Part 2 July Continuous Assessment

Transcription

1 Part 2 July Continuous Assessment Business Taxes Application & Interaction Saturday, 3 July 2010 Time Allowed 90 minutes INSTRUCTIONS Answer all parts of the question. All workings should be shown and made to the nearest. All names mentioned are entirely fictitious. Clearly state any assumptions that you make. The marks awarded for this assessment represent 10% of the total marks available for this module. Copyright: The Irish Taxation Institute 2010

2 QUESTION 1 YesUCan Ltd is an Irish tax resident company involved in the area of product licensing and development in the adult education market. Below is the Income Statement of the company for the 18 month period ended 31 December Note Revenue 900,000 Gross Profit 478,000 Other Income 1 50,000 Distribution Costs 2 (120,000) Administrative Expenses 3 (89,000) Finance Costs 4 (145,000) Profit before tax 174,000 Income Tax expense (21,837) Profit for period 152,163 The notes below have been provided by the Financial Controller of YesUCan Ltd. Note 1: Other income Profit on disposal of machinery 1,000 The machine was originally acquired for 18,000 in January 2005 and was sold for 12,000 in December A replacement machine was acquired immediately for 20,000. Dividends from Irish resident subsidiary 14,000 Dividends from UK quoted Plc 2,500 Income from letting company premises from 1 August 2008 (The part of the 32,500 premises sub-let represents 40% of the premises based on square footage). Note 2: Distribution Costs include Licensing royalties of 36,000 payable to UK licensing body for use of certain copyrighted materials. The 36,000 includes a closing accrual of 3,600. The Financial Controller has confirmed that these are not annual payments for the purposes of the Taxes Acts. (Ignore any withholding tax implications in respect of these payments). Payments of 18,000 were made to VHI on behalf of employees during the period. Note 3: Administration Costs include Provision for premises dilapidation costs 40,000 Pension charge of 19,000. The opening and closing pension accruals were Nil and 4,000 respectively. Legal fees incurred in negotiating subletting of premises incurred pre-letting 4,000 Depreciation charge 17,000 Cost of entertaining clients 7,000 Donation to local football team - company logo advertised on shirts 3,000 Donation to approved charitable body 1,200 (Continued overleaf) 1

3 Note 4: Finance Costs include Interest on Finance Leases (see also Note 5) 4,600 Interest on loan used to acquire company premises 60,000 Interest on loan used to lend to trading subsidiary (see Note 6) 32,000 Note 5: The following are extracts from YesUCan Ltd s Balance Sheet as at 30 June 2008 and 31 December 2009: 31 Dec June 2008 Current Liabilities Bank 230, ,000 Obligations under Finance Leases 34,000 50,000 Non-Current Liabilities Bank 300, ,000 Obligations under Finance Leases 230, ,000 The Financial Controller has also confirmed that a finance lease with a present value of 15,000 was entered into during the period. None of the Finance Leases are in relation to passenger motor vehicles. Note 6: The loan to the trading subsidiary met the requirements for interest relief under S.247 during the period. 20,000 of the interest was paid in the 12 months ended 30 June A closing accrual of 2,000 existed at the end of the accounting period. Note 7: The capital allowances schedule of YesUCan Ltd as at 1 July 2008 is as follows: Cost TWDV Rate p.a. Plant & Machinery/Motor Vehicles 230, , % Industrial Building 2,300,000 1,564, % A new passenger motor vehicle was acquired 1 August 2008 for 34,000, emissions category B. REQUIREMENTS (i) Prepare the corporation tax computations of YesUCan Ltd (including relevant withholding taxes unless otherwise stated) for the 18 month period ended 31 December 2009 claiming all available reliefs. You can assume that the profits from product licensing and development qualify for the 12.5% trading rate. (ii) Provide the basis for each adjustment in arriving at the Tax Adjusted Profit for the period (e.g. Legislative, Case-Law and/or Revenue Practice). 2

4 Business Taxes Application & Interaction July CA 2010 Corporation Tax Computations of YesUCan Limited for the 18 month period ended 31 December 2009 Net Profits per Accounting 174,000 Addbacks NOTES Dilapidation Provision ,000 Pension Charge ,000 Legal fees - subletting 3.3 4,000 Depreciation ,000 Client Entertainment 3.5 7,000 S.247 Interest ,000 Irish rental interest ,667 Irish rental interest 4.3 4, ,267 Deductions Other Income 1-50,000 Income Tax Medical Premiums 2.3-4,500 Pension Paid ,000 Finance Lease Payments 5-28,600-98,100 Tax Adjusted Case I Profits before Capital Allowances 222,167 Y/E 30/06/2009 P/E 31/12/09 Tax Adjusted Case I Profits before capital allowances 148,111 74,056 Capital Allowances 7-123,750-61,813 Tax Adjusted Case I Profit/(Loss) 24,361 12,243 Case III 1.3 1, Case V 1.4 2,363 3,470 Total Income 28,390 16,547 Chargeable Gains 0 0 Total Profits 28,390 16,547 S.247 Interest -20,000-10,000 8,390 6,547 Y/E 30/06/09 Y/E 30/06/09 Corporation Tax as follows: 12.50% 1, % 0 8,390 1,049 Income Tax Income Tax Medical Premiums 2.2 3,000 3,000 _ Net Tax Liability 4,049 3

