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EDUCATING SUPPORTING REPRESENTING Stage 3 Module 2 Small and Medium – Sized Entities Chartered Tax Consultant Presenter Name.

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Presentation on theme: "EDUCATING SUPPORTING REPRESENTING Stage 3 Module 2 Small and Medium – Sized Entities Chartered Tax Consultant Presenter Name."— Presentation transcript:

1 EDUCATING SUPPORTING REPRESENTING Stage 3 Module 2 Small and Medium – Sized Entities Chartered Tax Consultant Presenter Name –Cormac Kelleher 27 th & 28 th May 2 011 Chartered Accountants House

2 Introduction - Why? Sole Trader/Partnership & Small Company Likely increase in the two structures Opportunity to advise on tax issues Tax is a key issues for enterprises

3 Summary of Module –What? Schedule D Case I and II – principles Taxation Principles Case law – interpretation of fundamental issues Choice of trading structure Tax Reliefs – BES/SCS/Borrowings Close Companies Company Law and Accounting for Tax - Key Issues

4 Case I & II Back to basic principles – again and again Thorough understanding needed Can I get tax relief on refurbishment costs? Repair, Replacement or Renewal? Capital v Revenue – Case Law Capital Expenditure CA ? Sec 284 TCA 97? Capital Expenditure no CACGT enhancement? Premises owned or rented?Effect on CA/CGT? VATInput credit?

5 Schedule D Cases I & II Trade or Profession? Sec 18(2) TCA 1997 12.5% CT Rate – Trades Sec 3(1)TCA 1997 – “..every trade, manufacture, adventure or concern in the nature of a trade..” Broad definition – review all relevant facts

6 Case Law Wisdom v Chamberlain Expectation that asset paid for out of proceeds of sale Held – Adventure in the nature of a trade Comedian Norman Wisdom Silver bullion investment to hedge Financed by loans @ high interest Sale of asset needed to repay loan Rutledge v The Commission of the Inland Revenue Held trading Money lender by trade Bought 1m toilet rolls in Berlin Sold in UK at profit Volume of commodity–not personal use Noddy Subsidiary Rights v IRC Intellectual Property Rights – Trading? Granting of rights –trademark & copyright Trading activity Volume of transactions Employee needed – maintaining rights

7 Capital v Trading? Examine each case on its facts CGT rate lower than IT  CGT? Trading Losses for set off?  IT? Impact on deductibility of expense

8 Badges of Trade Key Indicators of what constitutes trading UK Royal Commissioners on Taxation Six Badges of Trade TB 57 “..fairly well established set of guidelines…laid down by the Courts in various decided cases over the years.”

9 Badges of Trade Subject Matter of the Realisation IRC v Fraser Manufactured Items Items acquired for personal use Large unusual transaction Length of Ownership Kirby v Hughes Sold within short time Business Stock Similar transactions over time Smith Brady v Cordy Repetition Systematic Supplementary Work Martin v Lowry Marketing and Advertising Substance of operation Circumstances for Disposal Spa Estates v O Hargain Sale trigger Genuine Risk MotiveSeller’s Intention Start Ups

10 Trade or Profession? No major impact of distinction for IT Sole Traders and Partnerships Close companies – distinction is significant

11 Revenue v Capital Receipt? No one test – general principles from case law 1.Fixed Capital Receipts = Capital Premises, P&M, Goodwill 2.Circulation Capital Receipts – Income Trading Stock, Consumables, Debts

12 Capital or Revenue Receipt? Compensation Payments Van Deb Berghs v Clarke Capital Asset = Capital Revenue Matter = revenue Profit making Asset destroyed = Capital Shadbolt v Salmon Estate Withdrawal of planning permission = revenue The Glenboig Union Fireclay V CIR Money paid to refrain clay company from extraction = capital

13 Capital or Revenue Receipt? Restrictive Covenants Nature of Asset, Trade and circumstances Derived from Capital Asset = Capital From Revenue matter = Revenue White v G&M Davies EC compensation to farmers = revenue Higgs v Olivier Payment to actor to refrain activities = capital

14 Capital or Revenue Receipt? Exploitation of Know How Allowing use of IP Circumstances of Transaction Jeffrey v Rolls Royce – trading receipts Granting licences = exploitation of capital asset Wolf Electric Tools v Wilson – shares for know how = capital Exchange of one capital asset for another

15 Expenditure What is deductible? 1.Revenue and not capital in nature 2.“Wholly and exclusively ….for the purposes of the trade or profession Sec 81(2)(a) TCA 1997 Revenue expenditure Statutory prohibition?  No  Allowable Capital Expenditure Statutory allowance?  No  Not Allowable

16 Revenue v Capital Expenditure No definition of capital expenditure TB 18 – Accounting Rules as modified for tax law will determine Sec 316(11) TCA 1997 – general guidance Case law important

17 Case Law Recurring Payments IRC v Adam Right to use property – not rent Revenue receipts Instalment payment still capital Identifiable Asset Test Ogden v Medway Cinema Walker v joint Credit Card Co Is intangible asset substantial/enduring? Goodwill pyt held to be Revenue Pyt to cease held to be Capital Acquisition of Business Watney Combe Reid & Co Ltd Restructuring Costs held capital Generally Capital Form of payment does not change Capital into Revenue Accountancy Treatment Heather v PE Consulting Courts must decide Question of law – not accountancy Weight given to accountancy Evidence of accountants of assistance

18 Sole Traders & Partnerships Sec 65(1) TCA 1997 Sch D Cases I & II – IT assessable on full amounts of “profits or gains” for the year Accounts prepared under cash or earnings basis Adjusted Tax Computation

