a guide to saving tax may 2008 ireland
TRANSCRIPT
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A Guide to Saving Tax
May 2008
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Dublin
24-26 City Quay
Dublin 2.
T +353 (0)1 6805 805
Limerick
Mill House
Henry Street
Limerick.
T +353 (0)61 312 744
Newbridge
Suites 3 & 4
Courtyard House
Courtyard Shopping Centre
NewbridgeCo Kildare.
T +353 (0)45 449 322
www.grantthornton.ie
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A Guide to Saving Tax
Contents
1. Business Structures 1
2. Business Tax 3
2.1 Business Taxation, Remuneration and Extracting Profts 3
2.2 Reducing Taxable Profts 6
2.3 Relie For Business Expenditure 6
2.4 Capital Allowances 7
2.5 Selling A Business 8
3. Capital Acquisitions Tax (CAT) 9
4. Employment Taxes 14
4.1 Benefts in Kind 14
4.2 Tax Efcient Benefts 15
4.3 Share Schemes 175. Personal Tax 19
5.1 Compliance 19
5.2 Planning 19
6. Capital Gains Tax 21
7. VAT 22
7.1 Compliance 22
7.2 Planning 22
8. Revenue Audits and Investigations 24
Appendix I: Personal Tax Compliance 26
Appendix II: Vat Compliance 27Appendix III: Income Tax & CGT Rates 2007 & 2008 28
Appendix IV: PRSI Rates 29
Appendix V: Corporation Tax Rates 30
Appendix VI: VRT 31
Our Specialists 32
Corporate M&A/Corporate Reorganisations & Reconstructions 32
Corporate Tax Planning 32
Estate Planning 32
Family Business Planning 32
Financial Services 32International Tax 32
Inward Investment 32
Personal Financial Planning 32
Personal Tax Planning 32
Property 33
Share Schemes 33
Stamp Duty 33
Tax Investigations/Revenue Audits 33
Tax Based Investments 33
Vat 33
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A Guide to Saving Tax
Introduction
Contact
For urther inormation contact a member o our tax team -
Dublin
Frank Walsh
Partner
T: +353 (0)1 6805 805
D: + 353 (0)1 6805 607
M: + 353 (0)87 805 7542
F: + 353 (0)1 6805 806
Bernard Doherty
Partner
T +353 (0)1 6805 805
D: + 353 (0)1 6805 611
M: +353 (0)86 856 8453
F: + 353 (0)1 6805 806
Limerick
Leslie Barrett
Partner
T +353 (0)61 312 744
D: + 353 (0)61 312 220
M: + 353 (0)87 987 1085
F: + 353 (0)61 317 691
Welcome to Grant Thorntons guide to saving tax. Within this guide wecover; Business Structures, Business Tax, Capital Acquisitions Tax (CAT),
Employment Taxes, Personal Tax, Capital Gains Tax, VAT and Revenue
Audits and Investigations.
We are ranked as one o the leading tax planning and tax transactional
advisers in Ireland.
Our tax specialists can assist you in saving tax and growing your business.
We place great emphasis on developing personal relationships with clients.
With the highest technical prociency, we deliver our services with the
hand-holding that other rms orget.
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A Guide to Saving Tax
1. Business Structures
Peter Vale
Director
T: +353 (0)1 6805 805D: +353 (0)1 6805 952
F: +353 (0)1 6805 806
Eamonn Murphy
Director
T: +353 (0)61 312 744
D: +353 (0)61 313 221
F: +353 (0)61 317 691
1.1 Business Structures Overview
In tax terms there are two basic types o businessstructure unincorporated and incorporated
businesses. The tax treatment o each type o
structure is dierent and care must be taken in the
early stages to decide which is appropriate.
Unincorporated businesses include sole traders and
partnerships, the eatures o which are:
Protsaretaxedastheyaccrueatthe
proprietors marginal rate o tax (usually
46% - 41% income tax + 5% PRSI & Health
Contribution); and
Lossesmayberelievedastheyarisebysetting
these o against other taxable income o the
proprietor.
In comparison, the tax treatment o a company is asollows:
Protsnotextractedfromthecompanyare
mainly taxed at 12.5% (trading) or 25%
(passive); and
Valuecanbebuiltupinthecompany,possibly
enabling tax savings on a sale owing to the
availability o various capital tax relies or
enhancing the unds available or investment
with higher ater tax income.
1.2 Incorporation o an Unincorporated Business
For tax purposes incorporation involves the
disposal o a business and its assets and this may
trigger a capital gain. Incorporation relie allows
this gain to be rolled over into the cost o the
shares acquired in other words it reduces the base
cost o the shares or tax purposes. The company
acquires the assets at their market value and can
subsequently dispose o them at that value with no
capital gain arising. The transer must be wholly or
partly or shares in the company. Relie is given to
the extent to which the proceeds are given by wayo shares. There may be a Stamp Duty charge i
property, or an interest in property or goodwill, is
to be transerred into the corporate structure.
There may be ongoing tax savings ollowing
incorporation and these should be weighed against
the additional costs o running your business
through a company. The level o savings will
depend on the level o any prots and the overall
percentage o prots retained within the business.
The decision-making process is not straightorward
and proessional advice should be sought to assist
both with this process and with any subsequent
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implementation o an incorporation strategy. In
contrast to incorporation, there are no specic
tax relies available or disincorporation and it
can be dicult to convert rom a company to a
partnership or sole trader.
1.3 Participation Exemption - Sale o
Subsidiaries
Since February 2004 there has been an exemption
rom tax or any gains made by parent companies,
provided certain conditions are met, on the sale o
shareholdings in qualiying trading subsidiaries or
subsidiaries that orm part o a trading group.
1.4 Dierent Share Classes
There can be problems where a company with
only one class o share wants to pay dierent
amounts o dividends to its shareholders which are
not in proportion to their shareholdings. Some
shareholders could ormally waive their dividends,
but to be eective or tax, this must be done in a
specic way and can have unexpected tax results.
One solution is to have dierent classes o shares,
with dierent levels o dividends voted on each
class o shares. This has been aided by the abolition
o capital duty rom 7 December 2005.
1.5 Demergers
Revenue concession is available or splitting amily
trading companies into two or more parts. Where
the conditions are satised, the only tax due will be
stamp duty.
This demerger concession is useul where it is
perceived that greater shareholder value can be
achieved through splitting out part o the business
rather than keeping it all together. Advance
clearance should be sought rom the Revenue toensure that the relie is available.
1.6 Purchase o Own Shares
A purchase o a companys own shares is a useul
tax planning technique. Depending on whether
or not certain criteria are met, the proceeds o the
repurchase are either treated as income and taxed as
a dividend or more attractively as a capital receipt
(particularly useul where CGT retirement relie
is available). It should be possible to structure the
purchase o a companys own shares to achieve the
desired treatment or all parties.
1.7 Share or Share Relie
I shares in a company are exchanged or shares
in that company or another company and no cash
proceeds are received, then or CGT purposes,
there is no sale and the new shares are deemed, ortax purposes, to be the same asset as the original
shares they replace.
CGT is deerred until there is a subsequent disposal
o the new shares.
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A Guide to Saving Tax
2. Business Tax
Sasha Kerins
Manager
T: + 353 (0)45 449 322
D: + 353 (0)45 448 852
F: + 353 (0)45 449 324
2.1 Business Taxation, Remuneration andExtracting Profts
2.1.1 Corporation Taxsel-assessment fle on time
A companys corporation tax sel assessment return
must be led within 9 months o the end o the
accounting period but no later than the 21st day
o that month. Late returns are subject to a tax
related surcharge between 5% and 10% o the tax
liability, up to a maximum o 12,695 where less
than two months late and 63,485 where submitted
thereater. The surcharge operates to increase the
tax liability which increases the interest or late
payment. In addition to the surcharge, there are
restrictions on the use the company can make ocertain relies and allowances in the event o the
return not being lodged on time.
A penalty amounting to 950 may also be imposed
by Revenue or ailure to make a return. This
penalty may also increase to 1,520.
2.1.2 Corporation Tax Rates
With eect rom 1 January 2003 the ollowing rates
o corporation tax apply:
The standard rate applies to trading income o a
company resident in Ireland.
The higher rate o 25% applies to passive income
(interest, dividends, rental prots, royalties etc),
certain land dealing activities and income rom
working minerals and petroleum activities.
