Taxation Issues: Letter To Adrian For Denis And Business Essay.

Write a letter to Adrian addressing the tax issues for both himself and Denis. For Denis, please refer to the following:

Explain Denis’s Irish tax residency position for each year since he left Ireland.

Explain what impact his tax residency position has for Irish income tax purposes.

Explain what the tax compliance implications are by having an Irish rental source of income.

Advise on what allowable expenses, Denis may deduct from the gross rents, in particular comment on the conditions for claiming interest on borrowed money.

In relation to Adrian, please address the following:

Expenditure on Plant may qualify for capital allowances. This issue has been the subject of many court cases over the years. Quote two decided cases where the taxpayer was successful in obtaining capital allowances on plant and two which were not successful. For each case give a brief description of the facts of the case.

Explain the commencement rules for a business and set out the assessable profits for Adrian for the first three tax years of trading, you may assume that there are no adjustments required to the profits.

The proposed partnership with Paul may not be treated as a partnership for income tax purposes, explain why this may be so, quoting relevant case law.

When should Adrian register for VAT – explaining the reasons for your answer?

What is the VAT treatment (quoting relevant VAT rates) for sales to business and private customers in the EU?       

Explain the terms “Two-Thirds Rule”, “Multi Supply” and “Composite Supply”

Denis's Irish tax residency position

The below letter has been written with an intention to clear all the tax related doubts which you had in relation to your brother Denis and your prospected business.

Denis and Adrian Gavin are both brothers and was domicile in Ireland. In the year 2014 both the brothers lost their jobs due to closure of the multinational company where both the brothers used to work. On 1st July 2015 Denis decides to move to Canada in search of job. While Dennis was working in Ireland he bought a house in the year 2010. While he moves to Canada he gave that house on rent to one of his friend at market rate. On the other hand, Adrian Gavin sets up a manufacturing unit where he used to manufacture waste disposal bins for the Healthcare industry. He is planning to commence a business buy 1st November 2017. He is planning to transfer the business if it runs successfully to a company for a considerable amount. In 2019 he decides to enter into a partnership with one of his friend Paul. Hindi partnership firm he wants to have a proper control over the business because it was his idea and his know how through which the business is running on and Paul has been introduced in the partnership only to introduce capital in the firm.

In case of Ireland for the purpose of determining the residential status for the purpose of tax computation there are certain points which needs to be kept in mind. A tax year in Ireland starts from 1st January every year and ends at 31st December. A person is regarded to be a resident in Ireland for tax purposes if:

• The person spends 183 days or more in a particular tax year in the country.
• If the person spends more than 280 days in two consecutive tax years in Ireland then the person will be regarded as a resident in the country for the second year.

Further for the purpose of determining the residential status there is a concept called ordinary resident. In this case if a person is resident in Ireland for three consecutive years, automatically becomes a resident in the country for the fourth year. Once a person becomes resident in the country, he will be liable to pay income tax as per the Irish tax laws on all income that has been earned by him either in Ireland or anywhere in the world.

Denis left Ireland on 1st July 2015. As already communicated for the purpose of determining the residential status, a tax year starts on 1st January every year and ends on 31st December. Being Dennis left Ireland on 1st July 2015 he has spent less than 183 days in the country. Thus, as per the provision of Irish tax laws, Denis will not be considered as a resident for tax purposes for the year 2015. From 2016 onwards being Dennis decides to stay in Canada itself and work for his Canadian employer, he will no longer remain a resident of Ireland for tax purposes.

Impact of tax residency position on Irish income tax

In case of Denis, his stay in the country is important in determining text Residency status. Dennis has been staying in the country from past many years. He left the country on 1st July 2015 but before leaving the country in the tax Year 2015, he has stayed in the country for less than 183 days. In this scenario, he will not be considered as a resident of the country for tax purposes; however any income that has been earned by him in the country will be taxable in his hand keeping in mind the tax provisions prevailing in the country. Thus, in case of Ireland, for determining the text residential status it is the number of days stay in the country is important and which impact the tax residency position

-Any rental income arising out of you renting a farmland, apartment, land or office

- Payments received for the purpose of allowing advertising signs or for the purpose of communication transmitter on property

- Payment received for allowing any right on property

- Payment received for allowing the rights of sports such as shooting for fishing on property

- Payment received to cover the cost of work from the tenant wherein tenant is not supposed to pay as per the lease.

- Few release premium as well as reverse and deemed premium.