5 P/E 31/12/09 P/E 31/12/09 Corporation Tax as follows: 12.50% % 0 6, Income Tax Income Tax Medical Premiums 2.2 1,500 1,500 Net Tax Liability 2,318 Note 1 1. Machine 18, % TWDV 1/1/09 9,000 Proceeds 12,000 Balancing charge 3,000 Avail of Replacement Option per S.290 Qualifying cost replacement 17, Irish Resident Sub Dividends - Franked Investment Income exempt per S UK Plc dividends - chargeable to corporation tax per 25% Option to 12.5% pursuant to S.21B(4) 4. Income from sub-letting premises taxable under Case V per S.96/97 See Note 4 re associated finance costs Note 2 1. Licensing Royalties not annual payments or patent royalties - should be deductible under the general "wholly and exclusively" test per S.81(2)(a). No withholding tax considerations. 2. Payments 18,000 made to VHI S.112A(3) YesUCan obliged to pay an amount of income tax in respect of the medical premium in accordance with S238 (S113(4) refers) Deduction for Income Tax 4,500 S.113 Income Tax Due 4,500 S.238 Note 3 Case V y/e 30/06/09 y/e 31/12/09 Income 21,029 11,471 Legal fees letting -4,000 Interest -14,667-8,000 2,363 3, S.81(2)(d) specifically provides that provisions for repairs are non deductible 15, Pension contributions deductible on a paid basis per S.774(6)(b) 30, Legal fees in negotiating letting of premises - not allowable per S.97(2), however allowable per Case Law "Stephen Court Limited vs. Brown") & followed in practice. 4. Depreciation disallowed per S.81(2)(f) 4

6 5. Client entertainment costs disallowed by S The donation to local football team should be deductible as a bona fide advertising/marketing on the basis that the cost incurred meets the "wholly and exclusively" test per S.81(2)(a). 7. Donation to approved charitable body deductible per S.848A Note 4 1. Interest on Finance Leases - deductible under the general "wholly and exclusively" test per S.81(2)(a). For the purposes of convention, the Finance Lease Interest is added back in the computation and the total Finance Lease payments (i.e. Interest and "capital" elements) are deducted. Note that S.81(2)(g) does not apply as no asset (capital) has been employed by the company, i.e. The company is not the legal owner of the asset % of Loan Interest deductible per S.97(2)(e) against Case V income 22,667 Balance deductible against trading profits - Interest on Loan used to acquire capital assets allowed by Revenue practice although disallowed by S.81(2)(h) 3. S.247 Loan Interest - interest not incurred for purposes of trade. S.243(8) applies to treat qualifying S.247 interest as a charge on income on a paid basis Year ended 30/06/09 Period ended 31/12/09 20,000 10,000 Note 5 Capital Repayments 50, , ,000-34, ,000 = 24,000 Deductibility as per Note 4.1 above Note 6 See note 4.3 above Note 7 The capital allowances schedule of YesUCan as at 1 January 2009 is as follows: Cost TWDV Rate p.a. Plant & Machinery/Motor Vehicles 230, , % Industrial Building 2,300,000 1,564, % Remove Machine disposed of - Cost 18,000, TWDV 9,000 Include Replacement Machine less balancing charge under replacement option - S.290 New Motor Vehicle - Emissions Category B - specified amount 24,000 Allowance 30/06 TWDV Cost 1/7/09 Allowance 31/12 TWDV 31/12 Rate p.a. Cost Plant & Machinery/Motor Vehicles 254,000 31, , ,000 15, , % Industrial Building 2,300,000 92,000 1,472,000 2,300,000 46,000 1,426, % 2,554, ,750 1,608,000 2,553,000 61,813 1,546,188 5

7 Examiner s Report Business Taxes Application and Interaction July Continuous Assessment 2010 Students did not generally deal adequately with the split of accounting periods into separate taxable periods of 12 and 6 months and the resulting requirement to allocate capital allowances and non trading income to the respective periods. A number of key marks were lost to those students who did not address this key requirement of any accounting period greater than 12 months. Students generally performed well in providing the appropriate basis for various add-backs and deductions. The majority of students did not deal correctly with the adjustments arising from the rental property and the correct calculation of the taxable rental income. Almost all students incorrectly added back licensing royalties as a charge. The requirement to calculate the level of capital allowances for both periods was generally not well addressed with a significant proportion of students failing to avail of the relief afforded by the replacement option. Highest mark was 80% Lowest mark was 0% Average mark was 47% 6

8 Sample Continuous Assessment Part 2 Paper 2: Business Taxes Application & Interactions Time Allowed 1.5 Hours. Copyright 2009: The Irish Taxation Institute 1

9 QUESTION MyFry Limited is an Irish tax resident company carrying on a trade in Ireland. Below is the Income Statement of the company for the year ended 31 December 2009 Note Revenue 3,400,000 Gross Profit 1,600,000 Other Income 1 160,000 Distribution Costs 2 (275,000) Administrative Expenses 3 (423,000) Finance Costs 4 (275,000) Profit before tax 787,000 Income Tax expense -98,375 Profit for period 688,625 The notes below have been provided by the Financial Controller of MyFry Limited. Note 1: Other income Dividends from Irish resident subsidiary 34,000 Interest Received from UK Bank Account 28,000 Profit on disposal of Immovable Property 98,000 The building was acquired on 2/2/1983 for 12,000 inclusive of stamp duty. Professional fees of 400 were incurred as part of the acquisition. A chimney on the building was originally replaced in 1996 at a cost of 16,000. Due to planning objections this chimney had to be subsequently replaced in March 1999 at a cost of 19,400. The building was sold to a third-party for 600,000 on 01/07/09. Legal and professional fees of 6,000 were incurred as part of the disposal and are included in Administration Expenses. Note 2: Distribution Costs include The level of audit materiality is 12,000 for this class of item. A provision for water pollution 34,000 The local authority is seeking in damages for water pollution alleged to be caused by MyFry for illegal dumping of frying oil. The company auditors have reviewed the issue and are satisfied that the provision is in accordance with IFRS accounting standards. MyFry has incurred legal and professional costs of 6,000 in defending the claim. The financial controller has advised that should the claim be found against the company, it could have adverse consequences for the ability of the company to continue as a going concern. 2

