Taxation RoI Revision 5 Topic: Case I/II

- Basis of assessment - TAP computation

Ciarán Armstrong 26th May 2020

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Schedule D case I/II – taxable profits of self-employed individuals

Some basic terms

Year of Assessment: The tax year = Calendar year

Basis Period: Accounting period that is taxed in the year of assessment

Actual Profits: Profits deemed to arise in a tax year

Rule 1:

Accounting period ending in the tax year

Two possible scenarios - 2 or more accounting dates (always use later date) - No accounting date in the year (use tax year)

Rule 2:

must be 12-month accounting period

Two exceptions - Commencement (start date to 31 Dec.) - Cessation (1 January to end date)

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Case I/II commencement: Robin Robin commenced business as a self-employed barber on the 1st April 2017. Accounts have been prepared to 31st March each year and show the following tax adjusted profits.

€ y/e 31st March 2018 24,360 y/e 31st March 2019 19,440 y/e 31st March 2020 25,200

Requirement: Calculate the assessable Schedule D case I income for Robin for the years 2017, 2018, 2019 and 2020

year basis period € 1 2017 1 April 2017 – 31 Dec 2017 18,270 2 2018 y/e 31 March 2018 24,360 3 2019 y/e 31 March 2019 19,440 Year 2 adj. # 3,690 15,750 4 2020 y/e 31 March 2020 25,200 # year 2 (2018) review 1 Jan ‘18 to 31 March ‘18 €24,360 * 3/12 6,090 1 Sep ‘18 to 31 Dec 2018 €19,440 * 9/12 14,580 20,670 Assessed 24,360 » adjustment 3,690

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Case I/II cessation: Tanya Tanya ceased trading on 28 February 2020, her year-end had been 30 September.

accounts € year-end 30/09/2018 22,000 year-end 30/09/2019 24,000 Period to 28/02/2020 20,000

Calculate her taxable profits for the tax years 2018, 2019 and 2020

year Basis of assessment € € 2018 y/e 30/09/2018 22,000 2019 y/e 30/09/2020 24,000 2020 01/01/2020 –

28/02/2020 €20,000*2/5 8,000

penultimate year (2019) review 01/01/2019 –

30/09/2019 €24,000*9/12 18,000

01/10/2019 – 31/12/2019

€20,000*3/5 12,000 30,000

Actual is greater than original » additional assessment of €6,000

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Case I/II profits in an Income Tax computation – Cessation examples 1. Elle and Terry are a married couple who have opted for joint assessment. Elle ceased trading as a self-employed beauty consultant on 30th June 2019. Tax adjusted profits per her accounts were: y/e 28/02/2018 €40,000 y/e 28/02/2019 €60,000 p/e 30/06/2019 €24,000 Calculate Elle’s 2019 case I/II profit for inclusion in their 2019 Income Tax return. Solution: 2019 is the cessation year so the profits assessed will be for the period 01 January 2019 to 30 June 2019 (the day Elle ceased trading).

01/01/2019 – 28/02/2019 €60,000* 2/12 €10,000 01/03/2019 – 30/06/2019 €24,000 2019 case I/II €34,000

2. Elle and Terry are a married couple who have opted for joint assessment. Elle ceased trading as a self-employed beauty consultant on 28th February 2020. Tax adjusted profits per her accounts were: y/e 31/10/2018 €70,000 y/e 31/10/2019 €48,000 p/e 28/02/2020 €40,000 Calculate Elle’s 2019 case I/II profit for inclusion in their 2019 Income Tax return. Solution: 2019 is the penultimate (second last) year so the profits assessed will be either the original assessment for 2019 or the actual tax year 2019, whichever is greater.

Original assessment y/e 31/10/2019 €48,000 Actual year 2019: 01/01/2019 – 31/10/2019 €48,000 * 10/12 €40,000 01/11/2019 – 31/12/2019 €40,000 * 2/4 €20,000 €60,000

As the profits for the actual tax year are greater the figure included in the 2019 Income Tax return for case I/II profits will be €60,000.

