B8AF104 Taxation Assignment: Ireland Taxation System Case Study

This case study examines the Ireland taxation system through the lens of Barry and Stephen Murphy. It begins by defining tax residency based on the number of days spent in Ireland and its impact on income tax liability, including the application of split-year treatment for Barry. The analysis de...Read More

Ireland taxation system

TABLE OF CONTENTS
Case of Barry and Stephen Murphy.................................................................................................3
Tax residency position of Barry..................................................................................................3
Impact of residency status on the income tax of Barry...............................................................3
Tax compliance for the Irish rental source of income.................................................................5
Allowed expenses from gross rent...............................................................................................5
Capital expenditure on plant........................................................................................................7
Commencement rules..................................................................................................................7
Effect of partnership on the income tax.......................................................................................9
Registration under VAT..............................................................................................................9
Vat treatment for sale to business and private customers in the EU.........................................10
Two-thirds rule, Multi supply, Composite supply.....................................................................11
References......................................................................................................................................11

CASE OF BARRY AND STEPHEN MURPHY
Tax residency position of Barry
As per the income tax of Ireland, a person is considered as a resident if the person spends at least
183 days in Ireland starting from 1st January to 31st December or if the person devotes at least
280 days in Ireland within a period of two continues tax year, then in the second year the person
is regarded as the residence of Ireland (Kennedy et al. 2016).
In the present study, it has been given that Barry is the Irish domiciled. However, due to the
employment, he moved to Canada from 1st July 2016. In the year 2015, the Barry live in Ireland
only, therefore for the year 2015; he is regarded as the residence of Ireland. In the year 2016, he
lived in Ireland for less than 183 days, but by considering the two consecutive years that is 2015
and 2016, Barry lived more than 240 days in Ireland, therefore in the second year that is 2016,
Barry is regarded as the residence of Ireland. For the year 2017, 2018 and 2019, Barry is not
considered as the residence of Ireland because the tax residency condition is not fulfilled.
Impact of residency status on the income tax of Barry
The tax liability of the person is affected by the residency status. There are separate rules and
regulations are described for the resident and the non-resident person of Ireland. A person who is
the resident of Ireland, then all the income whether it is earned in Ireland and out of Ireland, is
taxable under the income tax of Ireland (Yang, Cahill, and Hood, 2017). However if the person is
shifting to another country, and in the year of departure if he/she is the resident of Ireland and in
the next year if they have the status of the non-resident of Ireland, then the person can apply the
split-year treatment in the year when they move to abroad (Savage, 2017). In the split-year

treatment, all the income up to the date of departure is taken into account for the income tax
purpose of Ireland. The income which is earned after the date of departure is not considered for
the taxation in Ireland (Kennedy & et al. 2015). Further, in case of the non-resident, the person is
not required to pay the income which is earned outside Ireland, however, if the person is Irish
domicile than the source income is taxable in Ireland only. Source income includes the rental
income on the property (Riedel, 2018).
In the present case, Barry is the resident for the year 2015, and 2016, therefore, all the income
which is earned in all the year is taxable as per the income tax provision of Ireland, even if in the
year 2016 the income is generated from the outside Ireland. However, the split-year treatment
can be applied in the year of departure, and the income up to the date of departure is considered
for the income tax in Ireland. Further, in the year 2017, 2018 and 2019, the Barry is the non-
resident of Ireland. Therefore the money which is earned outside Ireland is taxable in that
country only, not in Ireland. However, the Barry rented the property in Ireland and Barry is also
the domicile person of Ireland. Therefore the income earned from letting out of the property is
taxable in Ireland for the year 2017, 2018 and 2019.
However many countries entered into the double tax agreement with the other countries. If a
person has to pay tax in more than one country, then the person can claim relief under the double
taxation agreement (Zucman, 2014). The tax paid by the person in one country is allowed for the
tax, which is payable in the other country (Beuselinck, Deloof, and Vanstraelen, 2015). The
Barry can also get the relief of double taxation agreement in the year2017, 2018 and 2019 (Lang,
2014).