10 Payments made to Quinn Health on behalf of employees during the period 16,000 Movement in General Provision for Bad Debts 5,000 Note 3: Administration Costs include Depreciation charge 46,000 Provision for premises dilapidation costs 40,000 Costs of obtaining a further 19 licences for Microsoft Office 1,200 Professional fees incurred in obtaining advice about potential staff redundancy entitlements - no redundancies were made 15,000 Professional fees incurred in defending possible takeover of company by competitor 30,000 Pension charge 32,000 The opening and closing pension accruals were 2,000 and 3,000 respectively. Foreign Exchange Gain (5,400) The Financial Controller has confirmed that this gain relates solely to the trading activities of MyFry. Assets below MyFry capitalisation level 3,200 The Financial Controller has confirmed that it is company policy not to capitalise asset additions below 750. The 3,200 is comprised of office furniture and sundry assets. Loss on sale of Quoted shares 40,000 Acquired 500 shares in 123 Plc on 1/1/1999 for 40,000 Sold 500 shares in 123 Plc on 01/05/2009 for 10,000 (market value at date of transfer) exclusive of dealing costs of 600 The shares were transferred to PigSwill Limited - the Financial Controller advised that PigSwill and MyFry are connected persons for the purposes of Section 10, TCA1997. Note 4: Finance Costs include Interest on Finance Leases (see also Note 5) 4,000 Interest on Loan used to acquire capital assets 44,000 Overdraft interest 75,000 Unrealised Gain on Foreign Currency Hedge related to stock in trade (12,000) Note 5: The following is an extract from Smarmite's Balance Sheet as at 31 December 2009 Current Liabilities Bank 25, ,000 Obligations under Finance Leases 175, ,000 3

11 Non-Current Liabilities Bank 975,000 1,056,000 Obligations under Finance Leases 325, ,000 The Financial Controller has also confirmed that a finance lease with a present value of 35,000 on 31/12/08 was terminated during the year. No payments were given/received on the termination of this finance lease. Note 6: S.396(1) Loss b/f 850,000 Note 7: The capital allowances schedule of MyFry Limited as at 1 January 2009 is as follows:- Cost TWDV Rate p.a. Plant & Machinery/Motor Vehicles 436,000 54, % REQUIREMENTS 1. Prepare the corporation tax computation of MyFry Limited (including relevant withholding taxes) for the year ended 31 December 2009 availing of all available reliefs. Clearly state any assumptions made where relevant 2. Provide the basis for each adjustment in arriving at the Tax Adjusted Profit for the year (e.g. Legislative, Case-Law and/or Revenue Practice). Clearly explain your reasoning where relevant 3. The Financial Controller has queried what use if any can be made of the trade loss b/f per Note 6 above if either (a) The loss is not fully utilised in 2009 and carried forward to 2010 (b) The loss is not fully utilised in 2009 and carried forward to 2010 during which time the company ceases with its existing trade and commences a related trade. Include legislative references where appropriate. 4

12 Sample CA Business Taxes: Application and Interaction Solutions Corporation Tax Computation of MyFry Limited for the year ended 31 December 2009 Net Profit per Accounts 787,000 Addbacks NOTE General Provision for Bad Debts 2.1 5,000 Legal & professional 1.1 6,000 Legal & professional 2.3 6,000 Dealing Costs Loss on Sale Shares ,000 Professional Fees - Takeover ,000 Dilapidation Provision ,000 Pension Charge ,000 Depreciation ,000 Software Licences 3.6 1,200 Capital items expensed 3.7 3,200 Finance Lease Interest 4.1 4, ,000 Deductions Other Income 1-160,000 Income Tax Medical Premiums 2.4-4,000 Pension Paid ,000 Total Finance Lease Payments , ,000 Capital Allowances 7-55, ,000 Tax Adjusted Case I Profit/(Loss) 717,950 S.396(1) Loss b/f 6-717,950

13 Taxable Case I Profits 0 Case III ,000 Total Income 28,000 Chargeable Gains 1.5 1,085,100 Total Profits 1,113,100 Corporation Tax as follows: % 135, % 7,000 1,113, ,638 Income Tax Income Tax Medical Premiums 2.4 4,000 4,000 Net Tax Liability 146, The Financial Controller has queried what use if any can be made of the trade loss b/f per Note 6 above if either (a) The loss is not fully utilised in 2009 and carried forward to 2010 The loss would be available for offset against MyFry trading profits in 2010 and subsequent taxable periods per S.396(1) (b) The loss is not fully utilised in 2009 and carried forward to 2010 during which time the company ceases with its existing trade and commences a related trade S.396(1) loss relief would not be available on the basis that MyFry does not continue to carry on the same trade. A related trade cannot be said to be the same trade. Terminal loss relief may be available under S.397 to extent that loss was unutilised

14 Note 1 1 Proceeds 01/8/ ,000 Costs of disposal 6, ,000 Indexation Index Cost 12,400 02/02/ ,937 19,400 01/03/ ,513 51, ,550 CGT Rate 1/11/09 25% 135,638 S.21(3) Adjusted Chargeable Gains 1,085,100 S.552(1) applies - expenditure on chimney 16,000 not reflected in state or nature of asset at time of disposal The cost of replacing a chimney which was a separate structure was held to be capital expenditure (O'Grady v Bullcroft Main Collieries Ltd 17 TC 93 2 Irish Resident Sub Dividends - Franked Investment Income exempt per S UK Interest - chargeable to corporation tax per 25% Note 2 1 General Provision for bad debts - disallowed by legislation per S.81(2)(i) which allows only specific bad debts Such a provision is not in accordance with IAS37 and would be expected to be removed by the auditors. 2 Provision against local authority claim is specific in nature on the basis that it meets the critera set out in IAS37 (approved by auditors) As such, the specific provision is deductible in accordance with the general "wholly and exclusively test" per S.81(2)(a) as supported by S.76A which provides for Case I/II profits to be computed in accordance with generally accepted accounting standards.