The manuacturing rate applies to the trading
prots o manuacturing companies and certain
IFSC and Shannon Airport Zone companies. This
10% rate is currently being phased out and is to be
completely phased out by 31 December 2010.
2.1.3 Use o Trading Losses
A company can maximise its use o losses to
reduce taxable prots over a number o accounting
periods. Trading losses can be oset against total
taxable prots on a value basis or the current year
or the previous year. All unutilised trading losses
can be carried orward indenitely to be osetagainst uture trading income o the same trade.
Loss relie is restricted i the returns are submitted
late (see 2.1.6).
2.1.4 Buying Capital losses
There are rules to deny the use o capital losses
brought into a group o companies. In a group
situation, generally the pre-entry losses o a
company joining a group cannot be used to oset
subsequent capital gains within the group. The
company entering the group will, however, be ableto use such losses in the normal way, as i it had
never joined the group.
Standard rate Higher rate Manuacturing rate
12.5% 25% 10%
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2.1.5 Corporation Tax Instalment Payments
For accounting periods ending on or ater 1 January
2006 preliminary tax is due and payable one month
prior to the end o the accounting period, but not
later than the 21st day o that month.
The minimum payment which must be paid is
either;
90%ofthenaltaxliabilityforthecurrent
accounting period, or
100%ofthenaltaxliabilityfortheprevious
accounting period where the company is deemed
to be what the Revenue term a small company
because its total tax liability or that period did
not exceed 200,000.
2.1.6 Groups
The concept o scal unity or consolidated
group tax does not exist in Ireland. However,
trading losses may be oset on a current period
basis, against taxable trading prots o another
group company. Being in a group coners certain
tax benets. The principal benets are that inter
group payments can be made without deduction
o tax and group losses can be surrendered by one
group company or the benet o another groupcompany.
The denition o group companies diers or
intra-group payment and group loss relie. There
is a 51% shareholding requirement in respect o
intra-group payment relie and a 75% shareholding
requirement in respect o group loss relie. Group
relie is restricted where a company submits a
corporation tax return late.
2.1.7 Close Company Surcharge
A surcharge o 20% is chargeable on a close
company where it does not distribute its ater tax
passive income (e.g. rental and investment income)
within 18 months o the end o its accounting
period. A close company is a company which
is controlled by ve or ewer participators or
under the control o its directors. A participator
includes any person who has a share or interest in
either the capital or income o the company.
The Finance Bill 2008 has provided that where adividend or a distribution is paid rom one Irish
tax resident close company to another and an
appropriate election is made by both companies,
then the distribution will not attract the close
company surcharge in the receiving company.
A surcharge o 15% also applies to proessional
service companies.
No credit is given to the shareholders or the
surcharge i and when the balance is distributed.
2.1.8 Dividends
Dividends are not an allowable expense or the
purposes o calculating corporation tax. A company
may wish to pay a dividend in order to avoid a close
company surcharge.
A company when paying a dividend may have to
deduct dividend withholding tax, at the standard
rate (currently 20%). In some instances, however,
the dividend may be paid gross, or example:
DividendstoanIrishresidentcompany;
Dividendstoindividualsresidentinacountry
with which Ireland has a tax treaty; and
Dividendstoindividualsresidentinacountry
within the EU.
Companies must make a return o all dividends
paid by the ourteenth day o the month ollowing
the distribution.
2.1.9 Tax Treaties
The Irish tax treaty network continues to be
expanded and updated and now numbers 44
tax treaties. A new treaty has been negotiated
with Chile and subject to necessary parliament
procedures being completed by Chile, it is expectedthat this treaty will become eective or tax periods
beginning in 2009. Negotiations are underway
on treaties with Argentina, Egypt, Kuwait, Malta,
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Morocco, Serbia, Singapore, Thailand, Tunisia,
Turkey and Ukraine. In addition, some existing
treaties, such as those with Cyprus, Germany, Italy,
Korea, Pakistan, and France are being reviewed.
Irish resident companies may avail o these treaties.
The double tax treaties can mean a reduction or
elimination o withholding taxes on royalties and
interest.
Where a double taxation agreement does not exist,
unilateral credit relie is available against Irish
tax or tax paid in the other country in respect o
certain types o income (e.g. dividends and interest).
2.1.10 Foreign DividendsDouble taxation relie is available on dividends
paid by subsidiaries to parent companies. The
relie is part o Irelands holding company regime
and it makes it more attractive or headquarter
operations to be located in Ireland by reducing
the shareholding requirements rom 25% to more
than 5% and by also allowing the Irish recipient
company to pool the tax credits arising on
oreign dividends. In addition, credit can also be
taken or local tax suered by a branch o a oreign
subsidiary.
Onshore pooling is useul as it allows companies
to mix the credits or oreign tax on qualiying
dividends received rom dierent oreign countries
and to use up any excess credit above the Irish
tax payable on a dividend, against another oreign
dividend where Irish tax would still be payable in
the same period. Any unused overall credit balance
can be carried orward and oset against tax or
dividends in subsequent accounting periods.
The Finance Bill 2008 revises the treatment ooreign dividends rom EU or tax treaty resident
companies, which will apply to dividends received
on or ater 1 January 2007. Eectively dividends
paid out o trading prots will in uture be
chargeable to tax in Ireland at 12.5% instead o the
25% rate. Where dividends do not qualiy to be
charged at the 12.5% rate they will continue to be
charged at the 25% rate.
The Finance Bill also amends the rules or pooling
o the tax credits arising on oreign dividends so
that in the uture the rules apply separately to
dividends taxable at 12.5% and 25%. Any surplus
o oreign tax arising on dividends taxable at the
12.5% rate will not be available or oset against
tax on dividends taxable at the 25% rate. However
there will be no similar restriction in the case o
dividends taxable at 25%.
2.1.11 Other Foreign Income
Foreign taxes paid by an Irish resident company
(or EU branch), whether imposed directly or by
way o withholding tax, may be available in Ireland
as a credit against Irish tax. The credit is limited
to the Irish tax reerable to the particular item o
income. The credit is computed on an item-by-item
basis (except or dividends rom 5% subsidiaries as
above) and excess credits can be relieved only by
deduction; there is no carry-back or carry-orward
o excess credits.
2.1.12 Corporate Capital Gains
Irish tax resident companies are taxable on world
wide gains. Non resident companies are chargeable
on capital gains arising on the disposal o Irish sites
assets and shares in unquoted companies whose
value is derived rom Irish lands. Capital losses
may only be utilised against uture capital gains.
In addition a capital loss cannot be oset against a
gain in another company within a group; however
it may be possible to transer an asset intra-groupbeore its disposal outside the group to utilise
capital losses generated or to oset group capital
losses against such a gain.
As part o Irelands holding company regime there
is an exemption rom tax on capital gains arising
to Irish-based holding companies on disposals o
certain shareholdings or assets related to shares in
an EU/double tax treaty resident (DTA) company
(which is a 5% subsidiary o the Irish parent
company) see section 1.3.
2.1.13 Salary v Dividend
Shareholders o a private company requently have
the ability to decide how to extract the prots o
their business. This is normally done via a salary
or a dividend. Dividends have the ollowing
disadvantages:
Theydonotcountaspensionableearnings;and
Theyarenottaxdeductibleforthecompany.
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As a rule o thumb, salary is usually more tax-
ecient.
2.2 Reducing Taxable Profts
2.2.1 Accounting Policies
The amount o a companys prot which is subject
to tax is based on the accounting prot, as adjusted
in line with tax law. There are many situations
where accounting practice permits dierent
methods o recognising income and expenditure.
You should consider the options careully in
situations where there are alternatives.
2.2.2 Change o Year-End
A change o year-end can be useul in group
situations. Companies can shorten or lengthentheir accounting period (subject to company
law) to maximise the amount o losses being
transerred rom one company to another. Only
contemporaneous losses can be surrendered and
claims are limited to prots o a corresponding
accounting period.
Where accounting periods are shortened, payment
o tax liabilities may be accelerated. For seasonal
businesses, it can be benecial to choose a year-
end date just beore a seasonal surge in income
and protability so as to give the maximum delay
between earning the prots and paying the tax.
2.2.3 Employment o Spouses
The payment to a spouse o a wage o up to 26,400
per annum (2008) may result in the ull utilisation
o the 20% rate band and use up any otherwise
wasted personal allowances. It is important that
the spouse carries out duties which justiy a salary
o this level.
