answers - acca global · professional level –options module paper p6 (irl) advanced taxation...

19
Answers

Upload: lethu

Post on 07-Aug-2018

269 views

Category:

Documents


1 download

TRANSCRIPT

Page 1: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Answers

Page 2: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Professional Level – Options Module Paper P6 (IRL)Advanced Taxation (Irish) June 2015 Answers

1 Anthony Manero

Chartered Certified AccountantsAny StreetAny Town

8 June 2014

Mr Anthony ManeroAny StreetAny Town

Re: Taxation issues arising on retirement

Dear Anthony,

I refer to our recent meeting and am writing to give you my advice on the various issues arising in relation to your proposedretirement and transfers of property.

(i) The taxes payable on the transfer of your shareholding in Tony’s Paints Ltd (TPL) to your nephew, John, by way of gift orinheritance

We have valued the shares in TPL at €1,530,000 (Schedule 1).

Capital gains tax (CGT)

(1) GiftRetirement relief applies when an individual aged over 55 disposes of qualifying shares in a company.

Shares are qualifying shares if all of the following conditions are satisfied:

– The company has been a trading company for at least the last ten years.– The individual has owned the shares for at least the last ten years prior to the disposal.– The individual has been a director of the company for at least ten years.– The individual has been a full-time working director for at least five years.– The company is a family company in relation to the individual, i.e. the individual owns 25% or more of the voting

rights in the company.

Your shares in TPL are qualifying shares for this purpose.

Tutorial note: A company also qualifies as a family company if the individual owns 10% or more of the voting rightswhere his family (including the individual) own 75% or more of the voting rights.

Where qualifying shares are disposed of to a child of the disponer and the disponer is aged under 66 (and the companyonly has business assets), the full amount of any gains arising on the disposal of qualifying shares is exempt, regardlessof the value of the assets.

For the purposes of this exemption, a nephew (such as John) or niece who has worked substantially on a full-time basisin the business for the period of five years up to the date of disposal qualifies as a child.

Tutorial note: There is a market value ceiling of €3 million over which the relief will not apply, in the case of individualsaged 66 and over, in respect of disposals of qualifying assets made on or after 1 January 2014. Relief will apply in fullto the extent that the value of the qualifying assets does not exceed €3 million, but a charge to capital gains tax willarise to the extent that the market value of the qualifying assets disposed of exceeds €3 million.

However, where the company has both business assets and non-business assets, the relief is only available for thatportion of the gain on the shares which is equivalent to the portion of chargeable business assets (CBA) to totalchargeable assets (CA). For TPL, these amounts (as calculated in Schedule 2) are €1,500,000 and €1,200,000respectively. Therefore, your proposed transfer of shares to John meets the conditions for retirement relief. However, asthe shareholding in Tavares Ltd, valued at €300,000, is a non-business chargeable asset, the retirement relief will berestricted on that portion of the gain.

The CGT payable on the transfer will be €83,695 (Schedule 3).

The retirement relief will be clawed back, if John disposes of the shares in TPL within six years of the date on which heacquired them. In that case John would become liable to pay the CGT which would have been payable by you ifretirement relief had not been available at the date of transfer.

(2) InheritanceCGT will not be payable in the event of a disposition by way of inheritance.

21

Page 3: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Stamp duty

(1) GiftStamp duty of 1% will be payable by John on the deemed consideration of €1,530,000, resulting in a liability of€15,300.

(2) InheritanceStamp duty will not be payable in the event of a disposition by way of inheritance.

Capital acquisitions tax (CAT)

(1) GiftJohn will be liable to CAT on the shares received from you.

John will qualify for business property relief in relation to the shares in the company, as the following conditions for reliefhave been satisfied:

– The company is unquoted.– The company carries on a qualifying activity (i.e. taxable under Case I or II of Schedule D).– John will own more than 10% of the shares after taking the gift/inheritance and has worked for the company for

the previous five years.(Note: Alternatively John will qualify on the basis that he will own more than 25% of the shares after taking thegift.)

– The shares have been owned by you for longer than the limit of five years for a gift (and two years for aninheritance).

Business property relief results in a 90% reduction in the taxable value of the business assets. However, that part of theshare value attributable to non-business assets, i.e. the shares in Tavares Ltd, will not qualify for business property relief.

To avoid a clawback of business property relief, John must retain the shares for at least six years (i.e. until 31 July2020).

Also, where a niece or nephew has worked substantially on a full time basis in the business of their aunt or uncle forthe five years ending on the date of the gift or inheritance, the class 1 threshold applies to any business assets takenby that niece or nephew. John currently qualifies for this higher threshold, should the property pass by way of a gift.

On this basis, John’s CAT liability will be €62,954 (Schedule 4). However, as CGT will be paid by you on the sameevent, this CGT can be offset against the CAT payable by John, resulting in a nil liability for CAT.

(2) InheritanceThere will be a CAT liability of €65,340 in the event of an inheritance (Schedule 4). This is higher than the CAT on agift because there is no stamp duty deduction and the small gifts exemption of €3,000 does not apply to inheritances.The CAT liability is based on the assumption that:

– John will continue to qualify for business property relief;– John will continue to work in the business and would therefore continue to qualify for the class 1 threshold; and– the value of the property being transferred is the same as its current value.

As no CGT is payable on an inheritance, there is no CGT credit to offset against the CAT.

