educating supporting representing stage 3 module 2 small and medium – sized entities chartered...
TRANSCRIPT
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EDUCATING
SUPPORTING
REPRESENTING
www.charteredaccountants.ie
Stage 3 Module 2Small and Medium – Sized Entities
Chartered TaxConsultant
Presenter Name –Cormac Kelleher
27th & 28th May 2 011
Chartered Accountants House
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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
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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
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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 CA CGT enhancement?
Premises owned or rented? Effect on CA/CGT?
VAT Input credit?
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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
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Case LawWisdom 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
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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
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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.”
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Badges of TradeSubject Matter of the RealisationIRC v Fraser
•Manufactured Items• Items acquired for personal use•Large unusual transaction
Length of OwnershipKirby v Hughes
•Sold within short time•Business Stock
Similar transactions over timeSmith Brady v Cordy
•Repetition•Systematic
Supplementary WorkMartin v Lowry
•Marketing and Advertising•Substance of operation
Circumstances for DisposalSpa Estates v O Hargain
•Sale trigger•Genuine Risk
Motive •Seller’s Intention•Start Ups
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Trade or Profession?
• No major impact of distinction for IT• Sole Traders and Partnerships• Close companies – distinction is
significant
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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
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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
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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
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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
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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 expenditureStatutory prohibition? No Allowable
Capital ExpenditureStatutory allowance? No Not Allowable
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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
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Case LawRecurring PaymentsIRC v AdamRight to use property – not rent
•Revenue receipts•Instalment payment still capital
Identifiable Asset TestOgden v Medway CinemaWalker 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 BusinessWatney Combe Reid & Co LtdRestructuring Costs held capital
•Generally Capital•Form of payment does not change Capital into Revenue
Accountancy TreatmentHeather v PE Consulting Courts must decide
•Question of law – not accountancy•Weight given to accountancy•Evidence of accountants of assistance
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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
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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
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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 31st May 2011 is Basis Period for 2010
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Apportionment NeededNo Accounts in Year of AssessmentSec 65(2)(c)Example €200,000 * 12/20
•Taxable on profits for Year of Assessment•Y/E 31st December•€120,000
AP > 12 monthsSec 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 YearExample(€100,000*6/8) + (€70,000* 6/6)
•Taxable on profits for 12 months to later accounting date•€145,000
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Special Rules
1. Commencement
2. Cessation
3. Change in Accounting Date
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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
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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?
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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
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Basis of Assessment
• Sec 66 TCA 1997 - Commencement
1st Year •Profits from date of commencement to 31st December
2nd Year1 Set of Accounts ending in yearAP ≠ 12 months
•First 12 months trading•12 mths ending on latest date•Actual profits for Year
3rd Year •Profits of 12 months AP ending in year•Claim for reduction for “second year Excess”
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Planning for Commencement
• Accounting date choice• Defer income/Accelerate costs• Early Accounting date – 31st January• Benefits when profits rising• Timing of invoicing/expenses – first 2
years• Low profits in first 2 years
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Example
• Commencement date 1st May 2009• Accounts to year end 30th 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
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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
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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
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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
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Cessation
• Final year of assessment – taxed on 1st 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
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Planning for Cessation
• Check penultimate year• Avoid additional tax and interest• If AP is 31st December no revision• “Smooth” profit pattern in final years?• Revision of penultimate
– Lower profits? – OK– Higher profits? – revision and additional tax
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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
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Change in Accounting Date1 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 mthsReview 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 YearReview profits of p/year on same basis
•Profits of Tax Year
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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
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Sec 81 (2) TCA 1997Sums 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
Depreciation Share based consideration for goods/services or to employees
Capital improvements General Bad Debts provisions
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Motor ExpensesCategory A Category B/C Category D/E Category F/G
0-120g/km 121-155g/km 156-190g/km 190g/km+
€24,000 = Specified Amount 2010
€24,000= Specified Amount 2010
€24,000*50% or if lower:Cost *50%
No CA or Leasing allowed
Sec 373, 377 380L& 380M
Sec 373, 377 380L& 380M
Sec 373, 377 380L& 380M
Sec 373, 377 380L& 380M
Leasing and CA restricted to SA
Leasing and CA restricted to SA
Leasing and CA restricted to SA
NONE
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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
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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
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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
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Adjusted Tax ComputationCapital Expenses X
Add Back Motor Leasing X
Private X
General Provisions Increase X
Loss on Sale FA X
Entertainment X €X
Deduct Capital Profits X
Profit on Sale of FA X
General Provision Decrease X
Investment Income X (€X)
Adjusted Case I/II €X
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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
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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
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Health Contribution
• Self Employed liable to HC on reckonable income
• Rates for 2010• First €75,036 @ 4%• Balance @ 5%• Module 3
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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
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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
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Pension Contributions
• Maximum contributions
• Overall NRE Limit €150,000 for 2010
<30 Years 15%
30-39 20%
40-49 25%
50-54 30%
55-59 35%
60 40%
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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 31st October
allowed in previous year• Claim and file Tax Return by due date
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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
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Partnerships
• Sec 1007 TCA 1997• Partnership Trade – “..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
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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
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Relevant Period
• Sec 1007 TCA 1997• Period during which partnership continues• Changes in partnership may take place
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Relevant PeriodRP Begins RP 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
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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
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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
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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
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Partnership Allocation
Partner 1 Partner 2
Salary €50,000 €50,000
Share of P/Ship Profit
€145,500 €47,500
Case 11 €195,000 €97,500
Case V €12,500 NIL
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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Transfer of Business to Company• Main Taxes• CGT & Stamp Duty on transfer of
business assets • Income tax adjustments to sole trade• VAT
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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
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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
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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
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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
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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
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Stamp DutyMoveable Property
•Legal title transferred by physical delivery•Pass by delivery•No document transferring title