The spouse may also qualiy or the contributory
old age pension i they are in an insurable
employment.
2.2.4 Subcontracting
From an employers point o view, there is a lower
PRSI cost i sel-employed workers can be used
instead o employees. However, the distinction
between employed and sel-employed is a grey areaand oten the Revenue Commissioners disagree
with an employer over the status o workers. Care
needs to be exercised i you do engage subcontract
workers in your business, as it can be expensive i
you get it wrong.
2.3 Relie or Business Expenditure
2.3.1 Non Deductible Expenditure
Non-capital expenditure incurred in the course
o business will normally be tax deductible.
Exceptions to this rule include certain
entertainment expenses, general provisions,
depreciation and a proportion o lease expenses or
cars costing over 24,000.
2.3.2 Pre-trading Expenses
Non-capital expenditure incurred three years prior
to commencement o business is an allowable
deduction in the computation o business prots.
Capital allowances may also be available on pre
trading capital expenditure.
2.3.3 Interest
Interest incurred wholly and exclusively or the
purposes o the trade is tax deductible rom income
on an accruals basis. The main exception is interest
paid to a non-resident non trading parent or
associated company where there is a 75% or greater
ordinary shareholding relationship. Such interest
is classied as a deemed distribution and is not tax
deductible. Since 6 February 2003, non-tradinginterest paid to a 75% related company in an EU
Member State is treated as a tax deduction rather
than as a deemed dividend. In addition, there is a
restriction on the amount o interest deductible in
the case o interest payable to an Irish tax resident
(or oreign company controlled by Irish tax
resident persons) connected person. The cumulative
deductions or loan interest cannot exceed the
cumulative amount chargeable to tax in the hands
o the recipient in the same chargeable period.
Interest on borrowings used or non-trading
purposes, or example or the acquisition o sharesin other companies, may be deductible on a paid
basis subject to certain conditions.
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2.3.4 Expenditure on Scientifc Research and
Development
A credit o 20% o the incremental expenditure
on revenue items, royalties, plant and machinery
related to research and development (R&D) isavailable or oset against a companys corporation
tax liability. This credit is in addition to any
existing deductions or capital allowances or R&D
expenditure. The ollowing conditions must be
ullled in order to qualiy or this credit:
R&Dactivitiesmustbecarriedoutinthe
European Economic Area;
Reliefisgrantedprovidedtheexpenditureisnot
deductible in any other territory;
Qualifyingexpenditurewillbereducedbyanygrant or State Aid received;
Paymentstoaconnectedpartyinrespectoftax-
exempt patent royalty income will not qualiy
or the relie; and
Paymentsmadeotherthanatarmslengthwill
not qualiy or relie.
Any amount o the credit unused in a particular
period can be carried orward until it is used up but
there are no carry back provisions.
There is signicant relie or qualiying R&D
expenditure on buildings or structures. The credit
or such expenditure is given over a 4-year period.
There is a provision or clawback o the relie
granted where the building or structure is sold
or ceases to be used or R&D activities within 10
years o the period in which the expenditure was
incurred.
The base year or expenditure which is used to
calculate the qualiying incremental expenditure
on R&D under the tax credit scheme is being xed
at 2003 or a urther 4 years to 2013. The change
will provide an additional incentive or increased
expenditure on Research & Development in uture
years.
Where R&D is incurred, it is worth exploring
whether there are any patents which can be
registered.
2.4 Capital Allowances
2.4.1 Plan the Timing o Capital Expenditure
Where capital allowances are available on
expenditure incurred within an accounting period,there is a cash fow benet i the expenditure
is incurred near the end o the period. For tax
purposes, the expenditure is incurred when the
obligation to pay becomes unconditional. In some
circumstances you can place an unconditional
order late in an accounting period and claim capital
allowances or that period, even i you do not pay
until the ollowing period (provided the assets are
in use at the year end).
2.4.2 Plant and MachineryCapital allowances or plant and machinery are
calculated on a straight line basis at a rate o 12.5%
per annum. Computer sotware is treated in the
same way as plant and machinery. State grants are
deducted in arriving at the qualiying expenditure.
Most buildings contain plant and machinery on
which capital allowances can be claimed. It can be
worth investing in specialist advice so as to obtain
the relie on all eligible items.
2.4.3 Industrial Buildings
Expenditure on industrial buildings may qualiy or
an industrial building allowance (IBA), provided
that the building is in use or the purpose o a
qualiying trade carried on by the company. It
should be noted that the qualication o a building
as an industrial building depends on the nature
o the trade or which it is in use and not on the
characteristics o the building itsel. Allowances are
given at rates between 4% and 15% per annum on a
straight line basis.
In relation to administrative oces, i they are part
o a single building, and represent no more than
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10% o the total cost, they could qualiy in ull or
IBAs. I they are created as a separate block, they
will not qualiy or any relie at all.
2.4.4 Acquisition o Second-hand
Industrial Buildings
Industrial buildings have a deemed tax lie and the
purchaser o a second-hand industrial building
needs to be aware o how old it is at the time the
ownership changes. I it is approaching the end
o its tax lie, this can be advantageous or the
purchaser. On the sale o an industrial building, the
original owner will have all the allowances clawed
back i he sells or at least the original cost. These
allowances are then potentially available to the
purchaser, spread evenly over the remaining lie othe industrial building. Thereore, i the building
is bought second-hand in the nal year o its lie,
the whole o the original cost will be given as a
deduction in that period to the purchaser, with
no restriction being made to the writing down
allowance.
2.4.5 Avoid Clawback o IBAs
I an industrial building is sold within its tax lie
or more than its tax written down value there will
be a clawback o the allowances previously given.However, there is no clawback i the owner o the
building grants a lesser interest rather than sells the
property. This means that the owner o the reehold
industrial building can grant a 999 year lease (which
is, or all intents and purposes, the same as selling)
but because he retains the reehold there will not
be a clawback o allowances. Similarly, the grant
o an inerior lease out o a lease will not trigger a
clawback.
IBAs will not be available to the purchaser in these
circumstances.
2.4.6 Motor Vehicles
The wear and tear allowance on new and second-
hand passenger motor cars is restricted by reerence
to the cost o the vehicle. From 1 January 2007
the maximum amount claimable in respect o any
passenger motor vehicle is restricted to 24,000
regardless o actual cost. This restriction does not
apply to commercial vehicles.
A revised scheme o capital allowances and leasing
expenses or cars used or business purposes is
being introduced. For capital allowance purposes
cars will be categorised by reerence to CO2
emissions. Vehicles are to be categorised as ollows:
Category A 0 120g/kmCategory B/C 121 155g/km
Category D/E 156 190g/km
Category F/G 191g/km and over
Vehicles under categories A, B and C continue to
qualiy or the same capital allowances as present
up to a value threshold o 24,000. Vehicles in
categories D and E will only qualiy or 50% o the
allowances. Vehicles in categories F and G will not
qualiy or capital allowances.
The granting o leasing expenses incurred will be ona similar basis to the new capital allowance scheme.
The revised scheme will come into eect in respect
o cars purchased or leased on or ater 1 July 2008.
2.5 Selling a Business
2.5.1 Assets or Shares
I you have shares in a company, it generally makes
sense to sell them rather than the assets o the
business, thus paying one charge to tax and makinguse o the CGT relies. In contrast, i you sell assets
rom the company there are two charges to tax
one on the company on the gains it realises and
another when those proceeds are extracted rom the
company by the shareholders.
When selling the shares in a business as opposed
to the assets, the purchaser may seek a discount on
the basis that there are underlying tax liabilities in
respect o the assets in that business.
2.5.2 Due Diligence
Normally there is more risk in purchasing an
incorporated business as the business would have
underlying liabilities, tax and otherwise. Thereore
the purchaser will undertake an enquiry process
(due diligence) prior to purchase. In order to
reduce the costs and time involved in the sale o
a business, the part o the business being sold can
be transerred to a newly ormed company. The
newly ormed company would have no underlying
liabilities and thereore the due diligence process
would be more straightorward and less costly.
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Aoie Walsh
Director
T: +353 (0)1 6805 805
D: +353 (0)1 6805 984
F: +353 (0)1 6805 806
3.1 Annual Exemption
Everyone has a 3,000 annual exemption or small
gits received rom any one donor.