Summary of taxes payable

Gift Inheritance Saving€ € €

CGT 83,695 0Stamp duty 15,300 0CAT 0 65,340

––––––– ––––––– –––––––98,995 65,340 33,655––––––– ––––––– –––––––

RecommendationEven though there is a higher tax liability associated with the transfer by gift, it is recommended that this option is chosen asthe amount of additional tax payable is not sufficiently high to warrant a postponement of the transfer until your death for thefollowing reasons:

– if the inheritance option were chosen, it is possible that the value of the business may increase in the intervening periodand this would result in increased tax liabilities;

– you have chosen to retire now; and– a transfer to John now will be an incentive to him to develop the business.

(ii) An alternative option available in relation to the use of your retirement fund

The Approved Retirement Fund (ARF) regime may be chosen, provided it is selected before your retirement date of 31 July2014.

22

Page 4: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

The main benefits of choosing this option are:

– You will continue to own the fund after retirement and if there are assets in the fund on your date of death, these assetswill form part of your estate. This compares favourably with the annuity regime, where the balance of funds invested inthe annuity would be retained by the insurance company on your death.

– While the funds remain invested, no tax is charged on the funds or on any gains or income. The tax charge crystallisesonly when income or gains are withdrawn.

– A lump sum of up to €250,000 (25% of the fund) may still be taken on retirement:

o the first €200,000 of this lump sum will be exempt from tax; ando the remaining amount of €50,000 will be liable to tax at 20%.

Tutorial note: Amounts above €500,000 are taxed at the individual’s marginal rate of income tax and universal socialcharge (USC) also applies.

The balance of the pension fund (after deduction of the lump sum) at retirement will be transferred to an ARF. Such fundsare administered by qualifying fund managers. Any withdrawal from the ARF is treated as income and PAYE is operated bythe fund manager.

Unless you have a guaranteed pension from another source of at least €12,700 per annum, an amount of €63,500 mustbe transferred from the ARF to an Approved Minimum Retirement Fund (AMRF) or used to purchase an annuity. No capitalcan be withdrawn from the AMRF until you reach the age of 75 or die. The earnings on the AMRF may be withdrawn, again,subject to PAYE.

(iii) The taxes payable in relation to your proposed gift of the quoted shares to Olivia

CGTThe quoted shares are not business assets and therefore are subject to CGT. The annual exemption will not be available if thegift is made in the same year as retirement relief is being claimed in respect of the transfer of the TPL shares to John.

Therefore, if you transfer the quoted shares to Olivia in 2014, CGT of €29,700 will be payable by you (Schedule 5).

Stamp dutyStamp duty of €1,800 (1% of the deemed proceeds) will be payable by Olivia.

CATThe class 1 threshold (parent to child) applies to dispositions from a grandparent to the minor child of a deceased child.Therefore, as the current market value of the quoted shares is less than €225,000, there will be a nil liability for CAT, providedthe shares are transferred to Olivia before her 18th birthday.

(iv) More tax efficient alternative to the gift of the quoted shares

The cash at bank and the government securities are not subject to CGT and are also exempt from stamp duty. The proposedgift to Olivia should therefore comprise cash and government securities rather than the quoted shares. This will save tax of€31,500 (€29,700 + €1,800).

It would also be advisable to increase the value of the gift by €48,000 to a total of €228,000. This would fully utilise boththe small gifts exemption of €3,000 and the class 1 threshold of €225,000 available for a gift prior to Olivia’s 18th birthday.This will save future CAT of €15,840 (€48,000 x 33%).

The above measures will result in a total tax saving of €47,340.

(v) Potential tax liabilities arising on the transfer of the remaining other assets to Olivia on your death

Assuming our advice in (iv) above is implemented, your remaining other assets (at current market value) will comprise quotedshares of €180,000, cash (or government securities) of €72,000 and your private residence of €320,000.

CGTNo charge to CGT will arise as the transfer will be on a death.

Stamp dutyNo stamp duty will be payable by Olivia, as the property is passing on an inheritance.

CATThe class 2 threshold of €30,150 will apply to any disposition from yourself which occurs after Olivia’s 18th birthday on 30 November 2014. Assuming you survive beyond this date, the CAT payable by Olivia based on the assets’ current valueswill be €178,811 (Schedule 6).

RecommendationIt may be possible for Olivia to avail of the CAT relief for dwelling houses, which would make the disposition of your privateresidence exempt from CAT. This would be the case if Olivia meets the following conditions at the time of your death:

– she has occupied the house continuously as her only or main residence for three years prior to the date of theinheritance;

– at the date of the inheritance, she does not own another dwelling house; and

23

Page 5: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

– she occupies the house as her only or main residence for six years after the date of the inheritance, otherwise there willbe a clawback of the relief.

I trust that the above addresses your requirements but please feel free to contact us if you require any further assistance.

Yours sincerely

ABCChartered Certified Accountants

COMPUTATIONAL APPENDIX

Schedule 1: Valuation of TPL

AssetsPremises at market value (MV) 800,000Equipment at MV 60,000Goodwill 340,000Shares in Tavares Ltd at MV 300,000Inventory 40,000Trade receivables 30,000Cash at bank 10,000LiabilitiesTrade payables (50,000)

––––––––––1,530,000––––––––––

Schedule 2: Chargeable assets (CA) and chargeable business assets (CBA)

CA CBA€ €

Premises 800,000 800,000Equipment 60,000 60,000Goodwill 340,000 340,000Shareholding in Tavares Ltd 300,000

–––––––––– ––––––––––1,500,000 1,200,000–––––––––– ––––––––––

Schedule 3: Anthony Manero CGT computation on the disposal of the shares in TPL

€ €

Deemed sales proceeds (as per Schedule 1) 1,530,000Less: cost 50,000Indexation 1976/77 5·238 (261,900)

––––––– ––––––––––Gain on disposal 1,268,100Retirement relief (note 1) (1,014,480)

––––––––––Taxable gain (note 2) 253,620

––––––––––CGT at 33% 83,695

Note 1: Retirement reliefGain x (market value of CBA/market value of CA)(€1,268,100 x €1,200,000/€1,500,000) €1,014,480

Note 2: Annual exemptionThe CGT annual exemption is not available in a year when retirement relief has been claimed.

