Tax Residency, Income Tax and Capital Allowances in Ireland

Position of Tax Residency

Position of Tax Residency

On all profit, gains or properties income tax is applicable which is also stated under section 12 of the Tax Consolidation Act 1997. The fact that whether the person has a permanent home or is a resident of Ireland is considered when determining the tax liability. Whether a taxpayer is a resident or not can be known by the guidelines laid in the Section 819 of the Consolidation Act 1997 (Callan et al. 2014). These provisions are:

• For more than 183 days in a year, the taxpayer must have resided in Ireland;
• Together in the last and current year, the taxpayer must have resided in Ireland for more than 280 days, including a minimum stay of 30 days in every year.

Apart from this, it is also stated under section 820 of the Tax Consolidation Act 1997, that a person will be considered as an ordinary resident if he/ she resides in the country for 3 successive years. Once the individual becomes the non-resident of Ireland for 3 successive years, then the individual will no longer considered as an ordinarily resident.

In the current case, on 1^st July 2015, Denis left Ireland. The below provided calculation shows the number of days stayed by Denis in Ireland. It is observed that in 2015, he has stayed for 181 days whereas he has stayed for the entire year in 2015. Thus, it clarifies that Denis has fulfilled the secondary residency test by staying more than 280 days together with the previous year and hence Denis will be considered as a resident of Ireland for 2015. In the year 2016 and 2017, Denis has not satisfied any provisions and thus he is considered as non-resident. Nevertheless, Denis will be sustained to be regarded as an ordinary resident.

If, for the purpose of taxation, an individual is a non-resident then he/ she shall pay tax on such income that has occurred in Ireland. If any duties of the foreign employment are undertaken in Ireland, then such income will also be subject to payment of taxation (Dukelow 2015).

An individual will be liable to pay tax on income earned worldwide except the following, if that person is an ordinarily resident.

• Incomes which are earned from such trade or profession that are not undertaken in Ireland;
• Income earned from employment or offices are non-taxable in Ireland whose duties are carried out outside the country;
• Income of foreign nature below €3,810 is not taxable.

Thus as it was observed in the current case that Denis, in 2015 was considered as a resident and hence all his income will be subject to taxation. However, in the year 2016 and 2017, the above stated rules are applicable to Denis as he is a non-resident but an ordinarily resident of Ireland.

Any income earned as a rent of residential or commercial property is taxable. Hence, the owner of such property earning rent is liable to pay tax annually.

The Impact of Tax Residency has for Income Tax Purposes

While Denis left for Canada, he has a residential property that was rented out. Therefore, in order to become a landlord for the first time, there are few essential steps which Denis must bear in his mind.

• After completion of the TR1 Form, the property must be registered with the revenue as landlord.
• It is also very crucial to maintain every records properly.

If the landlord is non-resident, 20% of the amount due shall be deducted by the tenant which is required to be remitted to the revenue department. At the end of the year, the tenant on behalf of the landlord is required to complete Form R185 (Markle 2016).

Few expenditures are claimed against the income earned as rent. Those are stated below:

• Expenses of nature such as insurance, repairs, maintenance, property management expenses and few other expenses are permitted as deductible.
• Expenses paid in the form of rates to the local authority.
• Such expenses are also permitted as deductible which are expenses relating to interest on the amount of money borrowed for the purpose of improvement, repair or replacement of property.
• Annually, the capital allowance on the incurred cost at a rate of 12.5% can be claimed as deduction.

Interest related to mortgage paid between the time of renting out for the first time and the purchase of the property is not allowed to be claimed as deductible. Moreover, it must be kept in mind that only 75% of the total interest paid can be permitted as deductible. Nevertheless, 80% of the mortgage interest that is paid in 2017 is allowed as deduction (Hanley 2015).

Expenses on Plant may qualify for Capital Allowances

Fixed Assets depreciation are not subject to deduction for taxation purpose in Ireland. Thus at the time of computing taxable profits, fixed assets depreciations cannot be appealed as deduction.

Allowances relating to wear and tear at a rate of 12.5% is offered for expenses on machinery and plant that are used in the business that are mentioned under section 284 of the Tax Consolidation Act 1997. Many court cases have touched the subject of whether the expenses relating to plant should be allowed as capital allowances. Below are the instances of two such cases each (Collins 2014).