19 Basis of Assessment Chapter 3 Part 4 TCA 1997 Computation Rules – Chapters 6&7 Part 4 TCA 1997 1.Profit/Loss of period of account 2.Assign Profit/Loss to year of assessment 3.Calculate Capital Allowances for year of assessment

20 General Rules Profits taxable in Year of Assessment = Profits for the Basis Period for that Year of Assessment Basis Period = 12 month period ending in that Year of Assessment AP Y/E 31 st May 2011 is Basis Period for 2010

21 Apportionment Needed No Accounts in Year of Assessment Sec 65(2)(c) Example €200,000 * 12/20 Taxable on profits for Year of Assessment Y/E 31 st December €120,000 AP > 12 months Sec 65(2)(b) Example (€100,000*8/8) + (€120,000* 4/12) Taxable on profits for 12 mths to end of AP ending in Year of Assessment €140,000 1 set of Accounts ending in Tax Year Example (€100,000*6/8) + (€70,000* 6/6) Taxable on profits for 12 months to later accounting date €145,000

22 Special Rules 1.Commencement 2.Cessation 3.Change in Accounting Date

23 Commencement Identify date trade/profession commences Retail Business – opening date/date customers sought Manufacturing – date process starts with intention of sale Purchase of machinery/materials not sufficient

24 When does trade commence? Developer acquires land to build and sell –Time of land purchase? –Time building commences? Power plant –Construction of plant? –Signing of electricity contract? –Testing of electricity period?

25 When does trade commence? Birmingham and District Cattle By- Products Co Ltd v IRC When raw materials received and manufacturing commenced J&R O’Kane v CIR – retails business commences when doors first opened Sec 82 TCA 97 – Pre trading expenses

26 Basis of Assessment Sec 66 TCA 1997 - Commencement 1 st YearProfits from date of commencement to 31 st December 2 nd Year  1 Set of Accounts ending in year  AP ≠ 12 months First 12 months trading 12 mths ending on latest date Actual profits for Year 3 rd YearProfits of 12 months AP ending in year Claim for reduction for “second year Excess”

27 Planning for Commencement Accounting date choice Defer income/Accelerate costs Early Accounting date – 31 st January Benefits when profits rising Timing of invoicing/expenses – first 2 years Low profits in first 2 years

28 Example Commencement date 1 st May 2009 Accounts to year end 30 th April 2010 Defer invoice of €30,000 to June 2010 Expense of €6,000 invoiced in AP Double taxation prevented Plan to keep profits low in first two years

29 Cessation When? – Matter of fact Trade cessation – disposal of trading stock Capital assets can be disposed of later Gordon and Blair Ltd v IRC Brewery stopped brewing Sale of beer continued Held cessation of brewing trade Commencement of new trade of selling

30 Cessation Rolls Royce v Bamford Change in nature of the trade = cessation? Considerable change in scale of activities Sudden occurrence 80%/90% sales and 75%/85% labour costs hived off to new RR co Held remaining activities ≠ continuance of trade by RR Ltd

31 Cessation Permanent cessation of trade or cessation on death – Sec 67(1)(b) TCA 97 Post Cessation Receipts – Sec 67 TCA 97 Cessation on incorporation by sole trader Change of owners – cessation Sec 69 TCA 97 Sole trader succeeded by partnership = cessation of sole trade

32 Cessation Final year of assessment – taxed on 1 st January to date of cessation Penultimate Year AP of 12 mths ending in the year Revision to actual profits where > original assessment Plan for cessation date

33 Planning for Cessation Check penultimate year Avoid additional tax and interest If AP is 31 st December  no revision “Smooth” profit pattern in final years? Revision of penultimate –Lower profits? – OK –Higher profits? – revision and additional tax

34 Short Lived Business Sec 68 TCA 1997 Commencement and Cessation within 3 years Taxed on actual profits If taxable profits>actual profits  adjustment Relief given in year 2 – taxed on actual profits Adjustment must be claimed in Tax Return by Return filing date

35 Change in Accounting Date  1 AP in Tax Year  Review profits of p/year on same basis Profits of 12 mths AP ending in AP or Profits of 12 mths ending on latest AP If profits for p/ year after revision > original  revision  AP in Tax Year>or< 12 mths  Review profits of p/year on same basis Profits of 12 mths AP ending on AP or Profits of 12 mths ending on latest AP  No AP in Tax Year  Review profits of p/year on same basis Profits of Tax Year

36 Tax Adjusted Profits Sch D Case I/II Rules Sec 81(2) TCA 1997 – disallowable expenditure Sec 1080(3) TCA 1997– interest on late payment of tax disallowed Sec 840 TCA 1997 – disallows entertainment expenses McKnight v Shepperd – parking fines

37 Sec 81 (2) TCA 1997 Sums not wholly and exclusively laid out General Loss provisions Sums for private or domestic purpose Sums recovered under insurance policy Rent for dwelling house not used for trade/profession Annuity or annual payment (not interest) paid out of profits Loss not connected with the trade or profession Patent Royalties DepreciationShare based consideration for goods/services or to employees Capital improvementsGeneral Bad Debts provisions

38 Motor Expenses Category ACategory B/CCategory D/ECategory F/G 0-120g/km121-155g/km156-190g/km190g/km+ €24,000 = Specified Amount 2010 €24,000*50% or if lower: Cost *50% No CA or Leasing allowed Sec 373, 377 380L& 380M Leasing and CA restricted to SA NONE

39 Example 1/1/2010 Car Leased Cost Price €25,000 Carbon emissions 180g/km 80% of use is for sole trader business use Annual leasing charge = €6,000 Running Expenses = €3,500

