Transcript Slide 1

Chartered
Tax
Consultant
Stage 3 Module 2
Small and Medium – Sized Entities
Presenter Name –Cormac Kelleher
27th & 28th May 2 011
Chartered Accountants House
www.charteredaccountants.ie
EDUCATING
SUPPORTING
REPRESENTING
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
Summary of Module –What?
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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
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?
Schedule D Cases I & II
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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
Case Law
Wisdom v Chamberlain
•Expectation that asset paid
for out of proceeds of sale
•Held – Adventure in the
nature of a trade
Rutledge v The Commission
of the Inland Revenue
•Held trading
•Comedian Norman Wisdom
•Silver bullion investment to hedge
•Financed by loans @ high interest
•Sale of asset needed to repay loan
Noddy Subsidiary Rights v
IRC
•Intellectual Property Rights –
Trading?
•Granting of rights –trademark &
copyright
•Trading activity
•Volume of transactions
•Employee needed – maintaining rights
•Money lender by trade
•Bought 1m toilet rolls in Berlin
•Sold in UK at profit
•Volume of commodity–not personal use
Capital v Trading?
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Examine each case on its facts
CGT rate lower than IT  CGT?
Trading Losses for set off?  IT?
Impact on deductibility of expense
Badges of Trade
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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.”
Badges of Trade
Subject Matter of the Realisation •Manufactured Items
IRC v Fraser
• 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
Motive
•Seller’s Intention
•Start Ups
Trade or Profession?
• No major impact of distinction for IT
• Sole Traders and Partnerships
• Close companies – distinction is
significant
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
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
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
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
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
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
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
Accountancy Treatment
Heather v PE Consulting
Courts must decide
•Generally Capital
•Form of payment does not change
Capital into Revenue
•Question of law – not accountancy
•Weight given to accountancy
•Evidence of accountants of
assistance
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
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
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
Apportionment Needed
No Accounts in Year of
Assessment
Sec 65(2)(c)
Example €200,000 * 12/20
AP > 12 months
Sec 65(2)(b)
Example
(€100,000*8/8) + (€120,000* 4/12)
•Taxable on profits for
Year of Assessment
•Y/E 31st December
•€120,000
•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
Special Rules
1. Commencement
2. Cessation
3. Change in Accounting Date
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
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?
When does trade commence?
• Birmingham and District Cattle ByProducts 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
Basis of Assessment
• Sec 66 TCA 1997 - Commencement
1st Year
•Profits from date of commencement
to 31st December
2nd Year
•First 12 months trading
1 Set of Accounts ending in •12 mths ending on latest date
year
•Actual profits for Year
AP ≠ 12 months
3rd Year
•Profits of 12 months AP ending in year
•Claim for reduction for “second year
Excess”
Planning for Commencement
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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
Example
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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
Cessation
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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
Cessation
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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
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
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
Planning for Cessation
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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
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
Change in Accounting Date
•Profits of 12 mths AP ending
in AP or
Review profits of p/year
•Profits of 12 mths ending on
on same basis
latest AP
•If profits for p/ year after
revision > original  revision
AP in Tax Year>or< 12 mths •Profits of 12 mths AP ending
Review profits of p/year on on AP or
same basis
•Profits of 12 mths ending on
latest AP
No AP in Tax Year
•Profits of Tax Year
Review profits of p/year on
same basis
1 AP in Tax Year
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
Sec 81 (2) TCA 1997
Sums not wholly and
exclusively laid out
Sums for private or domestic
purpose
Rent for dwelling house not
used for trade/profession
Loss not connected with the
trade or profession
Depreciation
Capital improvements
General Loss provisions
Sums recovered under
insurance policy
Annuity or annual payment (not
interest) paid out of profits
Patent Royalties
Share based consideration for
goods/services or to employees
General Bad Debts provisions
Motor Expenses
Category 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
Sec 373, 377
380L& 380M
€24,000=
Specified
Amount 2010
Sec 373, 377
380L& 380M
€24,000*50%
or if lower:
Cost *50%
Sec 373, 377
380L& 380M
No CA or
Leasing
allowed
Sec 373, 377
380L& 380M
Leasing and
CA restricted
to SA
Leasing and
CA restricted
to SA
Leasing and
CA restricted
to SA
NONE
Example
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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
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
Capital Allowances
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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
Adjusted Tax Computation
Capital Expenses
Add Back
X
Motor Leasing X
Private X
General Provisions Increase X
Loss on Sale FA X
Entertainment X
Deduct
€X
Capital Profits X
Profit on Sale of FA X
General Provision Decrease X
Investment Income X
Adjusted Case I/II
(€X)
€X
PRSI/Levies for Self Employed
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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
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
Health Contribution
• Self Employed liable to HC on reckonable
income
• Rates for 2010
• First €75,036 @ 4%
• Balance
@ 5%
• Module 3
Income Levy
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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
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
Pension Contributions
• Maximum contributions
<30 Years
15%
30-39
20%
40-49
25%
50-54
30%
55-59
35%
60
40%
• Overall NRE Limit €150,000 for 2010
Pensions
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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
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
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
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
Relevant Period
• Sec 1007 TCA 1997
• Period during which partnership continues
• Changes in partnership may take place
Relevant Period
RP 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
•Partnership succeeded by
on previous partnership
new partnership – no
trade – no common partner common partner
Income Tax & Profit Appropriation
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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
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
Partnership Allocation
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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
Partnership Allocation
Partner 1
Salary
Share of P/Ship
Profit
Case 11
Case V
Partner 2
€50,000
€50,000
€145,500
€47,500
€195,000
€97,500
€12,500
NIL
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
Loans to Partnerships
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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
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
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 assetsharing ratios
• Retirement/admission of partners
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
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
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
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
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
Tax Registration
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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
Incorporation
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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?