15 Reference the decisions in the cases of "Gallagher v Jones, Threlfall v Jones[1993]" and "Herbert Smith v Honour (HMIT) [1999]" which applied generally accepted accounting principles to the determination of taxable profits (however since legislated for per S.76A). 3 On balance Legal & professional costs of defending claim should not be deductible on the basis that they are capital and not revenue in nature The costs protect the ongoing viability of the trade in the future and consequently provide an enduring benefit to the trade. The "enduring benefit" test for distinguishing between capital and revenue expenditure was detailed in Atherton v British Insulated and Helsby Cables Ltd Alternatively, could be argued that expenses are wholly & exclusively trade related and do not provide enduring benefit 4 Payments 16,000 made to Quinn Healthcare Net Cost to MyFry 16,000 S.112A(3) MyFry obliged to pay an amount of income tax in respect of the medical premium in accordance with S238 (S113(4) refers) Deduction for Income Tax 4,000 S.113 Income Tax Due 4,000 S.238 Note 3 1 Proceeds 10,000 Costs of disposal 600 9,400 Indexation Index Cost ,000 01/01/ ,000 40,000 S.556 applies - no indexation relief -30,600 S.549(3) applies such that loss ring-fenced against gains on future disposals to connected party PigSwill

16 2 Professional fees re potential staff redundancy entitlements should be deductible under the general "wholly and exclusively" test per S.81(2)(a). 3 Professional fees incurred in relation to defending possible takeover by competitor - these costs are not laid out wholly and exclusively for purposes of the trade (S.81(2)(a)). The costs are incurred by the shareholders of MyFry in respect of their capital assets (shares in McFry) 4 S.81(2)(d) specifically provides for that provisions for repairs are non deductible 5 Depreciation disallowed per S.81(2)(f) 6 Software licences treated as plant/machinery per S capital expenditure not deductible per S.81(2)(f) 7 Capital expenditure not deductible per S.81(2)(f). Items should qualify for plant and machinery allowances per S.291 Note 4 1 Interest on Finance Leases - deductible under the general "wholly and exclusively" test per S.81(2)(a). For the purposes of convention, the Finance Lease Interest is added back in the computation and the total Finance Lease payments (i.e. Interest and "capital" elements are deducted. Note that S.81(2)(g) does not apply as no asset (capital) has been employed by the company, i.e. The company is not the legal owner of the asset.. 2 Interest on Loan used to acquire capital assets allowed by Revenue practice although disallowed by S.81(2)(h) 3 Overdraft interest allowed under general "wholly and exclusively" test per S.81(2)(a). 4 Unrealised foreign exchange gain/loss taxable/deductible per S.79(2) on basis it relates to a "relevant contract" Note 5 Capital Repayments 134, , , ,000 29,000 Deductibility as per Note 4.1 above

17 Note 6 S.396(1) Loss b/f from prior year - to be offset against trading profits Note 7 The capital allowances schedule of MyFry as at 1 January 2009 is as follows:- Cost TWDV Rate p.a. Plant & Machinery/Motor Vehicles 436, , % Include Software Licences 1,200 Include Asset replacement 3,200 Cost Allowance TWDV Rate p.a. Plant & Machinery/Motor Vehicles 440,400 55, , % 440,400 55, ,850

18 Part 2 January Continuous Assessment Business Taxes Application & Interaction Saturday, 23 January 2010 Time Allowed 90 minutes INSTRUCTIONS Answer all parts of the question. All workings should be shown and made to the nearest. All names mentioned are entirely fictitious. Clearly state any assumptions that you make. The marks awarded for this assessment represent 10% of the total marks available for this module. Copyright: The Irish Taxation Institute 2010

19 Smarmite Limited is an Irish tax resident company carrying on a trade in Ireland. Below is the Income Statement of the company for the year ended 31 December Note Revenue 1,235,000 Gross Profit 878,000 Other Income 1 90,000 Distribution Costs 2 (155,000) Administrative Expenses 3 (248,000) Finance Costs 4 (100,000) Profit before tax 465,000 Income Tax expense (56,000) Profit for period 409,000 The notes below have been provided by the Financial Controller of Smarmite Limited. Note 1: Other income Dividends from Irish resident subsidiary 34,000 Dividends from UK quoted Plc 4,000 Deposit interest received net (under deduction 20%) 7,300 Profit on disposal motor vehicle 12,000 The motor vehicle was originally acquired for 40,000 in October 2004 and was in use for purposes of the trade since that date. The disposal proceeds were 18,000. Capital Grant Income 32,700 A capital grant was received in 2006 in relation to the purchase of plant and machinery (see Note 7). Total other income 90,000 Note 2: Distribution Costs include The level of audit materiality for this class of item is 20,000. Provision for repairs to company premises 15,000 The financial controller wishes to keep a sinking fund for repairs that may be required in the future. Patent royalty costs 36,000 These were paid to another Irish resident company for the use of intellectual property required to carry out the trading activities of Smarmite Limited. (You may ignore withholding tax implications in respect of this payment in your answer.) Payments made to VHI on behalf of employees during the period 11,700 Employees contributed 650 to these payments on the basis that they would receive enhanced medical cover. 2 (Continued overleaf)

20 Note 3: Administration Costs include Depreciation 32,000 Costs of obtaining a further 150 licenses for anti-virus software 12,000 Ongoing computer software maintenance charge 6,000 Legal fees incurred in defending unfair dismissal claim 40,000 Professional fees incurred in reviewing possible takeover of competitor 22,000 Pension charge 34,000 The opening and closing pension accruals were 12,000 and 16,000 respectively. Keyman Insurance 7,000 Keyman Insurance is for the potential loss to goodwill caused by the illness of a key company founder. New legislation provision 60,000 A key piece of legislation may be introduced in the coming year which will have an adverse effect on Smarmite Limited s future profitability. In this regard the Financial Controller has included a relevant provision of 60,000 in the Income Statement. The company auditors have assessed this provision as part of their audit. Professional fees on impact of new legislation 35,000 Smartmite Limited incurred 35,000 in commissioning a study to assess the likely impact of this legislation. Note 4: Finance Costs include Interest on Finance Leases (see also Note 5) 7,500 Interest on Loan used to acquire capital assets 36,000 Overdraft interest 22,000 Note 5: Extracts from Smarmite's Balance Sheet as at 31 December Current Liabilities Bank 275, ,000 Obligations under Finance Leases 98,000 86,000 Non-Current Liabilities Bank 876, ,000 Obligations under Finance Leases 375, ,000 The Financial Controller has also confirmed that a finance lease with a present value of 175,000 was acquired during the year. None of the finance leases are in relation to passenger motor vehicles. 3 (Continued overleaf)