40 Example Leasing Restriction Allowable Leasing €6,000*80%* (€24,000*50%) =€2,880 €25,000 Disallow €4,800 - €2,880 = €2,000 Private Leasing 20% €1,200 Private Running Costs 20% €700 Total Add Back€6,780

41 Capital Allowances Car Cost €26,000 Category B Private Use 20% CA 2010: €24,000 * 12.5% = €3,000 Add Back Personal Use of €600 Capital Allowances 2010 €2,400

42 Adjusted Tax Computation Capital ExpensesX Add Back Motor LeasingX PrivateX General Provisions IncreaseX Loss on Sale FAX EntertainmentX€X Deduct Capital ProfitsX Profit on Sale of FAX General Provision DecreaseX Investment IncomeX(€X) Adjusted Case I/II €X

43 PRSI/Levies for Self Employed Self Employed Contributors Liable on Reckonable Income PRSI Class S1 – Rate for 2010 3% Entitlement to State Contributory Pension; Maternity Benefit and Bereavement Grant No Short Term Benefits – Jobseekers/Illness/Dental/Optical

44 Reckonable Income Trading and Professional Income and Investment Income Deduction for Capital Allowances No deduction for Losses or Retirement Annuities Deduction for pension contributions by S1 Directors – Module 3

45 Health Contribution Self Employed liable to HC on reckonable income Rates for 2010 First €75,036 @ 4% Balance @ 5% Module 3

46 Income Levy Sec 531A-531N TCA 1997 Calculated on Gross Taxable Income No deduction for CA or Losses No Income Levy on Deposit Interest 2010 Rates First €75,036 @2% Next €99,943 @4% Over €174,980 @6% Module 3

47 Pension Contributions RAC – Chapter 2 Part 30 TCA 1997 Relevant Earnings = Income from non pensionable employment or trade/profession RAC Conditions for Approval –Approved annuity provider –Annuity between 60 and 70 years –Lump Sum 25% fund at retirement –Provision for dependants

48 Pension Contributions Maximum contributions Overall NRE Limit €150,000 for 2010 <30 Years15% 30-3920% 40-4925% 50-5430% 55-5935% 6040%

49 Pensions Sec 787(2) TCA 97 NRE = RE-Losses/Cas and Charges Employed and Self Employed Earnings? One Limit– 2010 €150,000 Occupational Pension Scheme Contributions used first for Limit Contributions made by 31 st October allowed in previous year Claim and file Tax Return by due date

50 Limits on Pensions Chapter 2C Part 30 and Sch 23B TCA 1997 Cap on Tax Relieved Pension Fund Standard Fund Threshold/Personal Fund Threshold ARF Options/Annuity on retirement RACs/PRSAs/Certain directors and AVCs Module 3

51 Partnerships Sec 1007 TCA 1997 Partnership Trade – “ carried on by two or more persons in partnership” Sec 1 Partnership Act 1890 “partnership is the relationship subsisting between persons carrying on business in common with a view of profit” Persons = Individuals and Companies Business = every trade or occupation

52 Partnerships Sec 1007(1) TCA 1997 “Precedent partner” Resident in the State and first named in partnership agreement Normally the senior acting partner Obligations under TCA 1997 Sec 880 – Partnership Return Form 1 Firms by filing deadline Each partner responsible for Form 11

53 Relevant Period Sec 1007 TCA 1997 Period during which partnership continues Changes in partnership may take place

54 Relevant Period RP BeginsRP Ends Trade set up or commenced by two or more in partnership Trade discontinued Sole trade carried on becomes carried on by a partnership Partnership succeeded by sole trader New partnership carries on previous partnership trade – no common partner Partnership succeeded by new partnership – no common partner

55 Income Tax & Profit Appropriation Sec 1008(1) TCA 97 All partners assessable on share of profits Calculate partnership adjusted profit Allocate adjusted profit in profit sharing ratio Case I/II commencement/cessation rules apply to new/leaving partner

56 Salaried Partners Salaries to partners treated as appropriation of profit Not deductible in partnership Case I/II Rent paid to partner for business asset is deductible

57 Partnership Allocation Partnership Net Profit 2010 €90,000 2 Partners sharing 75%: 25% Partner salary of €50,000 each Partner 1 rents warehouse to partnership @ €12,500 Net Profit €90,000 Add Salaries €100,000 Adjusted Profit€190,000

58 Partnership Allocation Partner 1Partner 2 Salary €50,000 Share of P/Ship Profit €145,500€47,500 Case 11€195,000€97,500 Case V €12,500NIL

59 Capital Allowances Sec 1010(2) TCA 97 Precedent partner obliged to return CA on Form Firms 1 Sec 1010(8)(b) TCA 97 Unused CA by partner reverts to partnership Losses allocated in profit sharing ratio

60 Loans to Partnerships Sec 253 TCA 97 Tax Relief on interest paid on loans Specified Relief for sec 485C TCA Loan to –Acquire share in partnership –Capital contribution to partnership –Contribution used wholly & exclusively –Pay off another qualifying loan

61 Loans to Partnerships Individual must act as a partner throughout period of loan Recovery of Capital – Sec253(4) TCA 97 –Sale of partnership interest –Repayment of loan –Return of Capital Tax Relief reduced

62 Capital Gains Tax Sec 30 TCA 97 Each partner assessed to CGT on “look through” basis Partnership assets may be owned jointly by partners  CGT not straightforward Revenue precedent – change in asset- sharing ratios Retirement/admission of partners

63 Capital Gains Tax Revenue Precedent –If no consideration involved and –No revaluation of assets and –Partners are not connected (other than as partners) and –Bona Fide commercial arrangement with no tax avoidance  No Gain triggered for CGT