Debtors •Potential SD on gross value•Ownership remains with seller•Purchaser acts as agent to collect debtors•Repay creditors
Goodwill and IP •Sec 101 SDCA 1999 exemption for IP •Goodwill directly attributable to IP exempt•Sec 31 SDCA 1999 – SD on goodwill
Cash •Current account – not liable to SD•Deposit account – liable to SD•Transfer cash to current account
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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
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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
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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
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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
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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
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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
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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
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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
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BES Qualifying ActivitiesManufacture of goods -exceptions
Services where Employment Grant received (not IFSC)
Commercial R&D - exceptions Greenhouse 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 operations Sale of export goods by special trading house
Production, publication, marketing and promotion of qualifying musical recordings
Recycling companies with IDA grants
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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%
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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
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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
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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
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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
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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
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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
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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
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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
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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 closeNo need to consider how many participators control the company
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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
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Excluded CompaniesNon Resident Companies For 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 State If 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
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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
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Anti Avoidance
• Chapter 2 Part 13 TCA 19971. 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
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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
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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
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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
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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
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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
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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
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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
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ExampleCGTReduction of base cost of Aidan’s shares
Reduce shares by undervalueTotal undervalue €20,000Aidan’s shares 20% Reduction €4,000
Kenny Ltd liable to CGTSusan’s base cost for future disposal is €80,000
Sale Proceeds for Kenny Ltd is €80,000
Corporation TaxUndervalue €20,000 is a distribution
€25,000 distribution€5,000 DWTSusan liable to IT, PRSI and Levies
Stamp Duty for Susan Possible Surcharge on undervalue
CATGift to Susan of €20,000
Gift taken from other shareholdersLook through companyGift Tax may apply
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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
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CalculationStep 1 Calculate co’s IncomeSec 434(4) TCA 97
Income from all sources exc FIIBefore 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 incSec 434(5) TCA 97
Net Income * Estate & Inv Income Total IncomeAdd 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 incomeDeduct 7.5% if company is trading
Step 4 Calculate surcharge
Deduct distributions made during or within 18 mths of AP - Apply surcharge of 20%
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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
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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%
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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
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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
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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
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Professional Service Company
• Professionals includeAccountant Barrister Management
Consultant
Actor Computer Programmer
Optician
Actuary Dentist Private School
Archaeologist Doctor Quantity Surveyor
Architect Engineer Solicitor
Auctioneer/Estate Agent
Journalist Vet
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Professional Services CalculationStep 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 monthsOffset 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
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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?
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Cash ExtractionSalary/Bonus/Director’s Fees/BIK
Tax deductibleWholly and Exclusively
Dividends Not Tax Deductible
Termination Payments Tax deductible – but pitfalls
Pension Contributions Normally tax deductible
Liquidations CGT for shareholder
Sale of Shares CGT for shareholder
Loan to shareholder Close Co surcharge and Co law restrictions
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Family Remuneration
• Wholly and exclusively test• Regular profit extraction• Combined tax rate up to 55%• Class S1 PRSI • Salary v Dividend payment
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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
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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
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Pension Contributions
• Revenue Approved SchemesER 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
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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
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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
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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
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Sale of Shares• Tax Advantages
Vendor Purchaser
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 availableSubject to anti avoidance
No liquidation costs No VAT chargedVAT inputs on professional fees not available
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Sale of Shares• Tax Disadvantages
Vendor Purchaser
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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”
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Accounting Standards
• Expenditure which may be capitalisedSSAP 9Stocks and Long Term Contracts
Expenditure in bringing product or service to present location can be capitalised
SSAP 13Accounting for Research & Development
No specific restrictions “revenue” items may be capitalised
FRS 7Fair Values in acquisition accounting
Business combination – directly attributable costs may be capitalised eg professional fees
FRS 15Tangible Fixed Assets
Specific details – capitalisation of finance costs directly attributable to construction of asset
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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”
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IFRSIAS 2 -Inventories Comparable with SSAP 9
IAS 16/IAS 23Property plant and equipmentBorrowing costs
Similar to FRS 15 – but mandatory to capitalise directly attributable finance costs
IAS 39Financial Instruments – recognition and measurement
Specific detail on nature of costs to be capitalised – deduct from proceeds raised
IAS 40Investment Property
Capitalised costs include transaction and other directly attributable costs
IAS 41Biological Assets
Fair value measurement approach to be taken
IFRS 3Business Combinations
Requires all transaction costs to be expensed
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Round Up
• Trade or Profession?• Badges of Trade• Revenue v Capital Receipts/Expenditure• Role of Case Law• Fundamental Principles – relevance to all
cases
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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?
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Sole Traders & Partnerships
• PRSI• Health Contribution• Income Levy• Pension Contributions
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Sole Traders & Partnerships
• Taxation of Partnerships• Income and Profit Appropriation• Loans to Partnerships• Capital Gains Tax• Capital Acquisition Tax• Limited Partnerships
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Incorporation
• Tax and Commercial Considerations• Timing• Transfer of existing business to Company• BES and SCS• Borrowing to Invest in Companies• Financing Issues• Acquiring Property
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Incorporation
• CT Start Up Exemption• Close Company Issues• Service Companies• Directors’ Remuneration• Cash extraction• Pensions• Company Law• Accounting for Tax Issues
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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
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Learning Outcome
• Close company determination• Close company issues for participators• Transactions with directors, participators• Professional service companies• Cost benefit analysis of dividend v salary
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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