21 Note 6: Losses forward S.396(1) TCA 1997 loss brought forward 45,000 Note 7: Capital allowances The capital allowances schedule of Smarmite Limited as at 1 January 2009 is as follows: Purchase Cost TWDV Rate p.a. Plant & Machinery/Motor Vehicles 470, , % Industrial Building 650, , % A capital grant of 170,000 was received in 2006 in relation to the purchase of plant and machinery. REQUIREMENTS Prepare the corporation tax computation (including relevant withholding taxes unless otherwise stated) of Smarmite Limited for the year ended 31 December 2009 claiming all available reliefs. For each item outlined in the question, provide an explanation (e.g. legislative references, caselaw) of why an adjustment was or was not made in arriving at the Tax Adjusted Profit for the year. 4

22 SOLUTIONS Corporation Tax Computation of Smarmite Limited for the year ended 31 December 2009 Net Profit per Accounts 465,000 Addbacks NOTE General Provision for Repairs ,000 Patent Royalties ,000 Professional Fees - Takeover ,000 Pension Charge ,000 Depreciation ,000 Software Licences 3.7 & 7 12,000 Keyman Insurance 3.9 7,000 Finance Lease Interest 4.1 7, ,500 Deductions Other Income 1-90,000 Income Tax Medical Premiums 2.3-2,763 Pension Paid ,000 Total Finance Lease Payments , , ,238 Capital Allowances 7 & ,350 Tax Adjusted Case I Profit/(Loss) 311,888 Patent Royalties , ,888 S.396(1) Loss b/f 6-45,000 Taxable Case I Profits 230,888 Case III 1.3 4,000 Case IV 1.4 9,125 Total Income 244,013 Total Profits 244,013 Corporation Tax as follows: 12.50% 28, % 3, ,013 32,142 Income Tax Patent Royalties 2.2 7,200 Income Tax Medical Premiums 2.3 2,763 9,963 Credits DIRT 1.4-1,825 Net Tax Liability 40,280 5

23 Note 1 Note 1 Vehicle Qualifying Cost 22, % TWDV 1/1/09 8,250 Proceeds 18,000 Restricted Proceeds 9,900 Balancing Charge 1,650 2 Irish Resident Sub Dividends - Franked Investment Income exempt per S UK Plc dividends - chargeable to corporation tax per 25% Option to 12.5% pursuant to S.21B(4) 4 Irish deposit interest subject to DIRT taxable under Case IV Chargeable to corporation tax per 25% Credit for DIRT 20% Gross 9,125 DIRT 1,825 Net 7,300 5 Capital Grant amortised to Income Statement not taxable per S General Provision for repairs - disallowed by legislation per S.81(2)(d) Such a provision is not in accordance with IAS37 and therefore would be expected to be removed by the auditors. However, as it was below audit materiality the auditors would not have looked at it and it therefore remained in the accounts. 2 Patent royalties Non-deductible as a trading expense per S.81(2)(m) Deductible as a "relevant trading charge on income" on a paid basis per S.243 as restricted by S.243A (3) Income tax at standard rate to be deducted from patent royalty paid per S.238 (2) 3 Payments 11,700 made to VHI reimbursed Net Cost to Smarmite 11,050 [Note: Why might there be an amount reimbursed by employees? The company might offer to pay for Plan B with Options for its employees. Some employees might want Plan C cover instead. The company therefore deducts the extra money from the employees salaries (the difference in cost between Plan B with Options and Plan C) and pays the total amount to VHI.] S.112A(3) Smarmite obliged to pay an amount of income tax in respect of the medical premium in accordance with S238 (S113(4) refers) As the company only bore the cost of 11,050 itself it must only account for withholding tax on 11,050 and is entitled to a deduction for the additional income tax on this amount. 6

24 Deduction for Income Tax 2,763 S.113 Income Tax Due 2,763 S.238 Note 3 1 Costs of defending unfair dismissal claim should be deductible under the general "wholly and exclusively" test per S.81(2)(a). The costs are incurred solely to protect the ability of the company to continue to trade as a going concern. 2 Professional fees incurred in relation to reviewing possible takeover of competitor - these costs are not laid out wholly and exclusively for purposes of the trade (S.81(2)(a)). The costs relate to the possible acquisition of a capital asset, viz. the competitor. 3 Provision in relation to impact of future adverse legislation is specific in nature on the basis that it meets the criteria set out in IAS37 (approved by auditors). As such, the specific provision is deductible in accordance with the general "wholly and exclusively test" per S.81(2)(a) as supported by S.76A which provides for Case I/II profits to be computed in accordance with generally accepted accounting standards. Reference may be made to the decisions in the cases of "Gallagher v Jones, Threlfall v Jones[1993]" and "Herbert Smith v Honour (HMIT) [1999]" which applied generally accepted accounting principles to the determination of taxable profits (however since legislated for per S.76A which is more relevant). 4 Costs of commissioning study into legislative change should be deductible under the general "wholly and exclusively" test per S.81(2)(a). The costs are incurred to assess the impact of the legislative change on the trade and to determine what changes are required to protect the viability of the trade in the future. 5 Pension contributions deductible on a paid basis per S.774(6)(b) 30,000 6 Depreciation disallowed per S.81(2)(f) 7 Software licences treated as plant/machinery per S capital expenditure not deductible per S.81(2)(f) 8 Software maintenance deductible as trading expense under general "wholly and exclusively" test per S.81(2)(a) 9 Keyman insurance re loss of goodwill is an expense to protect the capital value of business (rather than loss of profits) Not deductible on the basis that the expense is capital and not revenue in nature - in accordance with case-law and in line with Revenue guidance in Tax Briefing 11 7