3.2 Estate Planning
Planning the transer o assets rom one generation
to the next is a task which throws up many varied
circumstances. It is important to strike a balance
between maintaining nancial independence and
security or retirement, while providing scope or
the most ecient transer o assets at the earliest
opportunity.
It is likely that most people will dispose o their
assets in a combination o the ollowing ways:
Bygiftsmadeduringtheirlifetime;
Throughtheuseoftrustsmadeduringtheir
lietime and intended to carry on or a period
ater death; and
Byinheritancestakenondeath.
The making o gits and transers to trusts will
involve capital gains tax (CGT) (with the possibility
o retirement relie) and CAT. Inheritances willtrigger liabilities to CAT unless they are covered by
one o the relies.
A Guide to Saving Tax
3. Capital Acquisitions Tax (CAT)Planning or the transer o assets requiresconsideration o a number o legal and tax issues.
Ater these issues have been discussed and decisions
have been taken, appropriate mechanisms must be
put in place to give eect to the decisions made.
Where no immediate git is intended, provision or
transer should be made through an appropriately
drated Will.
The importance o having an appropriately drated
Will cannot be overstated. The Will should give
eect to the wishes o the testator while taking
account o legal and taxation issues.
3.3 Tax Free Threshold
Every individual has a threshold below which they
will not pay CAT. This is a lietime threshold i.e.
the threshold may be reduced by the value o any
relevant previous gits and inheritances received
since 5 December 1991.
The indexed Group thresholds or 2006, 2007 and
2008 are set out in the table below.
3.4 Legal Issues
The Succession Act 1965 imposes obligations on
individuals to make certain provision or their
spouses and children in disposing o their assets by
Will.
A surviving spouse is entitled to a one-third share
o the estate o the deceased spouse who has made
Group Relationship to Disponer Group Threshold 2008(ater indexation)
A Son/Daughter e521,208
B Parent/Brother/Sister/
Niece/Nephew/Grandchild e52,121
C Relationship other that Group A or B e26,060
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a Will. This is a legal right and a recent Supreme
Court decision has conrmed that a one third share
o the estate o the deceased vests automatically in
the surviving spouse, where no provision has been
made or that spouse in the Will.
Pursuant to Section 117 o the Succession Act 1965
a child o any age has the right to apply to court or
a level o benet i they consider their parents have
ailed in their moral duty to provide or them. This
is a more dicult issue to advise on because there
are no statutory guidelines indicating the level o
benet to be conerred. A broad range o actors
will be taken into account including the lietime
provision made or that child, their age and position
in lie and their conduct.
It is dicult to give denitive advice in relation to
Section 117; it is sucient to say that the position
o all children should be careully considered when
a Will is being prepared.
I an individual dies intestate (having made no
Will), the Succession Act 1965 regulates the division
o that persons estate. I an individual is survived
by a spouse only, the spouse takes the entire estate.
When an individual is survived by a spouse and
children, the surviving spouse takes a two thirdsshare and the children take the remaining one
third share between them equally. I an individual
is survived by children only, the entire estate is
divided among them in equal shares.
Under the rules o intestate succession, where
survivors include a spouse and children, no
provision will be made or remoter relatives who
may have been in receipt o inormal support in a
amily situation. In making a Will an individual
should consider all o these issues as they apply.
Making a Will also provides an opportunity to
appoint Testamentary Guardians or children who
may be let without a parent while under the age
o 18. I guardians are not appointed by Will, an
application has to be made to the Circuit Court to
make an appointment ater the parents death.
A Will should be prepared to give eect to long
term decisions which have been made about the
distribution o the property and to ensure that
available tax relies are used to best eect.
3.5 Discretionary Trusts to Provide or
Incapacitated Relatives
A common use or a discretionary trust is to
provide or incapacitated relatives, usually children.
Where proper provision is not made or an
incapacitated person, the Courts may step in and
institute Wardship proceedings in order to
make that person a Ward o Court. Wardship
proceedings take place when a Court decides that a
person is incapable o managing his/her own aairs.
Ward o Court procedures can be expensive, they
are very slow and it can be dicult to access unds.
A discretionary trust is a useul mechanism through
which the welare o an incapacitated amilymember can be provided or. Funds within a
discretionary trust are administered at the absolute
discretion o the Trustees and are not under the
control o the beneciary. Thereore the choice
o trustee is very important. A proessional
trustee is usually chosen or their impartiality in
administering the trust. It can also be a good idea
to appoint a amily member as a co-trustee who
would be aware o the settlors wishes as to how
the trust should be administered and who would
personally know the beneciary. Wishes as to
how the trust is to be administered can be also
separately expressed through a letter o wishes.
It is important to choose the trust assets careully
depending on the requirements o the beneciary
i.e. income or capital.
Where the trust deed clearly states that the trust is
exclusively or the maintenance and upkeep o the
beneciary, discretionary trust tax does not apply.
There is an exemption rom CAT on payments
made by the trust or medical care and related
expenses but all other distributions/payments may
be subject to CAT.
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A discretionary trust can be set up either during
a persons lietime or by Will. The advantage o
setting one up during a persons lietime is that any
payments made to the beneciary rom the trust
(even ater your death) would qualiy or the annualsmall git exemption o 3,000 (6,000 i there are
two settlors). This is provided the settlor(s) survive
or two years ater the creation o the trust.
Trustees pay income tax at the standard rate o 20%
on the trust income and are not entitled to claim
any o the personal allowances or relies which
are normally available to individuals. Income is
also subject to a surcharge at a rate o 20% i it is
accumulated and has not been distributed within
eighteen months o the end o the year. Where
the beneciary o the trust is the sole personentitled to the trust income, the Revenue can
assess the beneciary to tax directly instead o the
Trustees. The beneciary will receive a credit i any
additional tax has been suered by the trust.
There is no CGT on the transer o cash into a
trust. However, on the transer o assets into the
trust, CGT at 20% is payable on the deemed gain.
I the trustees make a disposal o any assets in the
trust, the trustees are liable to CGT at 20% on any
gain on the disposal.
3.6 Dwelling House Relie
This relie was introduced in Finance Act 2000
and is not to be conused with principal private
residence relie which applies in the case o CGT.
This relie allows an individual to receive a git or
inheritance o a residential property ree rom CAT
i the ollowing conditions are met:
Thepropertywasthebeneciarysprincipal
private residence or three years prior to the git
or inheritance. Where the dwelling house has
directly or indirectly replaced other property,
this condition may by satised where the
beneciary has continuously occupied both
properties as his or her only or main residence
or a total period o three o the our years
immediately prior to the date o the git or
inheritance. Theindividualhasnobenecialinterestinany
other residential property at the date o the
benet.
Theindividualremainsinthepropertyora
replacement property or six years ater taking
the benet. The requirement to continuously
occupy the property or six years is relaxed in
the case o absences imposed by employment
obligations and removed i the beneciary dies,
is over 55 years old or has to sell the property to
go into a nursing home.
Finance Act 2007 introduced the ollowing
restrictions to this relie in relation to a git o
residential property:
Unlesstheindividualmakingthegiftwas
compelled by reason o old age or inrmity to
depend on the services o the beneciary, the
period o occupancy during the initial three year
period by the beneciary will be disregarded or
the purposes o this relie. Theindividualgiftingthehousemusthave
owned the house during the initial three year
period.
There is no requirement that the disponer and
beneciary be related and there is no cap on the
value o the property which can qualiy or the
relie.
This relie is useul or cohabiting couples because
one partner may inherit the house rom the otherree o CAT i the conditions are satised. It is also
o use in a situation where a child has remained
at home to look ater their parents and ultimately
receives the amily home.
3.7 Business Property Relie
Business property relie reduces the taxable value
o relevant business property by 90%. This
combined with the 20% rate o CAT means thatassets qualiying or business relie would suer an
eective tax rate o 2% ater the relevant thresholds
have been used up.
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The eatures o the relie are as ollows:
Thereliefappliestobusinesspropertyas
ollows:
a) Property consisting o a business or aninterest in a business;
b) Unquoted shares or securities o a company
(whether Irish incorporated or not) subject to
certain conditions;
c) Land, buildings, machinery or plant owned
by the disponer but used by a company
controlled by the disponer or by a partnership
in which the disponer was a partner;
d) Quoted shares or securities o a company
which were owned by the disponer prior to
their becoming quoted.
