Taxation For Capital Gains Tax

Market Value Substitution

Discuss about the Taxation for Capital Gains Tax.

Under Irish taxation law, the capital gains resulting from the clearance of assets are liable to tax under Capital Gains Tax. Under the provision of Irish taxation law, to determine tax value of the resulted capital gains in asset transfers, with either given or inward for consideration, the market value is likely to be substituted, as in certain circumstances, there are no actual purchase or the value of transfer does not replicate the asset value. The market value of asset is likely to be substituted but not applicable when transaction is involved ‘at arm’s length’ but valid in case wherein transmit of assets has taken place under bargains (Chartered Accountants Ireland, n.d.). The circumstance in which such provision will be applicable when an individual makes transaction  in the form of gifts, transmit of capital to shareholders by a corporate, all such transactions wherein consideration is difficult to be valued, acquisition related with any loss due to employment and salary decreases due to past services.

It can be affirmed that market value is also substituted in circumstances in the environment when company allots share to any individual who is involved with the corporate at a value lower than its actual valuation.

Development land refers to properties, which may include lands and buildings in the geographic region that is transferred with a valuation higher than its present value. The present value reflects the valuation of land if no development takes place apart from minimal natural development (¹Irish Tax and Customs, 2015). Reflecting to Esther’s planning to sale land in Wicklow, which she brought during 1990s and did not develop, it is suggested that if total consideration receivables on the development land were not more than €19,050, it would not be subjected to entitle the benefits of a special provision. In accordance with the Irish tax provision, if value of consideration is subjected to more than €19,050 in sale of property, an individual is not entitled to obtain relief related with tax exemption in capital gains.

Additionally, as Esther did not develop the land in the tenure from purchase until now, thus, it can be suggested to her that gains that she made in such act of selling of non-development lands are likely to be subjected to be taxed. It is worth mentioning to her that she will not be entitled to get indexation relief on the prosperity, because such reliefs are deemed as confined to the use of property. Evidently, the scenario clearly reflected that she did not use the property from the period when she brought the property, thus, she will not be entitled to avail benefits from the relief on the capital gains that will be made in selling the property.

Esther will not be entitled to gain provisional benefits to offset her loss resulting from sales of shares, as in accordance with tax laws, losses that are accumulated in selling of any asset, will not be categorised as development land, and are not adjusted with the profit from sale of development land (CPA Ireland, n.d.). Based on the notion that Esther incurred no development expense in the property, it can be suggested that she should not sell the property now, as it will not allow her to offset the losses she had incurred from the sale of shares.

Loss Offset in Sales of Shares

Various perspectives are required to be considered when incorporating a business, which is a complex and a challenging process that involves many risk drivers. However, in order to assist entrepreneurs in Ireland, certain support mechanisms and regulatory provisions are applied throughout the process of business commencement (¹Citizen Information Board, 2016).

Apparently, the period between quitting employment in Twilight Ltd and setting up a new business by Bertie Dunne ranges around 2 years. Thus, as per the Irish law, Bertie Dunne is unemployed and possesses an intention to form a business. He is entitled and qualified for the benefits under the provision of Back to Work Enterprise Allowance (BTWEA) or Short-Term Enterprise Allowance (STEA). He is also eligible for certain benefits, which will be applicable in his case. The government provides additional support and necessary benefits in accordance with the mentioned schemes, including arrangement of training, conducting market research, assisting in business planning and buying necessary equipments with loans. In keeping with Irish governmental purview, Bertie Dunne remained unemployed for more than a year thus he is deemed to be eligible for income tax exemption of a maximum limit of €40,000 annually until 3 years in the new business. The maximum amount of relief or exemption under the Irish tax provision in three year that Bertie Dunne can have will be €120,000. This relief is available only on the share of income tax that is payable on the profits obtained from the business operations.

It must also be noted in this context that if Bertie Dunne incurred losses in the initial years, the deficit amount can be forwarded for adjustments in the subsequent years as a relief from tax. Illustratively, suppose the business incurs a loss of €15,000 in its first year of operation and in the second year, the profit made amounts to €30,000. Under the scheme, the relief of tax payment will be available for the second year and loss of €15,000 from the first year will be subjected to adjustments in the third year, if profit is equal to or more than €40,000. If not, it can be adjusted in later years (³Irish Tax and Customs, 2014). Prior to the incorporation of Finance Act 2011, the owner of new businesses can avail full relief from corporate tax (²Citizen Information Board, 2016; ACCA, 2012).