64 Partnership and CGT Consider renting premises to partnership if CGT triggered by transfer of building VAT, SD and CA issues could also arise Sale of partnership asset – CGT for each partner Consideration allocated to each partner in profit sharing ratio Base cost – deemed acquisition of asset on joining partnership or other change

65 CAT and Partnerships Cessation by retirement of partner  no CAT Death of partner – share of partnership forms part of estate Successor does not become partner Partnership agreement –Automatic right to acquire share –Option to acquire share –If full consideration not paid  Gift/Inheritance

66 Limited Partnerships Limited partner has limited liability Partners access losses and CA for tax No recourse to partners for commercial exposure Limited Partnership Act 1907 At least 1 limited and 1 General Partner Limited Partner exposure limited to capital contributed LP cannot take part in management

67 Limited Partnerships Sec 1013 TCA Active Partner – works fro greater part of time on day to day management or conduct of partnership trade Anti avoidance legislation Sec 1013 TCA 97 – no benefit of trading losses or other reliefs for passive partners

68 Tax Registration Form TR1 for individuals and partnerships Income Tax, Employer PAYE, VAT,RCT Take care with Registration Forms Indication of trading/investment Principal contractor implications Election to register for VAT? –Reclaim Vat if customers no cost to clients –Zero Rated sales only –Significant up front costs

69 Incorporation Considerations and Timing Consider each case separately Are drawings less than profits? Shareholders’ needs for funds? Close company surcharges Losses in unincorporated business? Defer decision?

70 Why Incorporate? Control over cash flow for tax payments CT Rate 12.5% CT exemption for start up companies Termination payments Travel and Subsistence BES/Seed Capital to raise finance Company Pension Scheme Employment of Spouse and Children

71 Timing of Incorporation Effect of cessation for sole trader/partnership members Avoid/reduce penultimate year adjustment Defer date of incorporation if tax savings can be achieved

72 Transfer of Business to Company Main Taxes CGT & Stamp Duty on transfer of business assets Income tax adjustments to sole trade VAT

73 CGT on Transfer Chargeable event for CCT Sec 600 TCA 97 Transfer of Business Relief All assets (exc cash) transferred for shares in company Bona Fide commercial reasons – no tax avoidance scheme Business has broad meaning – America Leaf Blending Co case

74 CGT on Transfer Business must be transferred as a Going Concern Gordon v IRC Calculate CGT gain Amount appropriate to cash is taxable Balance of gain deferred Apportioned over shares to reduce base cost

75 CGT on Transfer Liabilities taken over treated as cash payment – exclude trade creditors Creation of loan account for part of consideration treated as cash Payment of pre incorporation tax or liabilities treated as cash Deferred Amount formula Chargeable Gain * Consideration in Shares Total Value of Assets

76 Transfer all Assets? Consider business premises May be tax efficient to hold premises personally and not claim Sec 600 Relief Avoids future double CGT charge Loan repayments -more tax efficient through company? Calculate CGT on both options CGT may be lower if no relief claimed Consider SD on building transfer

77 Stamp Duty No Stamp Duty Relief Ad valorem rates – up to 6% Land & Buildings; Goodwill; Plant & Machinery, Stock, Debtors No SD for transfers by delivery or oral agreement Conveyances – Land & Buildings Sec 31 SDCA 1999 – ad valorem rates

78 Stamp Duty Moveable Property Legal title transferred by physical delivery Pass by delivery No document transferring title DebtorsPotential SD on gross value Ownership remains with seller Purchaser acts as agent to collect debtors Repay creditors Goodwill and IPSec 101 SDCA 1999 exemption for IP Goodwill directly attributable to IP exempt Sec 31 SDCA 1999 – SD on goodwill CashCurrent account – not liable to SD Deposit account – liable to SD Transfer cash to current account

79 Stamp Duty Watch impact of SD planning on Sec 600 TCA 97 Relief Revenue aggregate consideration for assets passing by delivery with stampable consideration to determine SD rate Consideration in shares – Sec 58(2) Companies Act 1963 Written contract for shares for non-cash consideration  Sec 40 SDCA 1999

80 SD – Sec 41 SDCA 1999 Assets of unincorporated business transferred to company Wholly or partly for consideration of the assumption of debts by the company Instrument chargeable as conveyance on sale SD chargeable on liabilities assumed + other consideration No offset of creditors against debtors

81 Income Tax Issues Transfer of plant, equipment, fixtures and fittings etc Sec 289 TCA 97 – Balancing adjustment MV applied – IT rates up to 55% on BC Sec 312(5) TCA 97 – transfer at TWDV Common control Formal election in Form 11 and Form CT1

82 Income Tax Issues Trading Stock valuation Lower of cost or NRV Sec 89 TCA 97 – valuation rules –Unconnected persons – price paid –Other cases – open market price –Connected parties and omv > original cost an price  joint election for higher of original cost and actual price Avoids artificial loss on sale of stock Stops excessive profit on sale

83 VAT on Incorporation Transfer of Business Relief 1.Purchaser is VAT Registered * 2.Transfer of undertaking capable of being operated on an independent basis Sec 3(5)(b)(iii) and Sec 5(8) VATA 1972 Transfer ≠ Sale of Goods Sec 12(1)(a)(iiia) VATA – deduction for VAT on services related to the transfer * Ensure purchaser is VAT registered prior to transfer

84 BES Sec 493 TCA 97 Individual must not be connected with company for 2 years before and 5 years after issue of shares Cannot own > 30% of OSC or loan capital or voting power If investment not > €500,000  30% rule does not apply

85 BES Sec 495 TCA 97 Unquoted Irish resident company or resident in EEA State with Irish branch/agency Must carry on Qualifying Trade “wholly or mainly” – 75% turnover test Newly issued, fully paid up ord shares No preferential rights Max amount raised €2m - €1.5 any one year