24

Page 6: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Schedule 4: John Manero CAT computation

Gift Inheritance€ €

Market value of shares in TPL 1,530,000 1,530,000Less: stamp duty (15,300) 0

–––––––––– ––––––––––Taxable value of shares in TPL 1,514,700 1,530,000Less: business property relief (note 1) (1,095,930) (1,107,000)

–––––––––– ––––––––––418,770 423,000

Less: small gifts exemption (3,000) 0–––––––––– ––––––––––

Taxable value 415,770 423,000Class 1 threshold (225,000) (225,000)

–––––––––– ––––––––––190,770 198,000

–––––––––– ––––––––––Tax at 33% 62,954 65,340Less: credit due for CGT paid by Anthony (83,695) 0

–––––––––– ––––––––––CAT due Nil 65,340

–––––––––– ––––––––––

Note 1: Business property relief

€ €

Market value of shares 1,530,000 1,530,000Less: shares in Tavares Ltd (300,000) (300,000)

–––––––––– ––––––––––Market value of shares excluding investments 1,230,000 1,230,000Stamp duty at 1% (12,300) 0

–––––––––– ––––––––––Taxable value of shares excluding investments 1,217,700 1,230,000

–––––––––– ––––––––––Business property relief at 90% 1,095,930 1,107,000

–––––––––– ––––––––––

Schedule 5: Anthony Manero CGT computation on the disposal of the quoted shares

Deemed sales proceeds 180,000Less: cost (90,000)

––––––––Gain on disposal 90,000Annual exemption (not available) 0

––––––––90,000

––––––––CGT at 33% 29,700

Schedule 6: Olivia Manero CAT computation on inheritance of the remaining other assets (excluding pension fund)

Quoted shares 180,000Cash (or government securities) 72,000Private residence 320,000

––––––––572,000

Less: class 2 threshold (30,150)––––––––

Taxable 541,850––––––––

CAT at 33% 178,811

25

Page 7: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

2 The Gourmet group

(a) Loss group(s) for corporation tax purposes

The main condition for membership of a loss group is that a 75% shareholding relationship (directly or indirectly) must existbetween the relevant companies.

The following companies are members of the Gourmet loss group:

– Gourmet Ltd;– Pasta Ltd;– Pizza Ltd;– Bread Ltd; and– New Ltd.

Tutorial note: Idle Ltd cannot form part of the Gourmet loss group because Gourmet Ltd is only entitled to 64% of Idle Ltd’sshare capital (80% x 80%).

Bread Ltd and Idle Ltd also form a (second, separate) loss group.

(b) Capital gains group for corporation tax purposes

The main condition for membership of a capital gains group is that a 75% shareholding exists at each level between a holdingcompany and its subsidiaries.

Therefore, the Gourmet capital gains group consists of:

– Gourmet Ltd;– Pasta Ltd;– Pizza Ltd;– Bread Ltd;– Idle Ltd; and– New Ltd.

Tutorial note: Idle Ltd is a greater than 75% subsidiary of Bread Ltd and so it forms part of any capital gains group whichBread Ltd is part of. Unlike for a loss group, there is no requirement that Gourmet Ltd has an indirect interest of at least75% in Idle Ltd.

(c) Corporation tax liability of the Gourmet group companies for the year ended 30 September 2014

Gourmet Pasta Pizza Bread Idle NewLtd Ltd Ltd Ltd Ltd Ltd€ € € € €

Case I adjusted profit 180,000 45,000 60,000 Nil Nil 120,000Chargeable gain (note 1) 264,000

–––––––– ––––––– –––––––– ––– ––––––– ––––––––Profits taxable at 12·5% before loss relief 180,000 45,000 324,000 Nil Nil 120,000Loss relief (note 2) (45,000)Group loss relief (note 3) (180,000) (324,000) (60,000)

–––––––– ––––––– –––––––– ––– ––––––– ––––––––Profits taxable at 12·5% 0 0 0 Nil Nil 60,000

–––––––– ––––––– –––––––– ––– ––––––– ––––––––Corporation tax at 12·5% 0 0 0 0 7,500

–––––––– ––––––– –––––––– ––– ––––––– ––––––––Profits taxable at 25% 15,000

–––––––Corporation tax at 25% 3,750Group loss relief on a value basis (note 3) (3,750)

–––––––Corporation tax at 25% 0

–––––––

Note 1: Chargeable gain

Capital gain €100,000 x 33%/12·5% = €264,000

Note 2: Pasta Ltd – loss memorandum

Case I losses brought forward 360,000Utilised in 2014 (45,000)

––––––––Losses carried forward to 2015 315,000

––––––––

26

Page 8: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Note 3: Bread Ltd – loss memorandum

2014 Case I losses 640,000Surrendered to New Ltd (6/12 x €120,000) (60,000)Surrendered to Gourmet Ltd (180,000)Surrendered to Pizza Ltd (324,000)Surrendered to Idle Ltd on a value basis(€15,000 x 25%/12·5%) (30,000)

––––––––Losses carried forward to 2015 46,000

––––––––

Capital lossesCapital loss brought forward 60,000Losses utilised in 2014 0

––––––––Capital loss carried forward to 2015 60,000

––––––––

Tutorial note: Losses can only be claimed for the period that a company has been part of the group, which in New Ltd’scase is only for six months in 2014.