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Case I/II profits in an Income Tax computation – Commencement examples 3. Elle and Terry are a married couple who have opted for joint assessment. Elle commenced trading as a self-employed beauty consultant on 28th February 2019. Tax adjusted profits per her accounts were: p/e 30/06/2019 €40,000 y/e 30/06/2020 €60,000 Calculate Elle’s 2019 case I/II profit for inclusion in their 2019 Income Tax return. Solution: 2019 is the commencement year so the profits assessed will be for the period 28 February 2019 (the day Elle commenced trading) to 31 December 2019.

28/02/2019 – 30/06/2019 €40,000 01/07/2019 – 31/12/2019 €60,000 * 6/12 €30,000 2019 case I/II €70,000

4. Elle and Terry are a married couple who have opted for joint assessment. Elle commenced trading as a self-employed beauty consultant on 30th June 2017. Tax adjusted profits per her accounts were: p/e 31/10/2017 €20,000 y/e 31/10/2018 €60,000 y/e 31/10/2019 €36,000 Calculate Elle’s 2019 case I/II profit for inclusion in their 2019 Income Tax return. Solution: 2019 is the third year of commencement trading so you need to establish if there is a second year/ s.66 adjustment.

Original assessment 2019 y/e 31/10/2019 €36,000 Less: year 2/ s.66 adj. €4,000 2019 case I/II €32,000 Original assessment 2018 y/e 31/10/2018 €60,000 Actual year 2018: 01/01/2018 – 31/10/2018 €60,000* 10/12 €50,000 01/11/2018 – 31/12/2018 €36,000* 2/12 €6,000 €56,000 Actual is less than original > s.66 adj. €4,000

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Short-lived business: Donald Donald commenced business on 1st June 2018 and ceased trading on 31st October 2020. His tax adjusted profits were:

€ y/e 31st May 2019 96,000 y/e 31st May 2020 36,000 Period to 31st October 2020 6,000 138,000

Calculate Donald’s Case I/II assessments for all relevant years. Original assessments:

€ 2018 01.06.2018 to 31.12.2018 €96,000 * 7/12 56,000 2019 y/e 31 May 2019 96,000 2020 01.01.2020 to 31.10.2020: 1st Jan to 31st May (36,000*5/12) €15,000 1st June to 31st October €6,000 21,000 Less: year 2 adjustment # (21,000) Total assessed profits 152,000

Year 2 (2019) adjustment € 01.01.2019 to 31.05.2019 €96,000 * 5/12 40,000 01.06.2019 to 31.12.2019 €36,000 * 7/12 21,000 Actual year 2019 61,000 Original assessment 2019 96,000 Excess » available as year 2 adjustment 35,000 # Relief in 2020 restricted to available profits

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Business ceased on 31st October 2019 » no opportunity to carry forward the unutilised balance of €14,000 (€35,000 - €21,000). The taxpayer can now elect to have the 2018 assessment revised to the Actual profits for the year 2018.

Actual profits for 2018 € 01.01.2018 to 31.05.2018 €96,000 * 5/12 40,000 01.06.2018 to 31.10.2018 €36,000 * 7/12 21,000 61,000

Final assessment will be:

€ 2017 01.05.2017 to 31.12.2017 56,000 2018 y/e 31.12.2017 61,000 2019 01.01.2018 to 31.10.2018 21,000 Total 138,000

Claim for relief must be lodged by Donald on or before 31 October 2020 (or ROS date) - the filing date for 2019 returns.