In addition, Bertie Dunne can register the business as a limited company, which will create its separate entity, making the firm eligible for corporate tax reliefs, in the initial three years of business operations. Contextually, post amendment of the Finance Act 2011, the amount of relief linked with Employers’ PRSI is to be paid by the company on an annual basis, with a minimum wage per employee amounting to €5,000 and a maximum to €40,000. This implies that the overall amount of corporate tax payable by the qualified new business must not exceed €40,000 annually.

Setting Up a New Company in Ireland

The amount of corporate tax on the income and gains is subjected to Employers’ PRSI as well, wherein the adjusted amount should not exceed in comparison with the contribution in Employers’ PRSI (O’Hanlon Tax Limited, 2014; ⁴Irish Tax and Customs, 2012). However, regardless of exemption on this provision, payment of certain contribution in Pay Social Insurance (PRSI), which is a social insurance fund and in Universal Social Charge (USC), which is a special tax levy on the income above €13,000 annually, will be compulsory for Bertie Dunne with respect to operating his business. The amount paid by Bertie Dunne under PRSI will be adjusted with the relief that he is entitled to receive for the three years.

As under the provision, employers’ contribution in PRSI and USC is compulsory for the business (Irish Department of Finance, 2015; ⁴Irish Tax and Customs, 2012). Considering the assumption that Bertie Dunne’s business in initial five years of operations makes profit of €12,000, €15,000, €50,000, €120,000 and €150,000, the corporate tax will be applicable at a prevailing rate of 12.5%. The relief that Bertie Dunne will be entitled to availed under the provision of Irish tax law has been presented below:                                          

Year	2016	2017	2018	2019	2020
Profit	12,000	15,000	50,000	120,000	150,000
Corporation tax	1,500	1,875	6,250	15,000	18,750
Contribution in Employers’ PRSI	8,000	8,000	8,000	8,000	8,000
Unused and Excess carried forward	6,500	6,125	1,750	N/A	N/A
Aggregate amount (carried forward amount) 3 years			12,000
Relief claimed (after 3 years)				8,000	4000
Remaining carried forward amount				4000	Nil
Tax liability	Nil	Nil	Nil	7,000	14,375

Based on the above presented tax liability calculation, it can be affirmed that aggregate amount carried forward after 3 years for adjustment is €12,000 rather than €14,375, as under the provision of Irish law, reliefs allowable to the business after three years (if unadjusted) will be amounted to the maximum limit of €12,000. Moreover, if the company of Bertie Dunne tax is determined to be liable for more than €60,000 payment of tax in any accounting period, it will not be considered as eligible for any relief related to the deduction of corporate tax in that financial year.    

In the process of commencing a business, relief or deduction of tax can be claimed by Bertie Dunne on certain expenses paid before the business formal commencement. Under the provision to determine the taxable value, such expenses will be treated as losses, as it occurred before starting up the trade operations. Those expenses that will be available for relief to Bertie Dunne include leasing costs, which are related to business, costs required to develop the concepts of business, bear the legal fees and for conducting feasibility studies. The relief of tax initiatives related to Research and Development (R&D) can also be availed by Bertie Dunne under the provision. In terms of profits of the business, tax deduction is likely to be materialised for all such business expenses, which are wholly or partially incurred to conduct business trade, such as those included in the financial statements of the business as revenue expenses.

The capital allowances (i.e., expenses paid over buying capital equipments) are also allowed for tax deductions (Department of Social Protection, 2016; ²Irish Tax and Customs, 2016; Bank of Ireland, 2016). For instance, if Bertie Dunne’s Company gets hold of certain qualified intangible assets, the business will be entitled to avail reliefs on its related costs required for acquisition. Such intangible assets include name of company, brand, goodwill and copyright among others.

In the event of selling of business, Bertie Dunne needs to consider two different perspectives, which include selling of share of the company and assets. Selling of business by share liquidation will provide advantage of personal gains but tax on the capital gains will be applicable. Thus, considering the selling price of the company shares, tax will be due on the capital gains. The prices that will be considered will include the nominal and addition of premium values. The retirement benefit reliefs will also be entitled on the capital gains from selling of the business, as the age of the owner will be above 55 after 5 years.