(d) Sale of shareholding in Idle Ltd

The gain on the disposal of these shares will not qualify for the holding company (participation) exemption because, as aproperty holding company, Idle Ltd derives the greater part of its value from Irish land and buildings.

Corporation tax (CT) on chargeable gainThe gain will be subject to corporation tax on chargeable gains. As Bread Ltd has capital losses brought forward of €60,000,it will pay CT on the chargeable gain of €46,200 ((€200,000 – €60,000) x 33%).

Value added tax (VAT)There is no VAT on the disposal of shares.

Exit charge (CT) payable on leaving the groupAs Idle Ltd has left the capital gains group still holding the building received within ten years from another group member(Bread Ltd), the deferred gain will now become taxable on Idle Ltd. The tax payable will be:

Deemed proceeds (November 2008) 160,000Cost (July 2003) (50,000)

––––––––Capital gain 110,000

––––––––Corporation tax (effective rate 22%) 24,200

Tutorial note: The tax of €24,200 is the responsibility of the new owners of Idle Ltd.

Exit charge: stamp dutyThere would be no exit charge in respect of stamp duty because there would have been no relief from stamp duty on theoriginal transfer, as a stamp duty group requires a 90% shareholding relationship.

(e) Sale of the manufacturing unit by Pizza Ltd

CT on chargeable gain

Expected proceeds 1,000,000Cost to Pasta Ltd (2009) (700,000)

––––––––––Capital gain 300,000

––––––––––Corporation tax (effective rate 33%) 99,000

VATPasta Ltd had to charge VAT to Pizza Ltd on the transfer of the manufacturing unit on 20 January 2010 because the buildingwas less than five years old on that date (i.e. would have been classed as ‘new’).

On 31 January 2015 the building is no longer new, so the sale by Pizza Ltd will be exempt from VAT. However, a clawbackof VAT will arise under the capital goods scheme unless an election to tax the transaction is made.

27

Page 9: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

The clawback will be calculated as follows:

VAT applicable on the transfer from Pasta Ltd(€1,250,000 x 13·5%) 168,750Tax life of the building at January 2010 (years) 20Number of full intervals remaining 14Clawback ((14 + 1)/20 x €168,750) 126,563

RecommendationThe joint option to tax the sale of the manufacturing unit for VAT purposes should be exercised in order to avoid a clawbackof VAT under the capital goods scheme. This should be commercially feasible, provided the prospective purchaser is VATregistered and thus will be able to reclaim the VAT charged by Pizza Ltd on the sale of the manufacturing unit.

3 (a) Kevin O’Reilly

(i) Proposed lease of offices to the partnership

The leasing of property is an exempt activity for value added tax (VAT) purposes. Therefore, the proposal involves achange of use of the office building from a taxable to an exempt activity. Under the capital goods scheme, this is a ‘big-swing’ which would trigger a full clawback of the VAT reclaimed on the initial purchase of the office building, for theremaining years as follows:

Purchase price (excluding VAT) 250,000VAT reclaimed at 13·5% 33,750VAT life of new building (years) 20Number of full intervals remaining 9Clawback ((9 + 1)/20 x €33,750) 16,875

However, it will be possible to elect to have the ongoing rents subject to VAT at the standard rate of 23%. If this electionis made, there will not be a change of use to an exempt activity and so, no clawback will take place.

The option to tax the rents is available in this case, even though the letting is between connected persons. This isbecause the option is allowed between connected persons where the occupant is using the property for at least 90%VAT liable/deductible activities (which is the situation in this case).

If this single option to tax is made by Kevin (as landlord) and VAT is charged at 23% on the monthly rent, the partnershipwill be able to claim an input credit for the VAT incurred.

(ii) Other potential tax issues

Registration: It will be necessary to register the partnership for VAT, employer’s PAYE and income tax.

Income taxCessation: There will be a cessation of the sole trade business which may require a revision of the assessment for thepenultimate year.

Commencement: The partnership will commence from 1 June 2014. Marie will cease to be an employee and willbecome self-employed and subject to self-assessment from 1 June 2014 onwards.

Interest on the loan: The interest paid by Marie on the loan borrowed to invest in the partnership will not be an allowablededuction for income tax purposes.

Tutorial note: Tax relief is no longer available for interest on new loans obtained after 15 October 2013.

Capital allowancesThe disposal of the equipment at a value in excess of its tax written down value (TWDV) would normally generate abalancing charge. However, where a sole trader is transferring assets to a partnership and the sole trader is entitled tomore than 50% of the partnership profits (as in this case), both entities may elect to transfer the relevant assets at theirTWDV.

Capital gains tax (CGT)Kevin will be making a disposal of relevant assets, for CGT purposes.

The main asset of concern here is goodwill. As this will probably have a base cost of nil, CGT will apply at 33% to itsfull value. Kevin will not be able to avail of retirement relief because he is under 55.

CGT is not likely to be an issue in relation to the transfer of the equipment because it is not valued in excess of its originalcost. The work in progress and receivables (debtors) are not chargeable assets for the purposes of CGT.