25 Note 4 1 Interest on Finance Leases - deductible under the general "wholly and exclusively" test per S.81(2)(a). For the purposes of convention, the Finance Lease Interest is added back in the computation and the total Finance Lease payments (i.e. Interest and "capital" elements) are deducted. Note that S.81(2)(g) does not apply as no asset (capital) has been employed by the company, i.e. the company is not the legal owner of the asset. 2 Interest on Loan used to acquire capital assets allowed by Revenue practice although disallowed by S.81(2)(h). 3 Overdraft interest allowed under general "wholly and exclusively" test per S.81(2)(a). Note 5 Capital Repayments 86, , ,000-98, ,000 = 128,000 Deductibility as per Note 4.1 above Note 6 Note 7 S.396(1) Loss b/f from prior year - to be offset against trading profits The capital allowances schedule of Smarmite Limited is as follows: Plant & Machinery/Motor Vehicles at 12.5% Cost Allowance TWDV Purchase Cost 470,000 Less capital grant per S.317 (170,000) Qualifying cost at 1 January , ,500 Motor vehicle disposal (22,000) (8,250) Software addition 12,000 Qualifying cost at 31 December ,000 (36,000) 142,500 Industrial Buildings at 4% p.a. Qualifying cost at 1 January , ,000 Qualifying cost at 31 December ,000 (26,000) 558,500 Balancing Charge (Note 1.1) (1,650) Total Capital Allowances (60,350) 8

26 Examiner s Report Business Taxes Application and Interaction January Continuous Assessment 2010 My overall comment in relation to this paper is that the question was in general answered to a high standard. Marks were most commonly lost where candidates failed to correctly compute the capital allowances available to the company. Most candidates did not apply the correct restricted cost and sales proceeds to the motor vehicle disposed of during the year. Furthermore, several candidates did not apply the correct wear and tear and industrial building allowances rates. Many candidates did not make the appropriate adjustments required in relation to the VHI payments made by the company; in particular several candidates did not appear to understand how to correctly account for the contributions made by the employees. Several candidates lost marks on the appropriate tax treatment of the new legislation provision and the professional fees incurred in relation to its impact on the company s profitability. Many candidates were not aware of the link between Section 76A of the Taxes Consolidation Act 1997 and the terms of the International Accounting Standard 37 with regard to specific provisions. A number of candidates lost marks by omitting to provide an explanation for each adjustment made in the company s corporation tax computation, which was a specific requirement of the question. While in other cases, even though candidates provided detailed explanations on each adjustment, they did not prepare a corporation tax computation for the company. It was clearly stated in the requirements of the question that a corporation tax computation together with detailed explanations of each adjustment etc. was required in order to attain full marks. Highest Mark 93% Lowest Mark 16% Average Mark 63% 9

27 Part 2 Associateship Examination Business Taxes: Application and Interaction Summer 2010 Tuesday, 20 April 2010 Time Allowed 3 Hours INSTRUCTIONS TO CANDIDATES: Candidates must answer five of the six questions. All questions carry equal marks. All workings should be shown and made to the nearest. Start each answer on a new page. All names mentioned are entirely fictitious. Clearly state any assumptions you are making in your answer. The marks awarded for this assessment represent 90% of the total marks available for this module Copyright: The Irish Taxation Institute 2010

28 QUESTION 1 Tory Ltd is a company engaged in the distribution of parts for motor vehicles. The following is the Income Statement of Tory Ltd for the accounts year ended 31 December 2009: Notes Revenue 10,725,000 Gross profit 475,000 Other income (1) 25,000 Distribution costs (2) (125,500) Administrative expenses (3) (72,500) Finance costs (4) (22,500) Profit before tax 279,500 Notes: 1) Other income: Deposit interest received (net of DIRT) 6,000 Irish dividends received 14,000 Profit on sale of option (see note 5) 5,000 Total 25,000 2) Distribution costs: Depreciation 45,000 Profit on disposal of van (see note 6) (3,000) Pension fund contributions (paid 15 January 2010) 35,000 New security alarm system for premises 32,000 Motor expenses (see note 7) 16,500 Total 125,500 3) Administrative expenses: Bad debts written off 16,000 Bad debts recovered (1,000) Increase in specific bad debt provision 25,500 Debt collection legal fees 8,200 Entertainment (see note 8) 12,800 Subscriptions and donations (see note 9) 10,500 Interest on late payment of PAYE/PRSI 500 Total 72,500 4) Finance costs: Interest on bank overdraft 2,500 Finance lease charges (non-motor vehicles) (see note 10) 9,000 Interest on loan repayable in seven years 11,000 Total 22,500 5) Tory Ltd acquired an option on 1 January 2008 for 45,000, which entitled it to purchase a greenfield site within a three year period. Tory Ltd subsequently sold this option on 30 June 2009 for 27,500. (Continued overleaf) 1

29 6) The profit on disposal of 3,000 arose on the sale of a van for 10,000. The net book value of the van at 31 December 2008 was 7,000. The van was purchased on 1 March 2007 for 12,000. 7) Motor expenses of 16,500 relate to the following: Toyota Avensis purchased in February Cost Running expenses 15,000 2,500 BMW leased under an agreement dated 1 October 2009, Category D vehicle. Cost Running expenses Operating lease payments 30,000 3,000 5,000 The balance of 6,000 relates to van expenses. 8) Entertainment: Staff expenses for Christmas party 2,300 Cost of taking suppliers to lunch (including 2,000 for company s own staff who also attended) 6,500 Golf outing for customers 4,000 Total 12,800 9) Subscriptions and donations: Political donation 9,000 IBEC subscription 1,500 Total 10,500 10) Finance leases: Opening leasing obligations at 1 January ,000 Finance lease charges 9,000 Finance lease repayments for ,000 Closing leasing obligations at 31 December ,000 11) Capital allowances: Cost TWDV at Motor vehicles (purchased 2006) 15,000 9,375 Vans (purchased 2007) 25,000 18,750 Plant and machinery (purchased 2007) 37,000 27,750 REQUIREMENTS (i) Compute the corporation tax liability of Tory Ltd for the accounts year ended 31 December 2009 and state when the tax is payable. Detailed explanations for adjustments are not required. (15 marks) (Continued overleaf) 2