 Cases where taxpayers were allowed to obtain capital allowances

A portable portion was utilised to fix in the ceiling and on the floor of the office in this case. By the ordinary maintenance staffs, the relocation of the portion was carried out and that was fit to be utilised in other buildings. It was held by the court that it can be allowed as capital allowances as the portion was of a plant.

A swimming pool was being developed by a caravan part operator in this case which was also declared as safe for the use of visitors. As it was utilised for business or trade purposes, thus the swimming pool was considered as a plant by the court. Hence, the expenses incurred by the caravan owner for constructing the pool was permitted to claim as allowance of capital nature (Hardiman and MacCarthaigh 2017).

The tax compliance implications for having an Irish rental source of income

Cases where taxpayers were rejected to obtain capital allowances

An artificial football pitch not being a plant, thus, expenses related to construction of such pitch was not allowed as allowable capital allowances by the court. The taxpayer for the purpose of windows, stone floors, decorating and painting was not allowed to claim deduction for capital allowances in this case. As these are the portions of a building and hence it cannot be claimed as capital allowances was stated by the court.

At the beginning of any profession or trade, at its basis of assessment, there are several rules that are applicable to it as provided by the Income Tax Commencement Rule 1998/99. Special arrangements that are applicable for determination of profits that must be charged to tax is stated in case of Case I and Case II profits. Section 65 and Section 66 of the Tax Consolidation Act 1997 governs such rules (Egger et al. 2015).

The assessment for taxation purpose is carried out based on profits earned from the beginning of business until 31^st December, in the year of commencement.

On the number of accounting period that ended during the year, the assessment depends in the 2^nd year. Assessment also depends on the duration of the assessment period apart from this. The taxpayer will be assessable for profits of the later of the date of accounting if in excess of one accounting period ends in the 2^nd year. The computation of taxable profits will be on the basis of profit till the amount to which accounts are being made if there exist only one accounting period that ended during the 2^nd assessment year which is more than 12 months.

In the 3^rd year, based on 12 month profit ending in the period the assessment is conducted which is provided under section 65 of the Tax Consolidation Act 1997.

It is planned by Adrian to commence business on 01-11-17 and to close account on 31^st October each year in this case. Therefore the profits with respect to the period of 12 months are:

Year ended 31/10/2018 = €50000.

Year ended 31/10/2019 = €30000

First tax year ending 31/12/17

Assessable profit= (50000/12X2) = €8333

Second tax year 31/12/2018

Assessable profit = (50000/12*10) + (30000/12*2) = €46667.

Third tax Year 31/12/2019

Assessable Profit = (30000/12*10) = €25000.

Partnership is defined as a relationship among two person for undertaking business for profit motives under section 1(2) of the Partnership Act 1890. Taxation for business purpose are mentioned under section 1007 to 1013 of the TCA 1997. It can be observed in case of McCarthaigh v Daly [1985] IR 73 and Inspector of Taxes v Cafolla & Co [1949] IR 210 that for considering a business as a partnership, the same must be formed as partnership only. Hence, as partnership is only proposed and not formed, thus it cannot be granted as partnership for taxation purpose in this case (Bird et al. 2015).

Allowable expenses that can be deducted from Gross Rent

A tax known as Value Added Tax is applicable as well as payable subject to the below stated transactions as stated under section 3 of the Value Added Tax Consolidation Act 2010.

• If goods are supplied by an accountable person in exchange of any consideration;
• Goods imported in States;
• If any service is rendered by a taxable person in exchange of any consideration;
• New means of transport and Intra-Community acquisition of goods.

In the current scenario, Adrian is planning a business related to manufacturing of specialist waste disposal bins. Here VAT will be applied as here supply and manufacture of goods takes place (O'faircheallaigh 2017). Hence, as Adrian is an accountable person, thus with the initialization of the business, it is advisable to him to register for VAT.

The VAT rates as stated under section 46 of the VATCA 2010 are as follows:

• 0% or Zero Rate;
• 8% which is the Agricultural Rate;
• For certain good and services the rate is 13.5% or the Low Rate;
• 23% or the Standard Rate.