VATWhere a business is disposed of and both the vendor and the purchaser are registered for VAT, the supply is not vatableunder the transfer of business rules, if the business is capable of being operated on an independent basis. In the absenceof this relief, VAT would need to be charged on all assets for which an input credit had been claimed (i.e. the equipment).

28

Page 10: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

It is therefore essential that both entities (the sole trader and the partnership) are registered for VAT at the time of thetransfer of the equipment.

Stamp dutyStamp duty will be payable on the value of the goodwill transferred to Maria, at the rate of 2%.

If the equipment can be transferred by delivery, no stamp duty charge will arise.

The transfer of the work in progress and receivables (debtors) to the partnership would normally give rise to a liabilityto stamp duty at 2%. However, if the partnership does not take ownership of the debtors but instead collects thereceivables as an agent for the sole trader, then no stamp duty liability will arise on the value of the receivables.

(iii) Kevin is your client. It would be advisable for Marie to obtain separate advice in relation to the various tax issues involvedin setting up the partnership in order to avoid any potential conflict of interest.

(b) Garcia SRL

Garcia SRL is a distance seller. Therefore, if the total consideration for the supplies made into Ireland exceeds or is likely toexceed €35,000 in the calendar year, it must register for VAT in Ireland and account for Irish VAT at 23% on the sales.

If at the time of the January sale, Garcia SRL expected the turnover from sales to private individuals in Ireland for 2014 toexceed €35,000, then it should have registered for VAT in Ireland and charged Irish VAT as opposed to Spanish VAT on thesale.

Even if there were no likelihood of the €35,000 threshold being exceeded at the time of the January sale, Garcia SRL wouldhave been entitled to elect to register for VAT in Ireland.

Regardless of the position regarding the January sale, Garcia SRL would have been required to register and account for IrishVAT on both the June and October sales.

(c) Bathrite Ltd

Where the VAT-exclusive cost of goods to the supplier exceeds two thirds of the VAT-exclusive price to the customer, the rateof VAT to be charged on the contract price is the rate applying to the goods.

In this case the goods (materials) value amounts to 57% of the overall price (€4,000/€7,000). As this is less than two thirds,the reduced rate of 13·5% should be charged on the bathroom installations.

4 (a) Clearwater Ltd

Clearwater Ltd is a close company because it is under the control of five or fewer participators (and also is controlled byparticipators who are directors). It is therefore subject to the close company legislation.

Sale of the warehouse at an undervalueThe warehouse was sold to Mark Murphy at €100,000 less than the market value of the property at the time. The varioustax implications are as follows:

Clearwater Ltd: Corporation tax on capital gainClearwater Ltd is treated as disposing of the warehouse to Mark Murphy at market value.

Sales proceeds (deemed) 400,000Cost (2004) (320,000)

––––––––Capital gain 80,000

––––––––

Corporation tax of €26,400 (€80,000 x 33%) will be payable on the gain by Clearwater Ltd.

Clearwater Ltd: Dividend withholding tax (DWT)Mark Murphy is treated as having received a distribution of €100,000 (€400,000 – €300,000).

DWT of €20,000 (€100,000 x 20%) became payable by Clearwater Ltd on the 14th of the month following the deemeddate of the distribution, i.e. on 14 March 2014.

The company can seek to recover this DWT from Mark Murphy. If Mark Murphy does not repay the DWT to the company,the DWT may be treated as a further distribution.

Mark Murphy: Income tax, PRSI and USCMark Murphy is taxable at an effective rate of 52% on the distribution received, but will receive a credit for the DWT deducted.His tax payable on the €100,000 will amount to €32,000 (€52,000 – €20,000).

Shareholders’ base cost on future disposalsThe undervalue of €100,000 will be apportioned over all of the company’s issued ordinary shares and in the event of a futuredisposal of shares by any of the shareholders, the base cost of the shares will be reduced accordingly.

29

Page 11: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Payment of the legal expenses of Anne FogertyAnne is an employee of Clearwater Ltd and therefore the payment of her legal expenses will be treated as a benefit in kind.Anne will pay tax at an effective rate of 52% on this benefit.

Clearwater Ltd will be allowed a corporation tax deduction for the amount of the expense (benefit).

Clearwater Ltd: Corporation tax liability for the year ended 31 December 2014The company’s corporation tax liability on its income and chargeable gains is:

Case II (€200,000 x 12·5%) 25,000Case V (€30,000 x 25%) 7,500Chargeable gain (as above) 26,400

–––––––58,900–––––––

Clearwater Ltd: Close company surchargeClearwater Ltd is a professional service company and therefore is subject to an effective surcharge of 7·5% on its after taxundistributed Case II income; and to a 20% surcharge on its after tax undistributed Case V income, net of the tradingcompany deduction.

The company’s after tax income is calculated as follows:

€ €

Case II 200,000Corporation tax at 12·5% (25,000)

––––––––After tax trading income 175,000

––––––––50% of after tax trading income 87,500

Case V 30,000Corporation tax at 25% (7,500)

––––––––After tax estate income 22,500Trading company deduction at 7·5% (1,688)

––––––––20,812

––––––––108,312––––––––

Clearwater Ltd paid no dividends in 2014 or in 2015 to date. The distribution of €100,000 will be first applied to eliminatethe after tax Case V income of €20,812, attracting the higher (20%) rate of surcharge. The balance of €79,188 will beapplied to reduce the after tax trading income to €8,312 (€87,500 – €79,188).