86 BES Max tax relief is €150,000 in tax year Excess can be carried forward Claim within 2 years of end of year in which shares issued/ 4 months rule Company needs Revenue approval Cert issued to investor CGT – full cost allowed but restricted if loss 5 year holding period Clawback – Sch D Case IV

87 BES Qualifying Activities Manufacture of goods - exceptions Services where Employment Grant received (not IFSC) Commercial R&D - exceptionsGreenhouse cultivation of horticultural products Plant Cultivation - micropropagation or plant cloning Construction/Leasing of advance factory R&D or similar – certain trading operations Mushroom cultivation Tourist traffic operationsSale of export goods by special trading house Production, publication, marketing and promotion of qualifying musical recordings Recycling companies with IDA grants

88 Seed Capital Relief Significant Relief for start ups Refund of tax for capital invested in business by employees or unemployed Maximum €100,000 annual relief Can be carried back 6 years Qualifying co and shares = BES Full time employment for 12 months

89 Qualifying Individual Sec 494 TCA 1997 Irish or foreign employment income for 3 preceeding years prior to investment Max non employment income €25,000 15% of osc held for one year from commencement Cannot have held 15% or more of osc of any other company at date of investment Certifying Agency

90 Seed Capital Relief Who can benefit? An employee made redundant setting up a new qualifying business Relief can be claimed for the previous 6 years Qualifying investment of €200,000 in 2010 could result in a tax refund of between €40,000 and €80,000

91 BES and SCS Exit Issues Exit mechanism may not suit owner BES and SCS means shares must be sold for return on investment Owner may want to hold shares for longer term

92 Loans to acquire shares Sec 248 TCA 1997 – material interest Tax relief for interest paid on loans to acquire shares in or lend to companies Interest allowed as charge Sec 250 TCA – where material interest test or full time working test not met Sec 250 TCA – Restricted Relief for full time employees/directors of public companies – max €3,050 to acquire shares

93 Loans to acquire shares Interest relief on a paid basis Company must be a private trading company No relief if BES or Film Relief claimed Funds borrowed and applied –To acquire osc –To lend to trading company – wholly & exclusively for trading purposes –Top ay off a qualifying loan

94 Borrowings to Invest Must have material interest – 5% Work full time in the company Relief for part time directors and employees No recovery of capital – sec 249 TCA 97 –Sale of shares –Loan is repaid by company or connected co –Assignment of debt due by borrower to co –Disposal of shares for < MV

95 Financing Equity or Shareholder Loans? What is long term objective of shareholder? Equity = Base Cost for future CGT/Loss relief Equity = Possible BES or SCS Lender may require equity Loan gives maximum flexibility – repayment with no co law or tax issues

96 Property Hold property in company or personally? General Rule: Property owned personally Double CGT charge issues – ER 37.3% Property can be rented to company Commercial issues important too Loan repayments more efficient through company? Co after tax profits > Sole trader net income

97 Start Up Exemption Sec 486 TCA 1997 Start up companies Newly incorporated company and new trade in 2009 or 2010 Where CT for AP <= €40,000  NIL CT Marginal Relief where CT €40,000- €60,000 Relief for 3 years from commencement

98 Qualifying Trade Excludes trades previously carried on Excepted trades – land development, mining, petroleum activities - @ 25% Professional services -close company Relevant CT is total CT less –Close company surcharges –Profits from residential land dealing –Profits liable to CGT –CT on profits @ 25%

99 Marginal Relief Reduce CT using formula 3*(T-M)*(A+B)/T T= Total CT payable for AP M= Lower limit €40,000 A=CT payable on qualifying trade B=CT referable to CGs on assets of qualifying trade 3*(€55,000-€40,000)*(€55,000+0)/€55,000 =€40,909 Max CT = €40,909+€5,000

100 Commercial Issues Transfer of employees from sole trade to company TUPE Regulations Employees must transfer with business Accrued service, terms of employment etc Written terms to employees Legal advice for employment law issues

101 Close Companies Part 13 TCA 1997 To prevent accumulation of profits by close companies Anti avoidance provisions Participators prevented from extracting funds to reduce tax Owner manager SMEs

102 What is a Close Co? Irish resident company Under control of 5 or fewer participators or under control of participators who are directors, however many Sec 430 TCA 1997 Key terms in Chapter 1 Part 13 TCA 1997

103 Control Sec 432(2) TCA 1997 - 50% tests Person exercises control; is able to exercise control; is entitled to acquire control over company’s affairs If person possesses or is entitled to acquire –Greater part of issued share capital or voting power –Capital giving >50% of income on distribution –Rights giving> 50% of assets on winding up

104 Participator Sec 433(1) TCA 1997 Person with share or interest in capital or income of a company, including –Present or future rights to SC, Voting, Loan Capital, Loan Creditor –Rights to share in distribution by co –Right to share in premium on redemption of loan capital –Other rights to secure present or future income or assets

105 Associate of Participator Sec 433(3) TCA 1997 Associate in relation to any person is –Close relatives inc spouse, ancestor, lineal descendant, brother, sister – exc in laws –Business partners –Trustees of settlement made by person or close relative –Other person having interest in co as trust or estate beneficiary if person has interest through trust or estate too

106 Loan Creditor Any person:- Holding redeemable loan capital issd by co To whom the co is indebted for monies borrowed or capital assets acquired Who is entitled to a debt from the co for right to receive income Who has received/will receive substantially more fro the co than value of consideration given Bank loans in ord course of business excluded

107 Director Sec 433(4) TCA 1997 Director includes –Any person who instructs or directs the directors and they are accustomed to act on these –Any manager (alone or with associates) who controls 20% or more of OSC A company controlled by directors is always close No need to consider how many participators control the company

