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

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?• 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

• 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 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

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

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.”

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

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 expenditureStatutory prohibition? No Allowable

Capital ExpenditureStatutory 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 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

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 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

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 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

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”

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

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

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

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

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

• 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 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

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 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

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

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

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

• 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 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

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

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• 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

• Overall NRE Limit €150,000 for 2010

<30 Years 15%

30-39 20%

40-49 25%

50-54 30%

55-59 35%

60 40%

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

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 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

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

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

• 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 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

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

• 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 asset-

sharing 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

• 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

• 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?• 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 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

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

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

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 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

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 closeNo 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 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

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 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

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

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

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

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%

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 includeAccountant Barrister Management

Consultant

Actor Computer Programmer

Optician

Actuary Dentist Private School

Archaeologist Doctor Quantity Surveyor

Architect Engineer Solicitor

Auctioneer/Estate Agent

Journalist Vet

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

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 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

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 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

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 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

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

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

• 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

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”

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

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