The professional services company surcharge for the year ended 31 December 2014 will therefore amount to €1,247(€8,312 x 15%).

This may be reduced to nil if a dividend of at least €8,312 is paid within 18 months of the expiry of the relevant accountingperiod (i.e. before 30 June 2016).

(b) Softco plc

(i) Tax implications of the proposed share awards

(1) EmployeesThe market value of the free shares awarded will be treated as notional pay at the time the shares are awarded.This notional pay is subject to:

– income tax at the employee’s marginal rate;– universal social charge (USC); and– employee PRSI.

Therefore, the effective tax burden for higher rate taxpayers (such as the six employees) will be 52% (41% + 7%+ 4%).

Capital gains tax (CGT) will arise on a subsequent sale of the shares by an employee if the shares are sold at aprice higher than €10,000 (the market value of the shares on the day they were awarded to the employee).

(2) Softco plc (employer)Revenue approval is not required for share awards and the shares do not need to be offered to all employees.

Softco plc must account for the income tax, USC and employee PRSI on the share award through the PAYE systemin the same way as it does for other benefits in kind (BIK) and remit these to the Revenue in the month followingthe share award.

Share awards are not subject to employer’s PRSI.

30

Page 12: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Softco plc can collect the taxes due from the employee in future payroll periods provided the liability is paid in fullby 31 March of the following tax year. Otherwise another BIK charge will arise on the outstanding balance.Alternatively, Softco plc may withhold or sell sufficient shares to fund the taxes due on the award of the shares,before transferring the balance of the shares to the employees.

(ii) Tax planning proposal

The Revenue will allow a reduction in the taxable value of the free of charge shares, if the shares are subject to arestriction on disposal for a fixed period following the award (the ‘clog’ period). The longer the ‘clog’ period, the greaterthe reduction in taxable value, as follows:

Period of restriction Percentage reductionOne year 10%Two years 20%Three years 30%Four years 40%Five years 50%Over five years 60%

The CGT base cost of the shares for the purposes of any subsequent sale by the employee will be reduced by the samepercentage reduction as the taxable value of the award.

Tutorial note: The effective tax saving will only be 19% (52% – 33%), with the remaining 33% tax saving only beingdeferred until the sale of the shares (provided at least market value is realised).

During the ‘clog’ period, the shares must not be sold, assigned, charged, transferred or pledged as security for loans anda written contract must be entered into to this effect.

The employer will place the shares in a trust for the benefit of the relevant employees.

The employer must report to the Revenue (on a standard form RSS1) before 31 March in the tax year following theevent, where:

– restricted shares have been awarded to employees; or– restricted shares have been forfeited; or– shares have been disposed of prior to the end of the ‘clog’ period.

There are penalties for failure to make this return or for making a false return.

Tutorial note: An alternative recommendation would be to set up a Revenue approved profit sharing scheme (APSS).However, an APSS must be open on similar terms to all employees who have been employed for a minimum period setby the employer, not exceeding three years.

5 Cavern Ltd

(a) Trading structure for German office

(1) BranchThe taxation implications of operating the German office as a branch are:

– The branch profits will be liable to Irish corporation tax at 12·5%, assuming the trade is managed and controlledfrom Ireland.

– Any German branch profits are also likely to be liable to German tax at 30%, as the branch will be considered tobe a permanent establishment. However, a credit will be available in Ireland for any foreign tax paid, but limitedto the Irish tax charged on the same income, i.e. at the lower of the German or the Irish corporation tax rate.Therefore, it is likely that there will be no additional Irish corporation tax to pay on the profits of the German branch.

– Where German tax is unrelieved in any year, it can be carried forward indefinitely and credited against the Irishcorporation tax payable on the German branch profits in future years.

– The German branch losses anticipated in the first two years will be automatically utilised against the Irish profitsof Cavern Ltd, as the worldwide business is considered to be a ‘single entity’ for tax purposes.

(2) SubsidiaryThe taxation implications of incorporating a German subsidiary of Cavern Ltd are:

– The profits of the subsidiary will be liable to corporation tax in Germany at 30% and there will be no exposure forthe German profits to Irish corporation tax.

– Dividends paid to Cavern Ltd will be liable to corporation tax under Schedule D Case III.

– Credit relief will be available for any foreign withholding tax and underlying foreign tax paid on the profits out ofwhich the dividend was paid.

– As with a branch, where any German tax is unrelieved in any year, it can be carried forward indefinitely andcredited against the Irish corporation tax payable in future years.

31

Page 13: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

– Losses arising in the German subsidiary can only be set against profits in Cavern Ltd where the subsidiary is 75%owned by Cavern Ltd (which is likely to be the case) and the losses are not available for offset in Germany eitherby a current year claim, other group relief claim, a preceding year’s claim or the carry forward of the losses. Thisis a very restricted entitlement and in practice loss relief against Cavern Ltd’s profits is unlikely to be available.

– Dividends received from the German subsidiary will not count as investment income in Cavern Ltd for closecompany surcharge purposes.

RecommendationAs the German office is likely to be loss making for the next two accounting periods, a branch structure should beimplemented, in order to facilitate the use of these German losses against Cavern Ltd’s Irish profits.

Even once the German office becomes profitable, there is unlikely to be any additional Irish taxation on the profits from theGerman business due to the availability of a double tax relief credit for the German tax suffered (at a higher rate) on the sameprofits.