108 Directors Co XWZ Ltd has 8 Directors – 7.5% shares each 40% held by others – none holding >5% No shareholders are associated Not a close company on 5 or fewer participator test – BUT The 8 directors control the company XYZ Ltd is a Close Company

109 Excluded Companies Non Resident CompaniesFor control test, Irish resident co is close if controlled by non resident co that would be close Industrial and Provident Society and most Building Societies May be considered close for loans to participators Co controlled by State/EU StateIf not otherwise a close company Company controlled by non-close co Quoted company where shares >=35% voting rights held by public and not > 85% voting power held by principal members Shares dealt on Stock Exchange in previous 12 months Cos not regarded as close except by including non-close creditors as one of 5 or fewer participators for winding up test

110 Anti Avoidance Close company cannot be used to: Shelter income taxable at higher rate if distributed to participator Withdraw profits or value from company without paying tax

111 Anti Avoidance Chapter 2 Part 13 TCA 1997 1.Benefits & Expenses to Participators or associates treated as distributions 2.Interest> Specified Rate to directors or associated treated as a distribution 3.Loans to participators or associates penalised and taxed as income if forgiven 4.Transfer of assets at undervalue 5.Surcharge on undistributed investment rental and service company income

112 Expenses to Participators Sec 436 TCA 1997 Expenses regarded as distributions Excludes benefits treated as BIK Excludes ER pension contributions DWT due on distribution on mkt value of cash distributions Co has right to claim DWT from participator/associate

113 Interest to Directors Sec 437 TCA 1997 Director with material interest - >5% Prescribed limit 13% of loan or nominal amount of share capital No deduction for excess interest DWT due by company Recipient liable under Sch F

114 Loans to Participators Sec 438 TCA 1997 IT payable on regrossed value of loan Co liable to IT – repayment if loan repaid No liability where co makes loans in ordinary course of business Loans < €19,050 to full time director/employee with no material interest not within charge

115 Loans to Participators Sec 439 TCA 1997 Loans written off liable to IT - Sch D Case IV Individual liable to IT on gross amount Credit for IT paid by company Applies to loans by subsidiaries Applies to loans made to non resident companies outside EU Sec 122 TCA 97 – PAYE on Pref Loans Co Law restrictions on loans - OCDE

116 Example Close company makes interest free loan of €20,000 to 15% shareholder employee Annual payment is €20,000/80% = €25,000 Income Tax liability = €5,000 Cos PT includes IT €5,000 PAYE on interest free loan – Sec 122 E Brief 56/2007 – loans repaid by filing due date

117 Transfer of Assets at Undervalue Sec 589 TCA 1997 – four taxes 1.Sec 547 TCA 97 disposal at MV – chargeable gain 2.MV-Price treated as distribution. DWT applies. Sch F for individual Sec 130 3.Reduction of base cost of all shares – apportionment of undervalue 4.CAT for participator on gift element

118 Example Sale of property to Susan for €60,000 MV of property €80,000 50,000 shares – 20% held by 5 family members MV 10% company share at 6/4/1974 €11,500 Sale of 10,000 shares by Aidan after sale of property to Susan

119 Example CGT Reduction of base cost of Aidan’s shares Reduce shares by undervalue Total undervalue €20,000 Aidan’s shares 20% Reduction €4,000 Kenny Ltd liable to CGT Susan’s base cost for future disposal is €80,000 Sale Proceeds for Kenny Ltd is €80,000 Corporation Tax Undervalue €20,000 is a distribution €25,000 distribution €5,000 DWT Susan liable to IT, PRSI and Levies Stamp Duty for SusanPossible Surcharge on undervalue CAT Gift to Susan of €20,000 Gift taken from other shareholders Look through company Gift Tax may apply

120 Close Company Surcharge Sec 440 and 441 TCA 1997 Investment and Rental Income Professional Income Additional CT liability of 20%/15% On income not distributed within 18 months of AP De minimis limit €635 No surcharge if insufficient or negative reserves

121 Calculation Step 1 Calculate co’s Income Sec 434(4) TCA 97 Income from all sources exc FII Before deducting Trading/Case V losses carried fwd/back Case III/IV Losses fwd/mgt exp or charges fwd After deducting All losses in AP and charges/mgt exps Step 2 Calculate co’s rental & inv inc Sec 434(5) TCA 97 Net Income * Estate & Inv Income Total Income Add FII and deduct non trade charges and mgt exps Step 3 Calculate co’s distributable rental & inv inc Deduct tax payable (25%) from rental and investment income Deduct 7.5% if company is trading Step 4 Calculate surcharge Deduct distributions made during or within 18 mths of AP - Apply surcharge of 20%

122 Avoiding Surcharge Calculate tax cost of surcharge and compare to tax cost of making distributions Effective Rate of surcharge apprx 40% Effective Rate for individual could be 55% Sec 440(2) TCA 97 – no surcharge is distribution precluded by law

123 Professional Service Company Sec 441 TCA 1997 Additional surcharge Discourage professionals to shelter income at lower CT rates 15% surcharge applies to professional income Passive income also taxed @ 20%

124 Professional Service Company Sec 411(1) TCA 97 – definition of PSC –Carrying on a profession –Providing professional services –Having or exercising an office or employment –Providing services to professional person/partnership where connected person rules apply

125 Professional Service Company A Partnership is connected with a company or individual if any one of the partners is connected with the co or individual Genuine cases of services or facilities provided to non connected persons are excluded from surcharge

126 Professional Service Company Service company applies where main part of income derived from the profession, provision of professional services, an employment or combination of activities What is a professional? Tax Briefing 48 Revenue Precedent footnote to Sec 441 TCA 97