Thebusinesscarriedonmustnotconsistwholly
or mainly o dealing in land, shares, securities or
currencies or o making or holding investments.
Therelevantbusinesspropertymusthavebeen
owned by the disponer, or by the disponer and
his spouse, or at least ve years prior to a git, or
or at least two years or an inheritance taken on
the disponers death.
Assetsnotusedwhollyormainlyforthe
business concerned are ignored in valuing therelevant business property.
Agriculturalpropertyqualiesfortherelief
whether held by a company or an individual,
provided all the above conditions are satised
and that agricultural relie does not apply.
Businessreliefwillbeclawedbackifthe
business property is sold or otherwise disposed
o within a six-year period ater taking the git
or inheritance. This clawback provision was
extended in Finance Act 2006 to the eect that i
the business asset comprises development land
or shares in a company holding development
land and the land or company shares are sold
ater six years but beore the expiration o ten
years, the relie attributable to the development
value will be clawed back i.e. the relie
attributable to the current use value only is
allowed.
Wherethegift/inheritanceconsistsofquoted/
unquoted shares in a company, the beneciary
must ater taking the git or inheritance:
- control more than 25% o the voting rights
relating to all questions aecting the company
as a whole; or
- control the company within the meaning o
section 27 o the Capital Acquisitions Tax
Consolidation Act 2003 (i.e. the beneciarys
shareholding taken together with his/herrelatives shareholdings exceed 50%); or
- own 10% or more o the aggregate nominal
value o all the issued shares and securities
o the company and have worked ull-time
in a management or technical capacity in
the company (or in the case o a group, or
any company or companies in the group)
throughout the period o 5 years ending on
the date o the git or inheritance.
3.8 Agricultural Relie
Where a donee or successor is a armer within
the meaning o the Act, the market value o all
agricultural property is reduced by 90%. For
qualiying assets the eective rate o CAT in the
case o a git or inheritance is 2%.
A armer is an individual 80% o whose property,
ater taking the git or inheritance, consists o
agricultural property on the valuation date o the
git or inheritance. He or she must be resident in
the State or each o the three years o assessment
immediately ollowing the year o assessment in
which the valuation date alls. Prior to Finance Act
2006 it was necessary that he or she is domiciled in
the State but this is no longer the case.
Agricultural property is dened as meaning
agricultural land, pasture and woodland in the State
and crops and timber grown thereon, together
with houses and other buildings appropriate to the
property. It also includes livestock, bloodstock andarm machinery.
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The relie is clawed back i the agricultural property
is sold or compulsorily acquired within six years
rom the date o the git or inheritance and is not
replaced within one year by other agricultural
property. As with business relie, the clawbackprovisions were extended to the eect that i the
agricultural property comprises development land
and the land is sold ater six years but beore the
expiration o ten years, the relie attributable to the
development value will be clawed back.
3.9 Favourite Nephew Relie
The relie is set out in Schedule 2 CATCA 2003
and it provides two signicant benets where anindividual qualies or it:
Theindividualcanobtainthebenetofthe
Group A threshold in relation to certain benets
rom his aunt or uncle.
TheauntorunclecanclaimCGTretirement
relie under Section 599 TCA 1997 on a disposal
to a avourite nephew/niece as i he or she was
their child.
A beneciary who is a nephew or niece o the
disponer is regarded as a child o the disponer
or the purposes o the relie i he or she worked
substantially on a ull time basis:
Inthedisponersbusiness,tradeorprofession
and the benet consists o property used
in connection with that business, trade or
proession,
Inacompanycarryingonthebusiness,tradeor
proession and the benet consists o shares in
the company.
Working substantially on a ull time basis means:
Wherethebenetconsistsofapropertyusedin
connection with the disponers business trade
or proession, more than twenty our hours perweek, or
Morethanfteenhoursperweekforthe
disponer i the business is carried on exclusively
by the disponer, the disponers spouse and the
beneciary.
Favourite nephew relie does not apply to a benet
taken rom a Discretionary Trust.
3.10 CGT/CAT Set O
This relie applies where CAT and CGT are
payable on the same event. It was modied in
Finance Act 2006.
The relie applies where CAT is payable on the
happening o an event and that event is also a
disposal o an asset or CGT purposes. In these
circumstances, in calculating the amount o CAT
payable, a credit is allowed or the amount o
CGT payable on the same event. The amount othe credit is to be the lesser o the CGT and CAT
attributable to the relevant asset. What happens,
in eect, is that the CGT is payable in priority and
any CAT payable on the same event is relieved up
to the maximum o the CGT that was paid on that
event.
Finance Act 2006 modied this relie to include
a two year holding period: the relie claimed is
clawed back i the beneciary does not retain the
benet or a period o at least two years.
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A Guide to Saving Tax
4. Employment Taxes
4.1 Benefts in Kind
4.1.1 Employer ObligationsFrom 1 January 2004 employers are obliged
to calculate the taxable value o benet in kind
items and operate PAYE/PRSI on the relevant
amounts by processing them through the payroll.
New company law obligations, expected to be
introduced shortly, will mean that directors o
certain companies will be obliged to conrm in
writing that they have implemented procedures that
ensure compliance with company law, tax law and
other laws that may have a material eect on the
companys nancial aairs.
Emma Meehan
Manager
T: +353 (0)1 6805 805
D: +353 (0)1 6805 774F: +353 (0)1 6805 806
Claire Condron
Manager
T: +353 (0)1 6805 805
D: +353 (0)1 6805 802
F: +353 (0)1 6805 806
4.1.2 Benefts rom EmploymentBenets rom employment are a legitimate orm
o remuneration and can be very attractive to
employees. Governments oten pursue their
wider policy objectives by oering tax breaks
to encourage the provision o certain benets. A
current example is pension contributions, which
attract generous relie rom both tax and PRSI. Also
the exemption threshold or an annual git rom an
employer to an employee increased rom 100 to
250 rom 1 January 2005.
To be tax-ecient, a benet in kind must give a
taxable amount which is signicantly below the
true value o the benet. Despite the legislation
gradually catching more items, there are still
some which give a tax benet. Examples include
monthly or annual bus or rail passes, proessional
subscriptions and the provision o canteen meals.
The PRSI rules mean that most benets now
attract employers PRSI and usually employee
contributions as well.
4.1.3 Valuation Rules
The amount o the taxable benet in kind which is
liable to PAYE and PRSI is the higher o:
theexpensesincurredbytheemployerin
providing the benet to the employee; or
thevaluerealisablebytheemployeeforthe
benet in money or moneys worth;
less any amount made good to the employer by the
employee.
4.1.4 Cars Used or Business
The benet o a company car to an employee
is measured by determining a cash equivalent
o the private use o the company car. The cash
equivalent is determined by applying a business
mileage related percentage to the Original Market
Value (OMV) o the car supplied.
It may however be worth allowing employees
to use their own cars or business purposes. Theemployer can then reimburse business mileage
using the Revenue Commissioners authorised
mileage rates which are ree o tax and PRSI.
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These rates are oten higher than the cost incurred
by the employees in using their cars. In considering
running costs, employees need to think about the
depreciation in the value o the cars that they own.
Personal leasing or contract hire arrangements may
be more cost-eective over the lie o the car.
The new VRT system (Appendix VI), which will
come into eect rom 1 July 2008, will result in the
OMV o the car being lower or cars with low CO2
emission levels and higher or cars with high CO2
emission levels. Thereore the CO2 emission levels
should be considered when acquiring a company
car as this will aect the charge to BIK or new cars
acquired ater that date.
4.1.5 Alternatives to the Company Car
It may be worth looking at alternatives to the
company car. These include:
Extrasalaryinplaceofthecompanycar
Employeesleasingdirectlyfromavehicle
provider
Loantotheemployeetohelpbuyacar
Offeringcompanyvans.
When doing the calculations, consider:
Aretherepenaltiesforchanginganexistinglease?
Willextrasalaryandpensionschemepayments
cost more than the car?
Ifemployeesbuytheirowncarswillitportray
the right image or your company?
Willemployeesbedisgruntledifyoutakeaway
their company cars?
Whataboutemploymentcontracts?
Howmuchvaluedoestheemployeeplaceon
having a ully expensed company car?