However, the application of a subsidiary structure may facilitate the use of the holding company exemption on a futuredisposal, which may make structuring the operations through a subsidiary more attractive once the German office is profitable.

(b) Percy Bright’s severance package

Statutory redundancy and the pension lump sum are exempt from income tax.

The ex-gratia payment (€65,000) and the inclusion of a company car (€20,000) are equivalent to a lump sum payment of€85,000 and are partially subject to income tax. The tax free element of the package is calculated as follows:

Basic exemption

(€10,160 + (€765 x 24)) 28,520

Increased basic exemption

Maximum increase allowable 10,000Less pension lump sum (12,500)

–––––––Increase possible Nil

–––––––

Standard capital superannuation benefit (SCSB)

Last three years (2012, 2013, 2014)Total salary 108,000Total BIK 15,000

––––––––Total emoluments for the last three years 123,000

––––––––Average annual emoluments 41,000

SCSB

(€41,000 x 24)/15 65,600Less: pension lump sum (12,500)

–––––––53,100–––––––

The SCSB is the highest figure and therefore €53,100 is tax free.

The taxable portion of the lump sum is therefore €31,900 (€85,000 – €53,100). Income tax, at Percy’s marginal rate of41%, of €13,079, together with USC at 7% of €2,233 but NOT any PRSI will be deducted at source by Cavern Ltd.

Tutorial note: Top slicing relief has been abolished with effect from 1 January 2014.

(c) Engagement of Geoffrey March on a part-time basis

Geoffrey will be deemed to be an employee of Cavern Ltd if the circumstances indicate that he has been engaged under acontract of service rather than a contract for services. The following factors indicate that under the proposed arrangementGeoffrey would be an employee rather than self-employed:

o He would be paid a regular amount per week.o He would attend work and perform his duties at fixed times.o He would (presumably) use the equipment of Cavern Ltd in the performance of his duties.o He would not carry any financial risk.o He would have no opportunity to profit from sound management or efficiencies.

32

Page 14: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

In the event of a future Revenue audit, Cavern Ltd could be liable to pay the payroll taxes (which would include income tax,employer and employee PRSI and universal social charge (USC)) avoided by the proposed arrangement, plus interest andpenalties.

It may be possible for Cavern Ltd to demonstrate to the satisfaction of the Revenue that Geoffrey had correctly returned andpaid all the taxes due as a self-employed individual. However, at a minimum, the company would be held liable for theemployer’s PRSI which was avoided by the ‘self-employment’ arrangement.

Marking note: Credit will also be awarded for consideration of relevant alternative factors indicating Geoffrey’s employmentsuch as the fact that he must (presumably) perform his work personally and will (presumably) be subject to supervision andcontrol by the Browns.

33

Page 15: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Professional Level – Options Module Paper P6 (IRL)Advanced Taxation (Irish) June 2015 Marking Scheme

This marking scheme is given as a guide to markers in the context of the suggested answer. Scope is given to markers to awardmarks for alternative approaches to a question, including relevant comment, and where well reasoned conclusions are provided. Thisis particularly the case for essay based questions where there will often be more than one definitive solution.

Available Maximum1 (i) Transfer of TPL shares to John

Valuation of shares 1·0CGT – gift

Retirement relief 0·5Application of retirement relief conditions 2·0Child proceeds limit applicable to ‘favourite nephew’ 1·0Non-business assets, explanation and CGT calculation 3·0Clawback 1·0

No CGT on inheritance 0·5Stamp duty – gift 0·5Stamp duty – inheritance 0·5CAT – gift

Business property relief 0·5Application of business property relief conditions 2·0Class 1 threshold applies 1·0CAT computation including non-business assets 2·0Offset of CGT paid by Anthony 1·0Clawback 0·5

CAT – inheritance, computation 1·5Summary of tax payable 0·5Recommendation and reasons 1·0

––––20·0 17·0

(ii) Alternative option for pension fundChoose ARF regime before retirement date 0·5Benefits of ARF option (1 x 3) 3·0Balance after lump sum withdrawn is transferred to ARF 0·5Withdrawals from ARF subject to PAYE 0·5Explanation of AMRF 1·0

––––5·5 4·0

(iii) Transfer of quoted shares to OliviaCGT, calculation and comment 2·0Stamp duty 0·5CAT 1·0

––––3·5 3·0

(iv) Alternatives to transferring the quoted sharesGive cash or government securities, as exempt from CGT and stamp duty 1·5Increase gift to avail of class 1 threshold for CAT 1·0Increase gift to avail of small gifts exemption for CAT 0·5Quantify tax saving 0·5

––––3·5 3·0

(v) Potential tax liabilities on transfer of remaining assets and recommendationNo charge to CGT on a death 0·5No charge to stamp duty on a death 0·5CAT: explanation of class 2 threshold and computation 2·0Recommendation re dwelling house relief 2·0

––––5·0 4·0

Professional marksFormat and presentation of the letter 1·0Effectiveness of written communication 1·0Appropriate use of support schedules/appendix 1·0Logical flow of calculations 1·0 4·0

–––– ––––35

––––

35

Page 16: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Available Maximum2 (a) 75% shareholding requirement, direct or indirect 1·0

Gourmet loss group 1·0Bread/Idle loss group 1·0 3·0

––––

(b) 75% shareholding requirement, at each level 1·0Gourmet gains group 1·0 2·0

––––

(c) Pizza Ltd: calculation of chargeable gain 1·0Pasta Ltd: losses forward used first 1·0New Ltd: restriction of loss relief to six months’ ownership period 1·0Idle Ltd: 25% tax and loss relief on a value basis 1·5Group relief in Gourmet Ltd and Pizza Ltd (2 x 0·5) 1·0Tax payable only New Ltd at 12·5% 0·5Loss memoranda and losses carried forward 1·0 7·0