127 Professional Service Company Professionals include AccountantBarristerManagement Consultant ActorComputer Programmer Optician ActuaryDentistPrivate School ArchaeologistDoctorQuantity Surveyor ArchitectEngineerSolicitor Auctioneer/Estate Agent JournalistVet

128 Professional Services Calculation Step 1 Calculate Distributable Trading Income Step 2 Calculate 50% of this figure Step 3 Add distributable estate to Step 2 figure and investment income (net of 7.5%) Step 4 Deduct distributions made for AP or within 18 months Offset any excess against distributable trading income Step 5 Apply 20% surcharge to Step 4 Step 6 Apply 15% surcharge to total excess at Step 3

129 Director Remuneration in Service Director remuneration is an allowable deduction Carry out cost/benefit analysis After tax cost of surcharge v tax cost of taking salary or making a dividend Make employer pension contributions?

130 Cash Extraction Salary/Bonus/Director’s Fees/BIK Tax deductible Wholly and Exclusively DividendsNot Tax Deductible Termination PaymentsTax deductible – but pitfalls Pension ContributionsNormally tax deductible LiquidationsCGT for shareholder Sale of SharesCGT for shareholder Loan to shareholderClose Co surcharge and Co law restrictions

131 Family Remuneration Wholly and exclusively test Regular profit extraction Combined tax rate up to 55% Class S1 PRSI Salary v Dividend payment

132 Termination Payments Tax efficient tax extraction Resigning or retiring director No tax deduction if payment for sale of shares or business ceasing Reliefs –Basic €10,160+€765 per complete year service –Increased Relief = basic plus €10,000 –SCSB – based on service and salary

133 Termination Payments CT deduction allowed where: Statutory redundancy payments made Termination payments to non shareholders where business continuing Termination payments to shareholding directors/employees where no cessation of business and payment is justified on wholly & exclusively test

134 Pension Contributions Revenue Approved Schemes ER contributions deductible within limits. Relief on paid basis Corporate scheme deductions > self employed schemes or personal contributions Corporate Scheme protected from creditors Personal contributions to corporate scheme deductible subject to limits No BIK on employer contributions (subject to Salary Sacrifice issues) Life Cover, disability cover and PHI available for employee 2/3rds final salary – scope for top up Tax Free lump sum on retirement

135 Distributions Not tax deductible May be no option if shareholder not an employee/director DWT @ 20% Reduces close co surcharge Check if salary payment more efficient Payment of dividends prior to sale CGT rate could be replaced by IT

136 Liquidation Treated as disposal of shares by shareholders Subject to CGT Proceeds = amounts realised on liquidation Two potential charges Disposal of business and assets – CGT and Balancing Charges CGT for shareholder on share disposal

137 Sale of Shares Efficient tax extraction method CGT once only for vendor Compare capital distribution on liquidation with sale of shares Saving of €2.54m in example Purchaser acquires liabilities of business Legal warranties and indemnities Usually preference not to acquire shares Consider Hive Off of trade

138 Sale of Shares Tax Advantages VendorPurchaser No Balancing Charge as no sale of assets Stamp Duty @1% v Ad Valorem up to 9% No double CGT as sale of shares only Trading losses forward available Subject to anti avoidance No liquidation costsNo VAT charged VAT inputs on professional fees not available

139 Sale of Shares Tax Disadvantages VendorPurchaser Provision of warranties and indemnities Taking on past history – tax and legal Discount on share price to reflect latent gains Assumes cost of latent gains on CGT and CT

140 Anti Avoidance Sec 817 TCA 1997 Scheme or arrangement to convert Sch F income to CGT Does not apply to a share disposal where Shareholder has directly and indirectly reduced interest in the co Disposal is for bona fide commercial with no tax avoidance

141 Company Law Co has distinct identity Certificate of Incorporation Pre incorporation contracts not binding Contracts by sole trade prior to incorporation need approval in line with Articles of Association

142 Characteristics Separate legal rights Assets owned by Company Debts and obligations belong to Co Corporate Veil –Courts can lift if fraud or reckless trading Directors held personally liable if fraudulent or reckless trading or failure to keep proper books and records Perpetual succession in membership

143 Company Registration CRO – check index of co names Submit Form A1 Submit Bond – similar to insurance policy Memorandum of Association Articles of Association Letter of No Objection, if relevant

144 Distributable Reserves Protection of Share Capital Capital maintenance Rules Close company surcharge issues Identify distributable reserves Important for company Law and CT Accumulated realised profits less accumulated realised losses Illegal to make distribution in breach of rules

145 Distributable Reserves Exceptions for dividends –Issue of bonus shares –Reduction of share capital by extinguishing liability of partly paid shares or repaying paid up share capital –Redemption or purchase of shares out of capital, fresh issue of shares or unrealised profits –Distribution of assets to members on winding up

146 Undistributable Reserves Share Premium Account Capital Redemption Reserve Fund Capital Conversion Reserve Fund Accumulated unrealised profits> accumulated unrealised losses Other reserve in Statute or Memo and Articles which is non distributable

147 Co Law and Director Loan Accounts Sec 25-52 CA 1990 Significant restrictions Loans or financial assistance to directors, shadow directors and connected persons Transactions voidable Personal liability for beneficiaries Criminal sanctions against co officers who knew of contravention

148 Sec 31 CA 1990 Prohibition A company may not: Make loans or quasi loans to director of co or holding co or to person connected with director Enter into credit transaction as creditor for director or connected person Enter into guarantee or provide security in connection with loan for director or connected person

149 Sec 31 Exclusions Exception if Value < 10% Relevant Assets Directors Expenses – refund within 6 months Business transactions – Sec 37 Validation allowed only where loan made by any other person for a director and co enters into guarantee or security