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Case I/II adjustments Capital expenditure

Improvements v repairs: replacement of asset Depreciation: profit/loss on disposal Capital grants Expenses relating to capital items Capital loans: interest element allowed

‘Wholly and exclusively for purposes of trade’

subject to other taxation or another Income Tax case/schedule personal expenses (may be allowable elsewhere in IT computation)

Specifically disallowed

Entertainment Donations Penalties General provisions/estimates Leases passenger cars

General

Pre-trading (< 3 years & for purposes of trade) Payments to employees (allowable but potential BIK for employees) Pension contributions for employees – paid only

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TAP Computation - Bertie Bertie has owned a pawnbrokers business for a number of years. He has prepared accounts for the year ended 31 July 2019 and these are reproduced below:

Accounts for year ended 31 July 2019 notes € € Sales 202,404 Opening stock 40,100 Purchases 1 188,602 228,702 Closing stock 56,300 Cost of sales 172,402 Gross profit 30,002 Add: Rental income received 8,400 Discounts received 1,451 Dividends received 1,200 10,851 40,853 Less: Wages and salaries 2 37,991 Depreciation 2,157 Motor expenses 3 3,776 Entertainment expenses 4 416 Interest 5 2,866 Professional fees 6 1,479 Repairs 7 2,118 Bad debts 8 (190) Rent 9 1,500 52,113 Loss for year (11,260)

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Notes:

1. Purchases Included in purchases are items totalling €2,460 which Bertie used to furnish a rental property and items valued at €1,400 which were given to the van driver.

2. Wages and salaries € Van driver’s wages & subsistence 26,791 Casual wages for Bertie’s nephew for part-time work 1,200 Wages for Bertie 10,000 37,991 Included in the figure above for the van driver is a subsistence allowance of €300 per month.

3. Motor expenses €

Repairs to car 560 Petrol 806 Diesel and other van expenses 2,410 3,776 30% of the car use is private.

4. Entertainment expenses

The van driver was married during the year and Bertie paid for a stag night with the driver’s work colleagues. There were no other entertainment expenses.

5. Interest

€ Repayment of stock loan, including interest of €433 2,307 Current account fees 120 Interest on late payments to suppliers 439 2,866 Bertie forgot to submit his first two VAT returns on time. He subsequently paid an amount of €2,426 including penalty interest of €336, by taking out a personal overdraft He has since repaid this loan together with interest of €320, but the accounts do not include any of these amounts.

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6. Professional fees € Accountancy fees (including €280 on preparation of late VAT returns)

806

Stamp duty on purchase of shares 120 Legal fees re unfair dismissal 553 1,479

7. Repairs € Repairs to shop premises 710 Replacement of damaged shop windows 383 Repairs to rented premises 225 Provision for repairs 800 2,118

8. Bad debts

General bad debt provision

Specific bad debt provision

Bad debts written off

Bad debts recovered

Net P&L charge

€ € € € € Opening provision 900 600 Closing provision 700 700 Profit & loss account (200) 100 360 (450) (190)

9. Rent During the year Bertie rented a lock-up storage area to cater for slow moving stock. He paid a full year’s rent of €1,500 on 1 February 2019.

Requirement Compute Bertie’s Schedule D, case I adjusted profits for the year ended 31 July 2019

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TAP Computation – Bertie: Solution

Loss per accounts (11,260) Deduct: Rental income 8,400 Discounts received - Dividends received 1,200 9,600 (20,860) Addback: Depreciation 2,157 Rental property purchases 2,460 Purchases given to van driver - Wages and salaries Bertie’s wages 10,000 Casual wages - nephew - Driver’s subsistence - Motor expenses Repairs to car (30%) 168 Petrol (30%) 243 Entertainment) see note 1) 0 Interest Stock loan repayments (€2,307 - €433) 1,874 Payment of VAT (see note 2) 0 Professional fees Stamp duty 120 Accountancy fees - Repairs Repairs to rented premises 225 Replacement of damaged windows - Provision for repairs 800 Bad debts Decrease in general provision (200) Rent Prepayment (€1,500 * 6/12) 750 18,597 Case I adjusted loss (2,263)

Note 1 re entertainment – These are payments to an employee so are deductible by the employer in computing his accounts. The employee is subject to PAYE/BIK on benefit/payments received. Note 2 re VAT: This is payment of a Balance Sheet liability and does not impact on the income statement. Interest was charged on a personal account and cannot be claimed as a business expense- the interest amount of €336 payable to Revenue is not an allowable deduction.