––––

(d) Holding company exemption does not apply – explanation 1·5Corporation tax computation on chargeable gains 1·5VAT not applicable 0·5Company leaving group within ten years: CT exit charge payable 2·0No exit charge for stamp duty – explanation 1·5 7·0

––––

(e) Computation of potential CT on chargeable gain 1·0VAT chargeable on 2010 transfer by Pasta Ltd but not 2015 sale – explanation 2·0Explanation and calculation of VAT clawback 2·0Recommendation: elect to tax the sale for VAT purposes 1·5

––––6·5 6·0

––––25

––––

36

Page 17: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Available Maximum3 (a) (i) Explanation of transfer to an exempt activity 1·0

Calculation of potential clawback 1·5Election to tax the rents 1·0Restrictions re connected parties not applicable 1·5Kevin charges VAT and partnership reclaims 1·0

––––6·0 5·0

(ii) Registration for various taxes 1·0Income tax

Cessation of sole trade, potential revision of penultimate year of assessment 1·0Commencement of partnership, Marie becomes subject to self-assessment 1·0No interest relief on loan 1·0Capital allowances, ability to elect to avoid balancing charge 1·5

CGTIdentification of goodwill disposal 0·5Explanation of potential liability 1·0CGT not applicable to the equipment, receivables or work in progress 1·0

VATExemption if both parties are registered 1·0

Stamp dutyApplicable to goodwill 0·5Not applicable to transfer of equipment if by delivery 1·0Applicable to receivables and work in progress 1·0Receivables collected as agent 0·5

––––12·0 10·0

(iii) Marie to obtain separate tax advice – potential conflict of interest 1·0

(b) Distance sellers must register for Irish VAT if distance selling threshold exceeded 0·5If they expected to exceed this in January, must register and charge Irish VAT 1·0Could elect to register regardless of expectations 0·5Must register and charge Irish VAT on the June and October sales 1·0

––––3·0 2·0

(c) Explanation of two-thirds rule 1·0Determination of correct VAT rate 1·0 2·0

–––– ––––20

––––

37

Page 18: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Available Maximum4 (a) Close company: identify and explain 0·5

Sale of warehouse at undervalueClearwater Ltd: CT on disposal at market value 1·0Identification of distribution €100,000 1·0Clearwater Ltd: DWT calculation and payment date 1·0Right to recover DWT from Mark Murphy 0·5Potential further distribution if not repaid 0·5Mark Murphy: personal tax 1·0Reduction in shareholders’ base cost on future disposal of shares 1·0

Payment of expenses of Anne FogertyBIK taxable at 52% 1·0Valid CT deduction for the company 0·5

Corporation tax liability 1·0Surcharge

Identification of two potential surcharges 1·0Calculation of after tax income subject to surcharge 1·0Use of distribution against higher surchargeable income first 0·5Calculation of final surcharge amount 0·5Effect of payment of dividend within 18 months 0·5

––––12·5 11·0

(b) (i) Implications for employeesMarket value of free shares is treated as notional pay 0·5Subject to IT, USC and employee PRSI (52%) 1·0CGT on subsequent sale – explanation 1·0

Implications for employerRevenue approval not required 0·5Shares need not be offered to all employees 0·5Account for payroll taxes, similar to BIKs 0·5Not subject to employer’s PRSI 0·5Arrangements for payment and deduction of payroll taxes 2·0

––––6·5 6·0

(ii) A restriction (clog) on disposal reduces their taxable value 1·0Table showing reductions available 0·5Effect on employee’s CGT base cost 1·0Restrictions on selling, assigning, transferring, pledging, etc 0·5Employer places shares in a trust for the employee 0·5Reporting requirements for the employer 1·0

––––4·5 3·0

Alternative suggestion – Revenue approved profit sharing scheme (maximum 3 marks)––––20

––––

38

Page 19: Answers - ACCA Global · Professional Level –Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2015 Answers 1 Anthony Manero Chartered Certified Accountants Any Street

Available Maximum5 (a) Branch profits liable to 12·5% Irish corporation tax 1·0

Also, subject to German tax as permanent establishment 1·0Credit available for German tax paid subject to maximum of Irish tax liability 1·0Excess unused foreign tax credit can be carried forward 1·0Branch losses automatically utilised against Irish profits 1·0German subsidiary liable to German not Irish corporation tax 1·0Dividends liable to Irish corporation tax under Schedule D Case III 0·5Credit available for both withholding tax and underlying corporation tax in Germany 1·0Excess unused foreign tax credit can be carried forward 0·5Losses can only be offset in restricted circumstances 2·0Dividends will not count for close company purposes 1·0Recommendation 2·0

––––13·0 10·0

(b) Statutory redundancy exempt 0·5Basic exemption calculation 1·0Increased basic exemption calculation 1·0SCSB calculation 2·0Identification of income tax and USC to be deducted at source 0·5PRSI not applicable 0·5

––––5·5 5·0

(c) Factors indicating that Geoffrey would actually be an employee 2·0Responsibility of company for payroll taxes 1·0Demonstration of no loss of revenue 1·0Company at a minimum responsible for employer’s PRSI 1·0 5·0

–––– ––––20

––––

39