Why Incorporate?
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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
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
Transfer of Business to Company
• Main Taxes
• CGT & Stamp Duty on transfer of
business assets
• Income tax adjustments to sole trade
• VAT
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
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
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
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
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
Stamp Duty
Moveable
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
•Sec 101 SDCA 1999 exemption for IP
•Goodwill directly attributable to IP exempt
•Sec 31 SDCA 1999 – SD on goodwill
Goodwill and IP
Cash
•Current account – not liable to SD
•Deposit account – liable to SD
•Transfer cash to current account
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
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
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
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
VAT on Incorporation
• Transfer of Business Relief
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Purchaser is VAT Registered *
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
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
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
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
BES Qualifying Activities
Manufacture of goods exceptions
Services where Employment
Grant received (not IFSC)
Commercial R&D - exceptions
Greenhouse cultivation of
horticultural products
Plant Cultivation - micropropagation Construction/Leasing of advance
or plant cloning
factory
R&D or similar – certain trading
operations
Mushroom cultivation
Tourist traffic operations
Sale of export goods by special
trading house
Production, publication, marketing
Recycling companies with IDA
and promotion of qualifying musical grants
recordings
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
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
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
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
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
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
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
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
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
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
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%
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
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
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
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
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
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
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
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
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
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
Excluded Companies
Non Resident Companies
Industrial and Provident Society
and most Building Societies
For control test, Irish resident co is
close if controlled by non resident
co that would be close
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 Shares dealt on Stock Exchange in
>=35% voting rights held by
previous 12 months
public and not > 85% voting
power held by principal members
Cos not regarded as close except by including non-close creditors as one
of 5 or fewer participators for winding up test
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
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
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
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
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
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
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
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
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
Example
CGT
Reduce shares by undervalue
Reduction of base cost of Total undervalue €20,000
Aidan’s shares
Aidan’s shares 20% Reduction €4,000
Kenny Ltd liable to CGT
Sale Proceeds for Kenny Ltd is €80,000
Susan’s base cost for future
disposal is €80,000
Corporation Tax
Undervalue €20,000 is a
distribution
Stamp Duty for Susan
€25,000 distribution
€5,000 DWT
Susan liable to IT, PRSI and Levies
Possible Surcharge on undervalue
CAT
Gift to Susan of €20,000
Gift taken from other shareholders
Look through company
Gift Tax may apply
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
Calculation
Step 1 Calculate
Income from all sources exc FII
co’s Income
Before deducting
Sec 434(4) TCA 97 •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
Net Income * Estate & Inv Income
co’s rental & inv inc
Total Income
Sec 434(5) TCA 97 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%
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
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%
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
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
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
Professional Service Company
• Professionals include
Accountant
Barrister
Management
Consultant
Optician
Actor
Actuary
Computer
Programmer
Dentist
Archaeologist
Doctor
Quantity Surveyor
Architect
Engineer
Solicitor
Auctioneer/Estate
Agent
Journalist
Vet
Private School
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
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?
Cash Extraction
Salary/Bonus/Director’s
Fees/BIK
Dividends
Tax deductible
Wholly and Exclusively
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
Family Remuneration
•
•
•
•
•
Wholly and exclusively test
Regular profit extraction
Combined tax rate up to 55%
Class S1 PRSI
Salary v Dividend payment
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
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
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
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
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
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
Sale of Shares
• Tax Advantages
Vendor
Purchaser
No Balancing Charge as no Stamp Duty @1% v Ad
sale of assets
Valorem up to 9%
No double CGT as sale of
shares only
No liquidation costs
Trading losses forward
available
Subject to anti avoidance
No VAT charged
VAT inputs on professional
fees not available
Sale of Shares
• Tax Disadvantages
Vendor
Purchaser
Provision of warranties and Taking on past history – tax
indemnities
and legal
Discount on share price to
reflect latent gains
Assumes cost of latent
gains on CGT and CT
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
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
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
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
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
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
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
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
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
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
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
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”
Accounting Standards
SSAP 9
• Expenditure
Stocks
and Long Term
Contracts
which
Expenditure in bringing product
may
be capitalised
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
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”
IFRS
IAS 2 -Inventories
Comparable with SSAP 9
IAS 16/IAS 23
Property plant and equipment
Borrowing costs
IAS 39
Financial Instruments – recognition
and measurement
IAS 40
Investment Property
Similar to FRS 15 – but mandatory
to capitalise directly attributable
finance costs
Specific detail on nature of costs to
be capitalised – deduct from
proceeds raised
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
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
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
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
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
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
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
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
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
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
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
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
Round Up
•
•
•
•
•
Trade or Profession?
Badges of Trade
Revenue v Capital Receipts/Expenditure
Role of Case Law
Fundamental Principles – relevance to all
cases
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?
Sole Traders & Partnerships
•
•
•
•
PRSI
Health Contribution
Income Levy
Pension Contributions
Sole Traders & Partnerships
•
•
•
•
•
•
Taxation of Partnerships
Income and Profit Appropriation
Loans to Partnerships
Capital Gains Tax
Capital Acquisition Tax
Limited Partnerships
Incorporation
•
•
•
•
•
•
•
Tax and Commercial Considerations
Timing
Transfer of existing business to Company
BES and SCS
Borrowing to Invest in Companies
Financing Issues
Acquiring Property
Incorporation
•
•
•
•
•
•
•
•
CT Start Up Exemption
Close Company Issues
Service Companies
Directors’ Remuneration
Cash extraction
Pensions
Company Law
Accounting for Tax Issues
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
Learning Outcome
•
•
•
•
•
Close company determination
Close company issues for participators
Transactions with directors, participators
Professional service companies
Cost benefit analysis of dividend v salary
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