4.1.6 Company Vans
The taxable benet o a company van is calculated
at 5% o the Original Market Value o the vehicle
supplied. There will be no tax where an employee
that is required to take a van home at night, isallowed no other private use, spends at least 80% o
his / her time away rom the work premises and the
van is necessary in the perormance o the duties o
the employees employment.
4.1.7 Loans to Employees
Loans given by employers to employees at
preerential rates o interest are subject to PAYE
and PRSI. The taxable benet is the dierence
between the interest paid or payable on the loan
and the amount o interest which would have beenpayable i the loan had been subject to interest
at the specied rate. From 1 January 2008 the
specied rate or qualiying home loans is 5.5% and
or all other loans is 13%.
4.1.8 Accommodation
Where a company owner/director wishes to acquire
a second home, this could be purchased by the
company and provided to him/her as a benet in
kind. The director will pay tax by reerence to the
annual value o the use o the house. This valueis the annual rent which would be obtainable i
the property were let on the open market. The
company should get a ull tax deduction or the
interest payments on the money used to buy the
house.
4.2 Tax Efcient Benefts
4.2.1 Car Parking
There is currently no benet in kind charge arisingrom the provision o a car parking space at or near
the employees place o work, regardless o how it
is provided or paid or. This can be a very valuable
benet in city centres.
4.2.2 Travel Pass
PAYE and PRSI is not applied to the value o
certain monthly or annual bus, train and Luas
passes given to employees or use on a licensed
passenger transport service and commuter erries
operated within the State.
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4.2.3 Mobile Phones/Laptops/Home High
Speed Internet Connection
When employers provide the above or business
use and bear the costs o installation and use, a tax
charge will not apply to the employee provided thatprivate use is merely incidental to the business use
o the item.
4.2.4 Computers
The employer can provide computer equipment
in the employees home without a taxable benet
arising to the employee provided that it is or
business use and private use is incidental. A
computer supplied or the employees private use
is taxable. The amount o the taxable benet is
calculated at 5% o the market value o the asset
when rst provided to the employee.
4.2.5 Company Pension Schemes
There is no tax charge arising on contributions to
Revenue-approved superannuation schemes or
Personal Retirement Savings Accounts (PRSA) by
the employer in respect o an employee.
4.2.6 Crche/Childcare Facilities
A taxable benet does not arise where the employer
is at least partly involved in nancing and managing
the provision o childcare or employees children
and the premises meets certain requirements o the
Child Care (Pre-School Services) Regulations 1996.
4.2.7 Medical Check-ups
I employees are required by their employer
to undergo medical check-ups it will not be
considered a taxable benet where provided or bythe employer.
4.2.8 Course or Exam Fees
Course or exams ees paid by an employer will
not give rise to a taxable benet i the course
undertaken by the employee is relevant to the
business o the employer.
4.2.9 Proessional Subscriptions
Proessional subscriptions paid by an employer will
not give rise to a taxable benet i membership o
that proessional body is relevant to the business o
the employer.
4.2.10 Examination Awards
Examination awards paid to an employee will
not give rise to a taxable benet i the amount
can be regarded as a reimbursement o expenses
considered to be incurred while studying or
an examination relevant to the business o the
employer.
Special increments o salary awarded on passing an
examination are chargeable as part o an employees
remuneration in the normal way.
4.2.11 Long Service Awards
No taxable benet will arise in respect o an award
made to mark long service where the ollowing
conditions are met: -
Theawardmarksserviceofnotlessthan20
years;
Theawardtakestheformofatangiblearticle(s)
o reasonable cost;
Thecostdoesnotexceed50foreachyearof
service;
Nosimilarawardhasbeenmadetotherecipient
within the previous 5 years.
The treatment does not apply to awards made in
cash or in the orm o vouchers, bonds, etc.
4.2.12 Termination Payments
Where a payment is made on retirement or removal
rom an employment, and it is not otherwise
chargeable to income tax, tax is charged only on the
excess o the payment over the basic exemption or
an amount calculated by a ormula (SCSB) based on
the number o years o service.
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The basic exemption is 10,160 plus 765 or each
complete year o service in that employment. This
basic exemption may be increased by claiming
an additional 10,000 exemption, once every 10
years. This additional 10,000 is available wherethe individual is not a member o an occupational
pension scheme or irrevocably gives up the right
to receive a lump sum rom such a scheme. I the
member receives or is entitled to receive a pension
lump sum, then the additional 10,000 exemption
is reduced by the pension lump sum. Approval is
required rom the Inspector o Taxes beore the
additional exemption can be applied.
4.3 Share Schemes
4.3.1 Employee Share Schemes
The Government has been keen to promote the
concept o extending share ownership to the
workorce generally and also to key managers. Tax
relies have been applied to particular arrangements
(approved schemes) by bringing them into the
more avourable CGT regime.
4.3.2 Share Option Schemes
Share options are agreements entitling the holder to
buy shares in the uture at a xed price, usually the
current value o the shares. The holder can make a
prot i the shares increase in value and the option
is exercised. Options are oten used to motivate
selected, key sta in a company by tying their
remuneration to the share price.
UnapprovedShareOptionsSchemes
Under unapproved share option schemes
Income Tax is charged or the year o exercise
o the option, on the dierence between the
price paid (option price) and the market valueat that date. I the option is capable o being
exercised more than seven years rom the date o
grant and it is granted at less than market value,
Revenue reserve the right to tax the employee on
the dierence at grant at the marginal tax rate.
For share options exercised on or ater 30 June
2003 the tax due is payable within 30 days ater
the exercise. In addition Capital Gains Tax ispayable on disposal o the shares. Tax is charged
on the dierence between disposal proceeds and
original cost (option price).
ApprovedShareOptionSchemes
A company may qualiy to operate an approved
share option scheme by applying in writing
to the Revenue Commissioners. Under
an approved scheme the employee will be
chargeable to capital gains tax on the ull gain on
disposal o the shares. There is no income tax
chargeable on the exercise o the option. Thereare certain conditions which must be met in
order to gain Revenue approval, including:
Theoptionpricemustnotbelessthanthe
market value o the shares at date o grant;
Thesharesacquiredmustnotbesoldwithin3
years o the date o grant;
Shareoptionsmustbeawardedtoalleligible
employees on similar terms.
However it is permissible to have a discretionaryelement whereby the level o options granted to
certain key employees might be determined at the
discretion o the company and not under the similar
terms provisions. The number o discretionary
options cannot exceed 30% o the total number o
options granted under the approved scheme in the
same tax year. In addition, where a key employee is
granted discretionary options in any year he cannot
also be granted options under the regular employee
element.
4.3.3 Share Subscription Schemes
Where an eligible employee subscribes or eligible
shares in a qualiying company he/she will be
entitled to a deduction against their total income up
to a maximum o 6,350, subject to the ollowing
conditions:
Sharesmustbesubscribedforatnotlessthan
market value
Sharesmustbenewordinarysharesinthe
employer company
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Companyissuingsharesmustbeatrading/
holding company, resident in Ireland and not
resident anywhere else and incorporated in
Ireland
Shares must be retained or 3 years or tax relie will
be withdrawn.
The tax deduction granted is excluded or the base
cost on uture sales.
4.3.4 Save As You Earn (SAYE) schemes
This scheme allows employees to save part o
their ater tax salary over a three year period at the
end o which the employee can use those savings
to purchase shares in their employer company.Membership o this scheme must be made available
to all employees. The minimum savings amount
is 12 per month and the maximum is 320 per
month. The shares can be purchased at a discount
o 25% o their market value at the beginning o the
three year savings period. No charge to income tax
arises on the purchase at this discounted price. I
you acquire shares under a SAYE scheme, consider
putting them into your personal pension plan i
the plan rules allow. The value o the shares will be
grossed up at the basic rate o tax like a normal cashcontribution to a pension plan.
4.3.5 Approved Proft Sharing Scheme (APSS)
Under an APSS the costs o providing shares in a
prot sharing scheme and the costs o running the
scheme are tax deductible or the company subject
to certain restrictions. The recipient employee is
exempt rom income tax on shares received up to
an annual limit o 12,700 in a tax year and is also
granted avourable income tax treatment on any
growth in the value o the shares. However i the
employee sells the shares within three years income
tax is charged at 100% o the value o the shares
at the date o sale. However this holding period
will not apply where shares are transerred rom
an Employee Share Ownership Trust (ESOT)
to an APSS subject to certain conditions. The
disposal o shares will be subject to capital gains tax.