-Conacre lettings

-charges received for the services which are connected to the occupation of property

- Insurance policy payment for cover against nonpayment of rent

As per Irish tax law, text is liable on net profit from rental property and is applicable at and individuals marginal tax rate that is summation of income tax, PRS I and universal social charge. In simple words, tax is levied on gross rent receivable as reduced by deduction of allowable expenses. Important to note that there will be separate computation of profit or loss for each source of Rental income. And hence tax on rental income will be levied on total rental profit subtract losses from all rental sources

In the given case for the purpose of tax Denise may deduct below expenses for arriving at net rental income from gross rental income.

- Rates

- Fees from management,

- Maintenance and repairs,

- Ground rent,

- Premium from certain mortgage protection policies insurance,

- Accountancy, legal and advertising fees,

- Services cost only if they are not supposed to be paid by the tenant who includes water, electricity, refuse charge etc

Tax compliance implications of Irish rental income

- Any wear and Tear On fittings and furniture

As per Irish tax law deduction is also allowed for interest on borrowed money for repair or purchase of rental property. Allowable mortgage Interest on rented property is limited to 75% in 2016 assessment year and further it is dependent on tenancy being registered with residential tenancy board. In 2017, deduction of mortgage interest increased from 75 to 80%. Hence deduction will increase by 5% every year so that by 2021 it is 100% of interest on mortgage will be allowed as reduction from rental income received.

Hence for the purpose of claiming 100% deduction of mortgage interest landlord has to qualify below:-

-Renting of residential property to tenants having certain social housing support for 3 years

- Registration with private residential Tenancy Board

Weather an expenditure on plants qualifies for capital allowances are dependent on various parameters below is the few cases elaborating this: (Hardy, 2017)

O’Grady v Bullcroft Main Collieries Ltd. [1932] 17 TC 93–Capital expenditure allowed

In the given case expenditure incurred by the company for the purpose of free standing chimney which was designed to replace the existing one which has become unsafe. The new one was not only for the purpose of improving the performance but also was larger. In the given case that Chimney was one of the part of colliery complex but it was considered as an entity in itself, Expenditure incurred on Chimney is considered as entirely an expenditure for the purpose of creating an asset and hence capital expenditure

Atherton v British Insulated & Helsby Cables Ltd (192 5) 10 TC 155)- Capital expenditure allowed

In the given case law it was decided that for an expenditure to be termed as capital it is not important that same has been incurred only once but the same has been incurred with an intention to bring an asset into picture or provide additional advantage to the trade. In the case law it was decided that if the useful life of the asset is greater than 2 year the expenditure that has been incurred will be termed as capital.

Samuel Jones & Co. (Devondale) Ltd. v CIR [1951] 32 TC 513–Capital expenditure not allowed

In the given screen replacement of the chimney was not considered as capital but is considered as part of repair. As in the given case with chimney was not considered as appreciable against the old one for the purpose of improving the performance. Also the rebuilding cost of the factory and Chimney was compared to each other i.e.  £215,000 and £4,300 respectively. As a result it is not considered as an identity in itself but considered only as commercial emotionally and physically an inseparable part of factory.  Hence expenditure was not considered as being used for the purpose of creation of an asset but only as repair of the asset and therefore was not considered as capital.

Allowable expenses and deduction of mortgage interest

Rogate Services Limited v HMRC [2014] Capital expenditure not allowed

In the given case Rogate Services Limited which is the tax payer is one of the Renault garage franchise operator. Which includes the services like glass coat finishes application and other activities as per renault standard. Expenditure is incurred for the purpose of constructing valentine day for application for the purpose of glass coating finishes solely. They claimed this expenditure as capital allowance.

HMRC Claimed that bay was not plant and hence disallowed. The expenditure as plant and machinery

As per taxpayer the bay is used in trade tool and hence to be considered as plant.

As per First Tier tribunal valeting bay is a place of work not plant and hence was not a tool of trade.

As per Irish tax law in the case of commencement of a trade or profession in the first year the assessment will be based on profits and gains that has been raised from the business from the date of commencement to the following 31 Dec.

Second year of assessment film based basis situations that may arise in the second year. In the 2nd year of assessment will be basis one set of account which will be for 12 months. Hence in case one set of accounts in the second assessment year is available for individual then profits will be chargeable for income tax for that period of 12 months

In the given case Adian commenced trade as on 1^st Nov 2017 and accounts are prepared for 31^st Oct every year

Hence profits for first three tax years of trading are as below:

First Year

Profits will be assessed for the period 1^st Nov 2017 to 31^st Dec 2017 i.e.