30 (ii) Compute the stamp duty liability, if any, arising on the sale of the option on 30 June The deed was submitted for stamping on 15 September (5 marks) Total 20 marks 3

31 QUESTION 2 (a) Butler Ltd has issued share capital of 125,000 made up as follows: Ordinary shares John Butler (Director) 25,000 Eleanor Butler (John s wife) 15,000 Luke Butler (John s brother) 4,000 Aoife Butler (John s daughter) 8,000 EB Ltd (controlled by Eleanor Butler) 10,000 Andrew Butler (Luke s son) 5,000 Trustees of settlement made by John Butler 3,000 Mary Butler (Luke s wife) 1,000 Five other unconnected shareholders 29, ,000 A Ordinary shares (non-voting) 10 other unconnected shareholders 25,000 Total 125,000 REQUIREMENT State, giving reasons for your answer, whether or not Butler Ltd is a close company. (5 marks) (b) (c) A company s professional income is subject to a close company surcharge. Briefly explain, in your own words, how the meaning of a profession has been interpreted by case law. (7 marks) Rafferty Auctioneers Ltd is a company engaged in auctioneering services. Its results for the accounts year ended 31 December 2009 are as follows: Trading income (professional) as adjusted for tax purposes 45,000 Rental income 12,000 Bank interest (gross) 6,000 Dividends received from Irish resident companies 2,500 Chargeable gain (as adjusted) 5,000 During the year ended 31 December 2009: 1. The company paid charges of 4,000 in respect of its trading activities. 2. The company made distributions of 3, The company paid expenses of 1,500 for a participator of the company. The participator repaid the initial dividend withholding tax in respect of the expenses to the company. REQUIREMENT Compute the company s close company surcharge liability, if any, on undistributed income on the basis that no further distributions of any kind will be made out of the 2009 profits. (8 marks) Total 20 marks 4

32 QUESTION 3 On 1 January 2009, Intellect Ltd (an Irish resident company) purchased trademarks for consideration of 500,000. Intellect Ltd immediately commenced to carry on a business of licensing its intellectual property. During July 2009, Intellect Ltd incurred further expenditure on specified intangible assets of 475,000. Intellect Ltd borrowed 350,000 to fund the expenditure and paid 35,000 in interest for the accounts year ended 31 December The profits, before interest, of Intellect Ltd for the accounts year ended 31 December 2009 were 120,000 (75,000 relating to the management of its intellectual property and 45,000 relating to other treasury operations). REQUIREMENTS (i) Briefly outline, in your own words, the factors to be considered when determining if the licensing of intellectual property through Ireland constitutes a trade for Irish corporation tax purposes. Marks will be awarded for references to appropriate case law. (10 marks) (ii) On the assumption that Intellect Ltd is carrying on a trade, calculate the corporation tax liability of Intellect Ltd for the accounts year ended 31 December 2009, taking account of any relief available for expenditure incurred on specified intangible assets during the year. Marks will be awarded for appropriate statutory references. (8 marks) (iii) Calculate the stamp duty, if any, arising on the purchase of trademarks by Intellect Ltd on 1 January Marks will be awarded for appropriate statutory references. (2 marks) Total 20 marks 5

33 QUESTION 4 Cocoa Ltd is a company that has been engaged in the distribution of luxury chocolates for many years. The company s results for the last three accounting periods are as follows: Notes 12 months ended 31/12/ months ended 30/06/ months ended 31/12/2009 Trading profit/(loss) 1 150,000 (275,000) 125,000 Deposit interest received gross 10,000 5,000 7,000 Rental surplus/(deficit) Dublin property 2 15,000 (10,000) 5,000 Rental surplus/(deficit) Brussels property 2 12,000 (8,000) 10,000 Wear and tear allowances 3 (12,500) (12,500) (12,500) Industrial buildings allowances - Dublin Nil (5,000) (10,000) Profit/(loss) on disposal of a fixed asset 4 5 (20,000) Nil 25,000 Notes: 1. Trading profit/ (loss) figures are after adjusting for the profit/ (loss) on the disposal of fixed assets but prior to adjusting for capital allowances. 2. The rental surplus/ (deficit) figures are prior to adjusting for capital allowances. 3. The wear and tear allowances relate to capital expenditure incurred wholly and exclusively for the purposes of the company s trade. 4. The loss of 20,000 arose on the sale of a site with development potential. 5. The company disposed of shares in June 2009 for 30,000. Cocoa Ltd had acquired the shares in May 2002 for 5,000. The costs of disposal were 750. REQUIREMENT Compute the corporation tax liability for each period on the basis that maximum loss relief is claimed in respect of all available losses at the earliest possible opportunity and identify any losses available for carry forward. Marks will be awarded for the appropriate statutory references. Total 20 marks 6

34 QUESTION 5 (a) (b) Briefly explain, in your own words, how the meaning of the word plant has been interpreted by case law. (10 marks) Gold Ltd constructed a factory at a total cost of 575,000 (including site cost of 45,000) and commenced to use the factory in its manufacturing trade on 1 June The factory was used for the purposes of its manufacturing trade until 30 November 2008, when it was sold to Silver Ltd for 650,000. Silver Ltd used the factory building as a warehouse, until it subsequently sold the factory to Bronze Ltd for 625,000 on 1 September Bronze Ltd immediately used the factory for the purposes of its manufacturing trade. Gold Ltd, Silver Ltd and Bronze Ltd make up their accounts to 31 December each year. REQUIREMENT Outline the capital allowance implications for Gold Ltd, Silver Ltd and Bronze Ltd. (10 marks) Total 20 marks 7