Participation is open to every ull-time director/
employee and part-time employee chargeable totax under Schedule E who satises the qualiying
period (not more than 3 years). Shares may not
be allocated to any individual holding a material
interest (more than 15% o the ordinary shares) in
the company where it is a close company.
4.3.6 Employee Share Ownership Trusts (ESOT)
An ESOT is a tax-avoured trust mechanism
within which shares can be retained or up to 20
years or distribution to employees (and ormer
employees, within certain limits). They aredesigned to work with prot sharing schemes so
that shares can be released rom the ESOT each
year into the companys prot sharing scheme. All
employees and certain ull-time directors o the
ounding company or a group company who are
chargeable to tax under Schedule E and who satisy
the qualiying period (not more than 3 years) must
be eligible to be beneciaries under the ESOT.
However, employees and directors with material
interest (5% o the ordinary share capital) cannot
be beneciaries under the ESOT.
The ollowing are some o the relies available to
the company operating an ESOT:
Anychargeablegainarisingfromthetransfer
o shares rom the ESOT to an approved prot
sharing scheme is exempt rom capital gains tax;
TheESOTisnotchargeabletoincometaxon
dividend income arising on the shares i that
income is used or a qualiying purpose within
nine months o the date o receipt;
Acorporationtaxdeductionmaybeclaimedfor
the costs o setting up the scheme.
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A Guide to Saving Tax
5. Personal Tax
Lorcan Hand
Director
T: +353 (0)1 6805 805
D: +353 (0)1 6805 770F: +353 (0)1 6805 806
In recent years, the amount o paperwork
associated with tax compliance has increased
dramatically. However, it is important to keep-
up-to date to ensure that you claim all the relies,
allowances and credits to which you are entitled
and retain the supporting documentation This will
also ensure that you avoid interest and penalties or
ailing to comply with Revenues requirements.
5.1 Compliance
See Appendix I.
5.2 Planning
5.2.1 Bare Trusts
Parents can pass ownership o assets to theirchildren by means o a bare trust. Any gains are
those o the child, who can take advantage o the
annual CGT exemption. This arrangement is not
eective or income tax purposes and the income
is taxed as that o the parent. Consider using a
bare trust to hold assets designed to achieve capital
growth rather than income-producing assets.
5.2.2 Individualisation
For the tax year 2008 the ollowing tax bands
apply:-Single Person 35,400
Married Couple - One Income 44,400
Married Couple - Two Income 70,800
The 70,800 band or a two income couple istranserable rom one earning spouse to the other,
subject to a maximum individual band o 44,400
or either spouse.
5.2.3 Medical Expenses
Relie at the marginal tax rate is available on
certain medical expenses which are not reimbursed
by medical insurers/other authorities. Medical
expenses incurred on behal o a relative may
also be claimed. It may be worth considering
re-arranging the nancial aairs o a dependentrelative who is not availing o tax relie to ensure
maximum tax eciency.
Routine dental treatment and ophthalmic treatment
are specically excluded rom the relie.
5.2.4 Rent Relie
A tax credit may be claimed by tenants or rent paid
on residential accommodation. For 2008 the credit
is 400 per person under 55 years and 800 per
person where over 55 years.
5.2.5 Third Level Educational Fees
Tax relie is available at the standard rate or ees
paid or third level education. The relie is granted
where an individual pays the qualiying ees on his
or her own behal, or on behal o a dependent.
The maximum relie available or the academic
years 2007/2008 and 2008/2009 is 5,000.
5.2.6 Service Charges
A tax credit is available or local authority service
charges paid in ull and on time. The maximum
amount qualiying or relie is 400 per annum.
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5.2.7 Charitable Donations
Relie may be claimed by both individuals and
companies on charitable donations over 250 in a
year. Donations by PAYE taxpayers are granted
relie on a grossed up basis to the charity ratherthan a separate claim by the donor. Sel-employed
taxpayers make a claim or relie as part o their
return and there is no grossing up arrangement.
Tax relie is only available on donations to Revenue
approved charities and other approved bodies.
5.2.8 Interest Relie
Interestpayable
Relie is available or interest on money borrowed:
Forthepurposeofatradeorprofessioncarriedon by an individual or company (but may be
restricted in certain tax avoidance situations);
Forthepurchaseof,orexpenditureon,arented
property (relie is given against rental income);
Byanindividualtoinvestinortolendtoa
trading partnership in the conduct o whose
business the individual acts as a partner.
Individuals borrowing to acquire an interest in
property companies are no longer able to claim
the interest as a deduction. The deduction was
abolished in the Finance Act 2006 and applies to
loans taken out ater 7 December 2005.
The Finance Act 2006 also restricted interest relie
against rental income. A deduction or interest
paid on rented premises is only available where the
registration requirements o the Private Residential
Tenancies Board are met.
Relie is also available to individuals and companies
or interest on money borrowed to acquire aninterest in or to lend to a company, which is a
trading company, a rental company or a holding
company subject to certain conditions. This is
a very valuable relie, as it is given against the
individuals highest marginal rate o tax and there
is no monetary limit on the amount o the loan. It
thereore makes sense, rom a tax standpoint and
where commercially possible, or owner-managers
to organise their aairs so that they use all their
borrowings to lend to their business, thereby
obtaining maximum tax relie on the interest. Inthis respect it is possible to re-arrange existing
borrowings to meet this aim.
5.2.9 Restrictions on Tax Relies or High
Income Individuals
A limit on the use o tax relies by certain high
income individuals will apply rom the tax year
2007 onwards. The restriction will only apply tothose individuals with income and tax relies in
excess o 250,000 per annum.
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6. Capital Gains Tax
Paula Keaney
Director
T: +353 (0)1 6805 805
D: +353 (0)1 6805 769F: +353 (0)1 6805 806
David Keary
Director
T: +353 (0)1 6805 805
D: +353 (0)1 6805 767
F: +353 (0)1 6805 806
6.1 Use o Annual Exemption
The annual exemption or CGT o 1,270 is lost
i it is not used. Thought should be given beore
the end o each tax year to realise gains to use this
exemption.
6.2 Negligible Value Claims
It is not always necessary to dispose o assets whichhave become valueless, a loss can sometimes be
claimed without sale or liquidation. Such a loss is
allowable only in the year o claim. However, in
practice, a claim made within twelve months o the
end o the year o assessment or accounting period
or which relie is sought will be admitted, provided
that the asset was o negligible value in the year o
assessment or account period concerned.
6.3 April 5th 1974 Valuation o Shares
An asset owned beore 5 April 1974 can take its
value at that date as its base cost or CGT purposes.
In the case o unquoted shares, large discountsusually have to be applied in valuing minority
shareholdings to take into account their relative
lack o control and marketability. Where shares
are held by both husband and wie, it may be
possible to reduce the impact o this principle by
transerring shares between them to create a larger
single holding by one spouse and thereby establish
a higher 1974 value.
6.4 Retirement Relie
Where a person who has attained 55 years o age
disposes o the whole or part o his/her qualiying
assets or a consideration which does not exceed
750,000 relie is given or the ull amount o the
Capital gains tax chargeable.
Qualiying assets include, in the case o a sole
trader/partnership, chargeable business assets held
or 10 years and in relation to shares in a amily
company, where the individual has owned and
worked in the company or the last 10 years, 5 othem as a ull time director.
Marginal relie is available on disposals over
750,000.
There is no limit on the consideration where
the disposal is to a child or avourite nephew.
However, there is a clawback o the relie i the
child or avourite nephew disposes o the
property within six years o acquisition.
6.5 Transer o a Business to a Company
This relie provides that where the consideration or
the transer o assets o a business to a company is
the issue o shares in the company, the total gain is
not assessed but the base cost o the shares or the
purposes o a uture disposal is reduced by the total
gain on the transer o the assets.
The business must be transerred as a goingconcern.
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A Guide to Saving Tax
7. VAT
Finbarr OConnell
Manager
T: +353 (0)1 6805 805
D: +353 (0)1 6805 771F: +353 (0)1 6805 806
Some o these ideas oer outright VAT savings,
whilst others aim to provide cash fow benets.
For most ully taxable businesses, cash fow
planning represents the biggest opportunity or
VAT savings. Depending upon the size o the VAT
cash fows, the benets can be signicant.
7.1 Compliance
See Appendix II.