Tax compliance for the Irish rental source of income
If the person receives the rental income from letting out the property or by another source, then it
is taxable. The assessee is required to pay 20% or 40% tax on the net rental income, based on the
personal situation (Pomerleau, 2014). If the access renting out the entire property and it is
expected that the rental income more than € 5000 per year, then the revenue will be considered
that person to be chargeable person and it is required by the person to get the registration under
the income tax from the first date the property was rented by filling the form TR1. Further form
11 is required to file for the tax return in each tax year. however if the expected income is less
than €5000, then the requirement of TR 1 will not arise, but still, a person has to pay tax on the
rental income in form 12 in each tax year. By the end of 31st October of each year, the person
must have to file tax return along with the payment of tax (Balakrishnan, Blouin, and Guay,
2018).
Moreover, the local property tax is payable on the residential property, and the 10% LPT
surcharge is applicable to the income tax (Feld & et al. 2016). The surcharge is levy by the
government if the LPT return is not filed, payment of LPT liabilities was due, and the payment
was not made according to the payment arrangement. If the person does not pay the LPT then
8% interest is chargeable on the person and moreover, he/she cannot sell or transfer the property
unless the LPT paid.
Allowed expenses from gross rent
The Irish income tax provides some deduction, which can be claimed by the person at the time of
computing the taxable income (Breen, & et al. 2016). There are some general expenses provided
in the income tax act such as rent, rate and insurance, advertising expenses, legal expenses,
repair and maintenance cost, and many other expenses, which are allowed for deduction from the

rental income of the assessee (Faulkender, and Smith, 2016). However for claiming the
deduction three conditions must be satisfied by the assets, which are the expenses must be
incurred by the owner of the property, it must be in revenue nature, and the expense must be
related to the period in which the landlord receives the rental income.
Along with this for claiming the deduction of the interest paid on the borrowed capital, some
conditions must be satisfied, which are given below-
 The person can be claim only up to the 85% of the amount of interest (from the year
2018, in 2017 it was 80%, and in 2016 it was 75%), if the loan is applied to acquire,
improve or repair a rental property, however for the non-residential, this condition is not
applicable. Further 100% deduction is allowed in case of the office and warehouse.
 The landlord must have to comply with the registration and payment requirement by the
private residential tenancies board for the rented property.
 The actual interest related to the actual cost of acquisition, repair and renovation is
allowable.
In the given study Barry purchased the house in 2011 and borrowed the loan for the acquisition
of the house. In the year 2016, when Barry moved to Canada then rented this property. The
interest accrued after the renting period is allowed for the deduction (Know Your Tax.ie, 2018).
However, the Barry can claim only up to the 75%, 80% and 85% for 2016, 2017 and 2018 and
2019 respectively of the interest incurred for the borrowed capital as the house property is not the
non-residential property.

Capital expenditure on plant
Capital expenses in the nature of wear and tear expenses incurred for the plant are allowed for
the deduction if it is wholly and exclusively incurred for the purpose of trade. However, the
difference between capital expenditure and the expenditure incurred is not definite. In the case
of, O’Grady v Bullcroft Main Collieries Ltd. [1932] 17 TC 93, the expenditure was incurred for
the purchase of the new chimney for replacing the old chimney (Ken, 2007). The new chimney
was bigger and better. The chimney was the part of the whole complex, and it is regarded as the
expenditure on the building of an asset fully. The court was held that it is capital in nature.
Further in case of IRC v Scottish & Newcastle Breweries [1982], the definition of the plant is
not only considered on the basis of nature of trade, but the method of operation of the taxpayer
with relation to the particular business is also taken into account.
However, in the case of Samuel Jones & Co. (Devondale) Ltd. v CIR [1951] 32 TC 513, the
replacement of the chimney is not regarded as the capital expenditure. It is considered as the
repair. The court held that the Chimney itself was not regarded as the separable asset. Further in
the case of Tucker v Granada Motorway Ltd. The payment made for the lease was considered as
the capital in nature as the lease is the identifiable asset.
Commencement rules
On the commencement of the business, separate rules are defined under the income tax act of
Ireland, which are described below-
 The first year of commencement- in the first year, the tax is a levy on the income from
the date of commencement of the business to the next 31st December (Conway, and
Kavanagh, 2015).