If the sale of goods occurs within the state then these VAT rates will be applicable. Although in case if the goods are imported from other countries or sold to other countries respectively then certain special rule will be applicable. If the customer provides a valid VAT number, then VAT is not charged in case if the goods are sold to business within European Union. Nevertheless, VAT shall be charged as per normal rates if the customer does not provide suitable VAT number (Buckley and Doyle 2016).

It is essential for the business to register for VAT in that particular country in case if goods are sold to the clients of foreign country. VAT shall be charged by the business after registration at the rate that applies to that nation. If the sales are below VAT limits that are set by the country then that business is not required to register for VAT. In this case, German and Italy are the two European Countries that are selected having VAT limits €35000 and €100000 for Italy and German respectively (Cobham and Loretz 2014).

Two third Rule

The two third rule is such that the entire transaction will be treated as a sale of goods or services if the value of such good is more than two-third of its total price in case if price is provided for the combination of goods and services. This is also stated under section 41 of the VATCA 2010 (Hasegawa and Kiyota 2015).

Multi Supply

Items that are sold together at a single price can be supplied independently under multi supply. Among the various items for charging VAT, the amount received from such supply must be apportioned (Barrett et al. 2015).

Composite Supply

The process where more than two or at least two goods or services are offered in a combination of one another is called composite supply. One element in such supply is called ancillary element whereas the other one is called predominant element. In case of composite supply, the VAT rate of the principle element is charged (Schmidtke 2016).

Expenses on Plant may qualify for Capital Allowances

In order to clarify all those doubt that have arisen during the last meeting these above advices are provided and it is hoped that it will be sufficient to serve the need. Still if there exist any further doubt or query, one can ask for any further assistance at any point of time.

References

Barrett, A., Bergin, A., FitzGerald, J., Lambert, D., McCoy, D., Morgenroth, E., Siedschlag, I. and Studnicka, Z., 2015. Scoping the possible economic implications of Brexit on Ireland. Economic and Social Research Institute.

Bird, A., Edwards, A. and Shevlin, T.J., 2015. Does the US System of Taxation on Multinationals Advantage Foreign Acquirers?.

Buckley, P. and Doyle, E., 2016. Gamification and student motivation. Interactive Learning Environments, 24(6), pp.1162-1175.

Callan, T., Nolan, B., Keane, C., Savage, M. and Walsh, J.R., 2014. Crisis, response and distributional impact: The case of Ireland. IZA Journal of European Labor Studies, 3(1), p.9.

Cobham, A. and Loretz, S., 2014. International distribution of the corporate tax base: Implications of different apportionment factors under unitary taxation.

Collins, M., 2014. Total Tax Contributions of Households in Ireland.

Dukelow, F., 2015. ‘Pushing against an open door’: Reinforcing the neo-liberal policy paradigm in Ireland and the impact of EU intrusion. Comparative European Politics, 13(1), pp.93-111.

Egger, P., Merlo, V., Ruf, M. and Wamser, G., 2015. Consequences of the New UK Tax Exemption System: Evidence from Microâ€Âlevel Data. The Economic Journal, 125(589), pp.1764-1789.

Hanley, D., 2015. Austerity Ireland: The Failure of Irish Capitalism.

Hardiman, N. and MacCarthaigh, M., 2017. State retrenchment and administrative reform in Ireland: Probing comparative policy paradigms. Journal of Comparative Policy Analysis: Research and Practice, 19(2), pp.100-118.

Hasegawa, M. and Kiyota, K., 2015. The effect of moving to a territorial tax system on profit repatriation: Evidence from japan.

Markle, K., 2016. A Comparison of the Taxâ€ÂMotivated Income Shifting of Multinationals in Territorial and Worldwide Countries. Contemporary Accounting Research, 33(1), pp.7-43.

O'faircheallaigh, C., 2017. Mining and development: foreign-financed mines in Australia, Ireland, Papua New Guinea and Zambia. Routledge.

Schmidtke, H., 2016. The differentiated politicisation of European tax governance. West European Politics, 39(1), pp.64-83.