Under the provision of law, if the owner of the business is more than 55 years and sells the business then he/she is entitled for the tax relief on the capital gains made with the selling transactions (AIB Corporate Finance, 2008). Besides, the trade of the business will be ceased with selling of assets and accordingly, the provisions of company cessation will be applicable in the case (McAteer & Hegarty, 2015).

Any loss in the final accounting year is likely to be offset against the available capital gains to the owner in tax calculation. With regard to determining the amount of tax, balance charged will be evaluated by comparing sales proceedings of the assets with asset’s Tax Written Down Value (TWDV). The overall tax payable amount will also reduce, if sales value is inferior than TWDV and vice versa. The amount of balance charged will be limited to assets previously claimed for capital allowances. However, negative valuation in the capital allowances is expected to be subjected to the corporation tax. Selling of any of the inventory in profit will further increase the tax value, as it will be trading receipts in the hand of the seller. In the selling agreement, if assets including plants and properties are sold, Value Added Tax (VAT) will be applicable at that time. As the selling of business will include trade transfer, exemption can be claimed in accordance with the provisions of going concern indemnity.

However, such exemption will be applicable, if the purchase of business is registered to claim the advantages of VAT and is entitled to full relaxation of VAT recovery (McAteer & Hegarty, 2015). At the time of liquidation, Bertie Dunne’s Company’s intangible assets will also be subjected to taxable income, as it will be treated under the head of capital gain; for instance, selling of goodwill. Nevertheless, during selling of certain assets, including debtors and inventories, if the sales proceeding is equivalent to debtors’ value, no tax will be chargeable (Corporate Finance in Europe, 2016).

Bertie Dunne is therefore suggested that he should not sell the business after 5 to 7 years because to entitle the relief of retirement, the assets and shares must be owned for at least a period of 10 years.

References

ACCA 2012, New companies start-up relief, Company Start-Up Reliefs, viewed 05 July 2016, <https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012s/sa_feb12_p6_startup.pdf>.

AIB Corporate Finance 2008, Selling a business Ireland, MergerMarket, viewed 05 July 2016, <https://www.aib.ie/servlet/BlobServer/708/779/Selling%20a%20Business%20Ireland.pdf?blobcol=urldata&blobheader=application/pdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1214390540042&csblobid=1220890827190>.

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Corporate Finance in Europe 2016, Tax aspects when selling a business in Ireland, Tax Aspects Selling Company, viewed 05 July 2016, <https://www.corporatefinanceineurope.eu/ireland/sell-business/tax-aspects.htm>.

CPA Ireland n.d., CGT and capital losses, Taxation, viewed 04 July 2016, <https://www.cpaireland.ie/docs/default-source/media-and-publications/accountancy-plus/taxation/cgt-june.pdf?sfvrsn=2>.

Department of Social Protection 2016, Pay Related Social Insurance (PRSI) contributions and classes, Operational Guidelines, viewed 05 July 2016, <https://www.welfare.ie/en/Pages/PRSI—Pay-Related-Social-Insurance—Contributions-and-Clas.aspx>.

Department of Finance 2015, Tax and entrepreneurship review, Corporate Tax, viewed 05 July 2016, <https://www.budget.gov.ie/Budgets/2016/Documents/Tax_and_Entrepreneurship_Review_pub.pdf>.

Irish Tax and Customs 2015, ‘CGT1 Guide to capital gains tax’, Irish Tax and Customs, pp. 3-46.

Irish Tax and Customs 2016, ‘Universal social charge’, Irish Tax and Customs, pp. 11-30.

Irish Tax and Customs 2014, Frequently asked questions, Relief & Exemption, viewed 05 July 2016, <https://www.revenue.ie/en/tax/it/reliefs/own-business-scheme/faqs.html#section3>.

Irish Tax and Customs 2012, ‘Tax relief for new start-up companies’, Irish Tax and Customs, pp. 1-10.

McAteer, C S & Hegarty, C 2015, ‘Taxation considerations on the sale and purchase of a business: Asset sale v share sale’, CPA Ireland, pp. 1-5.

O’Hanlon Tax Limited 2014, Tax relief for new start-up companies, OHT Guide to Tax Relief On Start-up Companies, viewed 05 July 2016, <https://www.ohanlontax.ie/downloads/TaxReliefsforStart-UpCompanies.pdf>.