 marks) Page 1 [Total: 20 marks]
Solution 5 (a) Qualify as plant (½ mark each) - 2 marks Reasons (1½ marks each) - 6 marks (8 marks) (b) Self employed v. employee (1 mark each point) - 5 marks (max) State employee and give reasons - 2 marks (7 marks) [Total: 15 marks] Solution 6 (a) Rights issues of shares - Treat as enhancement - 1 mark - Attach to purchased shares - 1 mark - Sale of rights part disposal - 1 mark - Part disposal formula or explanation - 1 mark (4 marks) (b) (c) (d) Operation of the VAT system - Applies to supply of goods & services - 1 mark - Applies to VAT exclusive cost - 1 mark - material greater than 2/3 standard rate - 1 mark - material less than 2/3 service rate - 1 mark (4 marks) Qualifying voluntary disclosure - Prompted or unprompted - 1 mark - Full disclosure + payment - 1 mark - Prosecution / publication / penalties - 1 mark - Writing with signed declaration - 1 mark (4 marks) Corporate trading losses - Current year other Case 1 value basis - 1 mark - Previous year Case 1 value basis - 1 mark - C/F Case I same trade - 1 mark (3 marks) [Total: 15 marks] Page 1
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