7.2 Planning
7.2.1 Property Transactions
Short term leases (lettings o less than 10 years) are
exempt rom VAT. This means that the property
owner would be unable to reclaim the VATincurred on associated costs. It is possible to make
an election to waive the exemption or commercial
properties only, so that rents are subject to standard
rate VAT enabling VAT to be recovered on
related costs. The Finance Act 2007 introduced
a new Section which removed the right to waive
exemption rom VAT or residential lettings. The
provision applies to properties acquired on or
ater 2 April 2007 and does not aect lettings in
existence prior to this date. The new VAT rules to
be introduced in July 2008 will reer to this as optto tax.
From 1 July 2008, all leases o property (other thanownership-type leases) will be exempt rom VAT.
Landlords will be entitled to opt to tax such lettings
(i.e. charge VAT) assuming certain conditions are
satised. Options to tax will be on a property-by-
property basis. Depending on the history o the
property and the prole o the tenant, it may be
attractive or a landlord to opt to tax certain lettings
while not opting to tax other lettings. For example,
a landlord who owns a property and has a potential
tenant with no VAT recovery may (in consultation
with the tenant) choose not to opt to tax the letting
and increase the rent amount instead. While this
course o action may have implications or the
landlord under the capital goods scheme, the extra
rent achieved may be more signicant.
Due to the introduction o the Capital Goods
Scheme on 1 July 2008, it will be important to
consider the VAT consequences o the transer o
second-hand properties ater that date. It may be
that in certain cases, vendors and purchasers will
be satised that VAT is not chargeable on certain
sales. This may be the case in particular where thepurchaser does not have ull VAT recovery.
It is also possible that there will be transactions
whereby a vendor will want to charge VAT on
the sale o a second-hand property. For example,
a nancial institution may be able to recover a
substantial amount o VAT in the event that it sells
a second-hand property and charges VAT (this
assumes that it was not able to recover all o the
VAT when the property was acquired, which is
generally the case).
It will be vital that detailed records are kept o all
property transactions including reurbishment
work etc. These records will be required when
properties are being sold or i businesses are being
transerred (e.g. as part o due diligence process). It
is a legal requirement to maintain such a record.
Note: Property-related transactions are generally
complicated and the specic circumstances will
dictate the best course o action. Specialist advice
should be sought in advance o concluding any
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transaction. Some o the scenarios reerred to
above would have potential implications or other
taxes.
7.2.2 Accruing or Purchase Invoices
VAT can be reclaimed on all purchase invoices
received and dated within the period covered by
the return. However, it is possible that by the end
o a VAT period not all purchase invoices will
have been posted to the purchase ledger. Consider
making an accrual or VAT on purchase invoices
dated within, but not posted until ater, the end o
the VAT period. Any such accrual must, however,
be reversed at the beginning o the next VAT
period.
7.2.3 Credit Notes
In certain cases provided both parties agree, VAT
can be excluded rom credit notes. This means
that the supplier will not have to reund the VAT
element to the customer and may give them a cash
fow benet.
7.2.4 Business Gits
Subject to certain rules, no VAT is due on business
gits costing not more than 20 (excluding VAT).
In addition, gits in reasonable quantities to actual
or potential customers o industrial samples in a
orm not normally available or sale to the public
are also not subject to VAT.
7.2.5 Bad Debt Relie
Ensure you have systems in place to recover VAT
accounted or on sales invoices that must be written
o. Where the actual payment received in respect
o a debt is less than the amount which would
otherwise be liable due to a bad debt, relie is given
or the sum not received. Bad debts are subject to
agreement with the Inspector o Taxes and it is
possible to seek advance approval beore claiming a
VAT deduction or bad debts.
There is one situation where VAT relie in respect
o bad debts is not available - where the bad debt
is in respect o VAT arising on the grant o a longterm lease (10 years or greater) o immovable
goods. This should not apply to leases granted ater
1 July 2008.
7.2.6 Recovery o VAT on Pension FundExpenses
The management o a pension und or a companys
own employees (excluding the business activities
o the pension und) is part o the employers
business. An employer who is registered or VAT
can recover any input tax incurred on establishingthe und and its on-going management (subject
to the normal rules). This recovery can be made
even i the management o the und is undertaken
by trustees and they are responsible or paying the
management costs.
7.2.7 Export Companies
Businesses with signicant export sales can achieve
cash fow savings by obtaining authorisation rom
the Revenue Commissioners to receive goods and
services without incurring VAT. A trader whoderives 75% or more o annual turnover rom zero
rated intra-Community supplies o goods or rom
exports o goods may apply to have most goods
and services received by him and intra-Community
acquisitions and imports made by him zero rated.
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A Guide to Saving Tax
8. Revenue Audits and Investigations
Jim Kelly
Director
T: +353 (0)1 6805 805
D: +353 (0)1 6805 780F: +353 (0)1 6805 806
8.1 Revenue Code o Practice
There is a Revenue code o practice which now
applies to notications o all Revenue audits
ater the 1st September 2002. There has been a
undamental revision by the Revenue to their
auditing procedures and there is a greater onus odisclosure (in writing) placed on the taxpayer.
Following is a brie summary o what is involved in
the new procedures:
Greateronusonthetaxpayertomakea
written voluntary disclosure to the Revenue
Commissioners in advance o their visit;
Withinfourteendaysofnoticationthetaxpayer
must inorm Revenue i he wishes to make a
voluntary disclosure; Withinsixtydaysthetaxpayermustselfassess
or penalties and interest on late payment o
tax as well as the tax involved. Previously, a
taxpayer was simply required to disclose an
underpayment o tax when Revenue visited and
it was then a subject o negotiation. From 1st
September 2002 the taxpayer is now required
to make an up-ront eective admission o tax
underpayment. A cheque or tax, interest and
penalties is to be paid at the outset o a Revenue
audit. This eliminates the old negotiation tactics; Thevoluntarydisclosuremustbeinwritingand
signed with a certiying statement o complete
disclosure;
IfthereisanincompletedisclosuretoRevenuethe penalties are now much more signicant.
These risks include the imposition o ull civil
penalties and the possible consideration by
Revenue o urther proceedings;
Therecanbesevereconsequencesensuingfrom
making a less than complete voluntary disclosure
or indeed rom not making any disclosure at
all when one should have been made. Revenue
have stated that both o these cases are ones that
they will consider or urther prosecution;
IfthenetunderpaymentofVATforthetwo-month period being corrected is less than
5,000, the amount o the tax can be included
(without interest or notication to Revenue)
as an adjustment on the next VAT return to be
submitted. The only tax this applies to is VAT
and the taxable person must be a bi monthly
remitter;
Thecodealsoprovidesforahard-lineapproach
in relation to underpayments o Capital
Gains Tax where Revenue orms a view that
proessional valuations o property werespurious;
Thecodeintroducesaconceptofself-correction
o tax returns. Where the taxpayer becomes
aware o an underpayment o tax due to
negligence, they can avoid penalties (but not
interest) by advising Revenue in writing o the
underpayment and by submitting a cheque in
payment o tax and interest due.
In summary, the new code takes a hard-line
approach and puts a much greater emphasison up-ront disclosure and payment o tax by
the taxpayer. There has been an increase in the
requency o audits and this is likely to increase in
the uture.
To urther complicate matters, negligence is not
dened but the code sets out three categories o
negligence each o which carries their own penalties
which can be urther reduced depending on the
level o disclosure and co-operation (see table
below). There is also the concept o prompted andunprompted qualiying disclosure and there is even
a urther concept o a repeat voluntary disclosure.
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8.2 Revenue Investigations
Revenue Investigations are becoming a regular
eature o the Irish tax system. The RevenueCommissioners have recently undertaken an
audit and intervention programme targeting the
construction and property development sectors.
Up to 25% o the Revenues audit personnel have
been concentrating specically on the construction
sector.
The Revenue Commissioners are currently
examining tax compliance in a number o business
sectors. Current reviews include the property /
rental income sector, computer and sotware sector,
the licensed trade, the building industry (relevant
contracts tax), hairdressing and beauty parlours,
management consultants, high earning doctors and
late lers o annual VAT returns.
8.2.1 General Pattern
The investigations have been ollowing the same
general pattern. Firstly there is an announcement
by the Revenue Commissioners that an
investigation into a particular source o income
will commence. This is generally ollowed by a 60day period