€ 50000 x 2/12 =€8333.33

Second Year

Assessable on profits of 12 months i.e. € 50000

Third Year

Assessable on profits of next 12 months i.e. € 30000

As per the provision of Partnership act 1980 in Ireland, a partnership is a combination of two or more persons who agreed to carry on the business in common with a view to exchange profit. In the given case Paul agreed to become the partner with Adrian, where he would be contributing only the amount of capital which was required by Adrian for carrying out the business operations. All the knowhow will be owned by Adrian, thus, the business in nutshell will be carried on by Adrian. This part of adjustment which has been made by the two persons is not covered in the definition of partnership provided in the Partnership Act 1980 in Ireland. (Brick, n.d.)

Capital allowances for Plant expenditure - decided cases

VAT is applicable on a person who supplies goods and services within the state. An accountable person is referred to a person who supplies more than $75,000 taxable goods in a continuous period of 12 months. It also refers to a person who supplies services worth $37,500 in a continuous period of 12 months. Person who supplies both goods and services will be eligible for VAT if 90% of its total turnover comprises of sale of goods. In this case a person can even get registration in VAT if its sale of services exceeds 10% of its total turnover, when the total turnover of services exceeds $37,500. In the given circumstances, Adrian is planning to comments business from 1st November 2017. Thus, before this date, he is not eligible to get registration in VAT. Even after commencing business he is required to cross the stipulated turnover limit that has been set a path for getting registration in VAT.

However in the year 2018 and 2019 he is planning to get a profit of more than $50,000 every year. In the circumstances it is projected that the total turnover of the business will exceed the threshold limit for getting a VAT registration and in this case, excel become mandatory for Adrian to get a VAT registration

The VAT treatment on selling goods and services to business counterparts and to the customers is different. In case the sale of goods and services have been made to the business counterparts we are eligible to take credit for the VAT amount that they have paid on the goods and services from the bat amount that they have recovered by selling their own goods to the another business counterpart or to be customers. On the other hand in case the goods and services are sold to the customers, they will not be eligible to take any bad credit on the amount that they paid on the goods and services. The VAT amount in this case will be treated as part of total cost for the customers.

As per the two third rule, if a company supply services, the same will be taxable as supply of goods, if the total value of the goods which is in the transaction exceeds to third value of the total value of the transaction. This two third rule will apply in case of determining the VAT tax rate. (Branigan, 2011)

Under the composite supply rule, if a business entity is supplying both goods and services to the customers, the same will fall into the composite scheme for determining the indirect tax amount. This composite scheme is generally used by the companies in cases where the services they offer to the customers in the normal course of business consist of both goods and services.

Under the multi supply rules, two or more individual suppliers supplies services to the customers in combination, to a taxable person for a fixed price. In this case services that have been provided by the suppliers cannot be provided individually and are dependent on each other. This multi supply concept is generally used by companies for determining the goods and service tax (GST).

I hope the above solution clear all yours doubts. Please feel free to contact me in case of further clarification required.

References

Anon., 2003. Basis of assessment at commencement of trade or profession. [Online] Available at: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-04/04-03-03.pdf [Accessed 1 Nov 2017].

Anon., 2009. Capital Allowances: Plant and Machinery - Back to Basics. [Online] Available at: https://www.cap-allow.com/articles/plant-capital-allowances [Accessed 1 Nov 2017].

Anon., 2017. Tax residence. [Online] Available at: https://www.revenue.ie/en/jobs-and-pensions/tax-residence/index.aspx [Accessed 1 Nov 2017].

Anon., 2017. Tax residence and domicile in Ireland. [Online] Available at: https://www.citizensinformation.ie/en/money_and_tax/tax/moving_country_and_taxation/tax_residence_and_domicile_in_ireland.html [Accessed 1 Nov 2017].

Anon., 2017. Taxation of Rental Income in Ireland. [Online] Available at: https://www.accountsadvicecentre.ie/taxation-of-rental-income-in-ireland/ [Accessed 1 Nov 2017].

Branigan, D., 2011. Rules on what VAT rate to charge (the 2/3rds rule and Subcontractors). [Online] Available at: https://irishaccounts.ie/blog/2011/03/vat-rules-on-what-rate-to-charge/ [Accessed 1 Nov 2017].

Brick, M., n.d. Partnerships –Approach with Caution. [Online] Available at: https://www.mhc.ie/uploads/Irish_Tax_Review_Gavin_OFlaherty_Muireann_Brick_April_09.pdf [Accessed 1 Nov 2017].

Hardy, K., 2017. Capital Allowances. [Online] Available at: https://assets.kpmg.com/content/dam/kpmg/ie/pdf/2017/06/ie-irish-tax-review-ken-hardy-capital-allowances.pdf [Accessed 1 Nov 2017].