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Additional note and questions for Webinar Case I/II TAP Computation – Motor lease restriction If for the business owner, always deduct personal element first. The formulas below are an alternative to the options used on pages 53 and 54 of your textbooks for the calculation of the above. These formulas initially calculate the allowable amount. X = value above €24,000 Y = value below €24,000 LC = leasing charges Car value A, B, C €X >€24,000 LC / X * 24 €Y <€24,000 LC / Y * 24 D, E €X >€24,000 LC / X * 12 €Y <€24,000 LC * 50%

Example where €30,000 is used as an example of a car value greater than €24,000 and €15,000 for a car value less than €24,000. In all cases Leasing Charges are €5,000 Car value allowed disallowed A, B, C €30,000 >€24,000 €5,000 / 30 * 24 €4,000 €1,000 €15,000 <€24,000 €5,000 / 15 * 24 €8,000 *(€3,000) D, E €30,000 >€24,000 €5,000 / 30 * 12 €2,000 €3,000 €15,000 <€24,000 €5,000 * 50% €2,500 €2,500

note * Extra amount that can be claimed

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Case I/II commencement: Leo Leo commenced business on 1 November 2018 and accounts to 31 January 2019 showed profits of €6,000 and year ended 31 January 2020 had profits of €60,000. Requirement: Calculate the assessable Schedule D case I income for Leo for the years 2018, 2019 and 2020 Case I/II cessation: Kevin Kevin ceased trading on 30 September 2019, his year-end had been 31 March.

accounts € Year-end 30/03/2017 48,000 year-end 31/03/2018 44,000 year-end 31/03/2019 36,000 Period to 30/09/2019 12,000

Requirement: Calculate his taxable profits for the tax years 2017, 2018 and 2019 year

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Case I TAP: Carlos The Profit and Loss account for the year ended 31st December 2019 of the plumbing supplies business operated by Carlos Pearson is as follows:

€ € Salaries and wages 62,500 Gross profit 595,200 Rent & rates 5,400 Irish dividends 1,600 Repairs (1) 16,100 Bad debts account (6) 1,300 Professional fees (2) 1,600 BS interest (net) 1,200 PHI premium – Carlos 350 Profit on sale of plant 4,300 Depreciation 13,000 Rental income 60,000 Accountancy fees 1,000 Insurance 1,720 Subscriptions (3) 2,400 Discount allowed 320 Bank interest (4) 7,060 Motor expenses (5) 8,450 Light and heat 3,800 Net profit 539,900 663,600 663,600

Notes: 1. Repairs Amount includes repairs to leased offices of €1,200 and €4,000 for a small extension to the factory. 2. Professional fees Includes debt collection fees of €200 and architects’ fees on factory extension of €500. 3. Subscriptions

€ Fianna Fail 1,000 Sundry charity collectors calling to factory 100 Trade Association 400 Chamber of Commerce 150 Conquer Cancer (approved charity) 100 Golf club – Sales Manager 650 2,400

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4. Bank interest This item is made up of interest €1,020 on a loan to finance the factory extension, and the full repayment of a short-term loan used to refurbish a room for entertaining large customers – total repayments were €6,020 including interest of €320. 5. Motor expenses The only motor expenses are in respect of a delivery van and a leased car. Running costs were €1,250 for the van and €1,200 for the car. The leased car (retail price €15,000) is category A, Carlos’s personal use is estimated at 40% and the lease charges amount to €6,000. 6. Bad debts account

€ € Bad debts w/o 450 Opening provision: Profit & Loss a/c 1,300 general 1,000 Closing provision: specific 2,000 general 0 specific 1,250 3,000 3,000

Requirement: Compute Carlos’s case I tax adjusted profit for the year ended 31st December 2019.