150 Transactions with Directors Sec 29 CA 1990 Acquisition of non cash asset by company from director Arrangement must be approved by resolution passed at shareholder meeting Breach of S 29 – director liable to make good loss

151 Accounting for Tax Revenue v Capital No charge to P&L for capital items Key consideration for taxable profit Assets defined for accounting purposes Irish GAAP – Statement of Principles “rights of other access to future economic benefit controlled by an entity as a result of past transactions or events”

152 Accounting Standards Expenditure which may be capitalised SSAP 9 Stocks and Long Term Contracts Expenditure in bringing product or service to present location can be capitalised SSAP 13 Accounting for Research & Development No specific restrictions  “revenue” items may be capitalised FRS 7 Fair Values in acquisition accounting Business combination – directly attributable costs may be capitalised eg professional fees FRS 15 Tangible Fixed Assets Specific details – capitalisation of finance costs directly attributable to construction of asset

153 IFRS Asset definition “a resource controlled by an entity as a result of a past event from which future economic benefits are expected to flow into the entity”

154 IFRS IAS 2 -InventoriesComparable with SSAP 9 IAS 16/IAS 23 Property plant and equipment Borrowing costs Similar to FRS 15 – but mandatory to capitalise directly attributable finance costs IAS 39 Financial Instruments – recognition and measurement Specific detail on nature of costs to be capitalised – deduct from proceeds raised IAS 40 Investment Property Capitalised costs include transaction and other directly attributable costs IAS 41 Biological Assets Fair value measurement approach to be taken IFRS 3 Business Combinations Requires all transaction costs to be expensed

155 Accounting for Tax Entities may apply a minimum capitilisation threshold Be aware of small items that are capital but showing in P&L Adjustments may be needed to tax comp to claim Capital Allowances Deferred Tax arises if timing or temporary differences arise

156 Debt & Equity Instruments Impact on Financial Statements Accounting treatment may be split Accounting treatment has no impact on legal form Usually no impact on tax status FRS 25 (GAAP) or IAS 32 (IFRS) Complex classification criteria

157 Debt & Equity Instruments Key Issues Financial instrument is a financial liability if issuer obliged to settle in cash or delivery of another financial asset Financial instrument classified as equity where issuing entity has right to avoid settlement in cash Review terms of preference shares and similar instruments

158 Debt & Equity Instruments Contractual obligation not negated by lack of funds – series of preference shares but no reserves to pay dividend  shares classified as financial liabilities Financial Liabilities include: –Instruments redeemable at option of holder –Non redeemable pref shares with non discretionary dividends –Subordinated liabilities

159 Debt & Equity Instruments Instrument containing both financial liability and equity component Obligation to make interest payment and conversion feature = compound instrument Split accounting Convertible Bond Non cumulative mandatory redeemable preference share

160 Debt & Equity Instruments Preference shares with option for redemption by holder = contractual obligation to deliver cash  Financial Liability Instrument classified as Financial Liability has a coupon which is a financing item showing as interest expense in P&L account

161 Deferred Tax GAAP – No DT implications on classification of debt and equity All differences regarded as permanent IFRS – Compound Instruments Convertible Bond Does a temporary difference arise between carrying value in accounts and tax base? If yes – DT issues

162 Certain Loans Loans by shareholders to company interest free or below MV Irish GAAP – silent on notional interest IFRS – liability should recognise market interest Treated as capital contribution Loans from Enterprise Ireland

163 Distributions Has entity sufficient reserves? Correct timing of recognition of distributions Includes dividends, assets in kind, redemption of shares etc ICAEW Guidance – Technical Statements UK Guidance No distributions out of capital unless on liquidation or with Court permission

164 Distributions Companies Acts – have regard to “relevant accounts” Consider period between relevant accounts and date of proposed distribution Are reserves in FS “realised”? Realised in form of cash or other assets that can be ultimately realised Profits from recognition of changes in fair values if readily convertible to cash

165 Close Co Surcharges Before distribution made – availability of retained profits Tax Provision – potential surcharge Irish/UK GAAP-no accrual needed if firm expectation of distribution IFRS, IAS 12 ignore impact of future distribution on current tax  accrue potential surcharge and release only when distribution is made

166 Round Up Trade or Profession? Badges of Trade Revenue v Capital Receipts/Expenditure Role of Case Law Fundamental Principles – relevance to all cases

167 Sole Traders & Partnerships Adjusted Tax Computation Allowable Expenditure Sec 81 TCA 1997 Motor Expenses Basis of Assessment General and Special Rules Attention to commencements, cessations etc – tax savings?

168 Sole Traders & Partnerships PRSI Health Contribution Income Levy Pension Contributions

169 Sole Traders & Partnerships Taxation of Partnerships Income and Profit Appropriation Loans to Partnerships Capital Gains Tax Capital Acquisition Tax Limited Partnerships

170 Incorporation Tax and Commercial Considerations Timing Transfer of existing business to Company BES and SCS Borrowing to Invest in Companies Financing Issues Acquiring Property

171 Incorporation CT Start Up Exemption Close Company Issues Service Companies Directors’ Remuneration Cash extraction Pensions Company Law Accounting for Tax Issues

172 Learning Outcome Sch D Case I and II principles Applying Case Law to situations Basis of assessment and now to apply to partners Key factors in deciding to incorporate

173 Learning Outcome Close company determination Close company issues for participators Transactions with directors, participators Professional service companies Cost benefit analysis of dividend v salary

174 Learning Outcome Cash extraction Different methods and tax issues Anti avoidance measures Legal and accounting for tax issues Effect on transactions and tax computations/tax provisions for SMEs

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