35 QUESTION 6 (a) (b) Briefly outline, in your own words, the requirements of the International Accounting Standard 12 with regard to the reporting of current and deferred tax. (7 marks) The draft accounts of Rain Ltd for the accounts year ended 31 December 2009 show a profit before tax of 125,000. Rain Ltd s tax advisors have prepared a draft corporation tax computation for the company for the accounts year ended 31 December 2009 and have calculated a corporation tax liability of 15,375. The following adjustments were made to the profit before tax of 125,000 in order to calculate the corporation tax liability: Depreciation 10,000 Political donation 1,500 Client entertainment 2,000 Dividends received from Irish resident companies 4,000 Gross bank interest 1,000 Capital allowances 12,500 The tax advisors schedule for the deferred tax in the previous year was as follows: Carrying amount as at 31 December ,000 Tax base as at 31 December ,000 Taxable temporary difference 10,000 Deferred tax liability as at 31 December 2008 (1,250) REQUIREMENT Prepare the accounting disclosures required under IAS 12 for the auditors of Rain Ltd for the accounts year ended 31 December (13 marks) Total 20 marks 8

36 Business Taxes Application and Interaction Solutions Summer

37 Qs Model solution Key point 1(i) Tory Ltd. Corporation tax computation for the accounts year ended 31 December 2009 Profit before tax Addback Depreciation Pension Alarm system Motor lease expenses Entertainment Subscriptions and donations Interest on late payment of PAYE/PRSI Finance lease charges Balancing charge on van Deduct Other income Profit on disposal of van Finance lease payments Capital allowances Schedule D Case I tax adjusted profits Schedule D Case IV Total income Chargeable gain Total profits Corporation tax as follows: 368,375 at 12.5% 8,000 at 25% Total Less: DIRT Net tax due 41,442 (90%) due by 21 November ,605 (10%) due by 21 September 2010 Wear and tear computation: Van: original cost Less disposal Revised van cost Plant and machinery: original cost Add cost of alarm system Revised plant and machinery Motor vehicle: cost Wear and tear [13, , ,000] at 12.5% Balancing charge computation on disposal of van: Sale proceeds Less: TWDV at Balancing charge Capital gains tax computation on disposal of option: Sale proceeds Less cost incurred wasted [i.e. 45,000 x 1.5/3] Capital gain 279,500 45,000 35,000 32,000 3,000 10,500 9, ,000 1,000 (25,000) (3,000) (26,000) (12,125) 358,375 8, ,375 10, ,375 46,047 2, (2,000) 46,047 25,000 (12,000) 13,000 37,000 32,000 69,000 15,000 12,125 10,000 (9,000) 1,000 27,500 (22,500) 5,000 10

38 Adjust gain for corporation tax purposes [i.e. 5,000 x 25/12.5] 10,000 1(ii) Study notes: - Dividends received from Irish resident companies are franked investment income and are therefore, exempt. - Pension fund contributions are allowed on a paid basis and therefore, the accrual must be added back. - The new alarm system is regarded as capital expenditure and therefore, not deductible but Tory Ltd. can claim capital allowances on the expenditure. - Motor running expenses no longer restricted. Van expenses are fully deductible. Motor lease restriction [24,000/30,000 x 50% x 5,000 = 2,000]. Addback 3, Increase in specific bad debt provision is deductible. - Staff Christmas party expenses deductible, balance treated as non-deductible client entertainment. - Political donation not a deductible expense. - Finance lease charges are added back but Tory Ltd. is entitled to a deduction for the total finance lease repayments during the year. Section 31 of Stamp Duties Act 1999 states that a contract for the sale of equitable interest is property. Sale of option is a sale of an equitable interest (ref. George Wimpey & Co Ltd. V IRC) Stamp duty as follows: 27,500 at 2% Stamped late i.e. due 30 July 2009 but submitted on 15 September Additional penalty (0 to 6 months) [550 x 10%] Interest [550 x % x 77] Total stamp duty due, including interest and penalties

39 Qs Model solution Key point 2(a) John Butler s associates: Eleanor Butler (his wife) Luke Butler (his brother) Aoife Butler (his daughter) Trustees of settlement by John Butler Butler Ltd is a Close Co, as under the control of John Butler John Butler, together with his associates, is in control of 55% of the voting power of Butler Ltd, and therefore, it is a close company. The rights of an associate of an associate of John Butler cannot be attributed to him, i.e. EB Ltd. The rights of an in law cannot be attributed to John Butler, as in laws are not relatives. 2(b) 2(c) The word profession is not defined in the Taxes Consolidated Act 1997, other than to say, it includes a vocation. In the case of Partridge V Mallandaine, the courts determined that vocation is a word of wide significance and refers to the way in which a man passes his life. In the case of IRC V Maxse, the courts held that a profession refers to an occupation requiring purely intellectual skills or of any manual skill controlled by intellectual skill. IRC V Masxe, the taxpayer was held to be carrying on the profession of a journalist. In the case of Mac Giolla Mhaith (IOT) V Cronin & Assoc Ltd, the Circuit Court held that the advertising business was not a profession, on the basis that: - No education or qualification was required to work in advertising; - No code of practice governing or controlling advertising agencies; - Membership of the advertising Institute was not compulsory; - The Institute had no disciplinary functions; - Advertising agencies advertised their own businesses and freely disclosed who their customers were in their advertisements. Surcharge calculation for Rafferty Auctioneers Ltd. Calculate distributable trading income of the company: Case II Less relevant trade charges Less corporation tax at 12.5% Distributable trading income Divide by 2 Calculate distributable investment and estate income: Case II Case III Case V Less relevant trade charges 59,000 x 18,000/63,000 Add franked investment income Less corporation tax at 25% (i.e. 16,857 x 25%) Less trading discount at 7.5% Add half of distributable trading income Less distributions (i.e. 3, ,500) Total surchargeable Distributable investment and estate income S2 TCA ,000 (4,000) 41,000 (5,125) 35,875 17,938 45,000 6,000 12,000 63,000 (4,000) 59,000 16,857 2,500 19,357 (4,214) 15,143 (1,136) 14,007 17,938 31,945 (4,500) 27,445 14,007 12