 The second year of commencement- the second period assessment based on the latest 12
month accounting period, if more than one accounting period is ending in the second
year. Further, if the accounting period is more than 12 month, then the assessment is
based on the 12 months to which the accounts are created. Moreover, in the second year,
the 12 month accounting period ends, and it is the single period of accounting then the
assessment is based on profits of the 12 month accounting period.
 The third year of commencement- the assessment is based on the latest 12-month profit
of the business. however if the actual profit of the second year is less than the assessable
profit of the second year, then in the third year the excess amount can be deducted from
profit (Griffin, 2015).
In the present study, Stephen started a business from 1st November 2017 accounts closed in 31st
October of each year. Projected profit
Year ended 31/10/2018= €50000
Year ended 31/10/2019= €30000
In the first year of commencement that is 2017, the assessment is based on the profit earned from
1st November 2017 to 31st December 2017, which is 50000/12*2= €8333 and in the second year
the assessment is based on €50000. Further, in the third year profit, the assessment is based on
the 12 month accounting period that is € 30000.
Effect of partnership on the income tax
In the present study, Stephen entered into the partnership with his friend named as Jennifer. The
main purpose of the partnership is only for the investment by the Jennifer in the business and all
the effective control over the business remained with Stephen only. Jennifer has no control over

the day to day operation. Therefore for the income tax purpose, this partnership is not considered
as a legal partnership.
In the case of Inspector of Taxes v Cafolla & Co [1949] IR 210, Cafolla entered into the
partnership firm with his son so that the overall benefit of the tax liability can be reduced by
availing the benefit from the tax-free allowance of children (Gavin and Muireann, 2018). In this
case, the court held that the income of the partnership is regarded as the income of Caffola. The
existence of the valid partnership deed is essential for the partnership, but the mutual agency did
not exist as the only one partner entered into the contract on behalf of the firm.
On the basis of the above case law, the partnership between Stephen and Jennifer is not treated as
a partnership for the income tax purpose.
Registration under VAT
Registration under the VAT depends on the threshold limit which is described under the Act.
After exceeding this limit or it is expected that within 12 months the limit exceeded, then it is
compulsory to obtain the registration under the VAT (Revenue, 2018). For the manufacturer and
the supply of goods, the limit is € 75000. However, for determining the threshold limit, the
payment of vat which was incurred on the purchase of goods for resale is deducted from the
actual turnover.
In the given study, not any information regarding the turnover is given, therefore when the
Stephen expect that the turnover crosses the prescribed limit of the VAT, then he is required to
get registration under the Act.

Vat treatment for sale to business and private customers in the EU
If the supply is made to the business customer in the EU, then the person must obtain the VAT
registration number of the business customer and make sure about its validity. In the invoice,
VAT number must be inserted, and for the transaction, the record should be preserved. Further, a
person is required to issue the invoice to a business customer and indicates that the reverse
charge will be applicable. If the business customer is the new customer and VAT number is not
available, then the letter should be obtained from the tax authorities (Gavin and Muireann, 2018).
For the purpose of the VAT information exchange system, it is to be established that the supply
is non-chargeable to tax in the other member state. If the supply is taxable then on the vat
information exchange return, it must be included.
If the supply is made to the private customers of the EU, then VAT on the sales is charged at the
rate applicable on the member state where the customer is based. For instance, if the customers
are based on France then at the rate 20% VAT charged, and if the customer is based on
Germany, then 19% VAT rate will be applicable.
Two-thirds rule, Multi supply, Composite supply
Two third rule means, where the VAT on the cost of good which is used in the provision of
service is higher than by the two third of the total VAT exclusive amount charged on the
customer then the whole amount is taxable at the rate of goods, however if it does not more than
by the two third then full amount is taxable as a supply of service, it is regarded as a two third
rule.
Multi Supply means each part of the supply is physically and economically separated from the
other parts of the supply (Breen et al. 2016). In this, each part is capable of selling

independently, but it is sold together with one consideration. For the purpose of charging VAT,
consideration for multiple supplies must be allocated
Composite supply means the supplementary element is sold together with the principal element.
The supplementary element is not capable of selling their own (Conway and Kavanagh, A.,
2015). The VAT is charged on the whole amount of consideration at the rate applying to the
principal element.

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