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Professional, Practical, Proven
AcademyAdvanced Taxation
Lecture 5Badges of TradeIncome Tax including Capital Allowances
Badges of Trade
It is important to establish what constitutes a Trade
Commission set up which identified what are the essential features of trading What are the Badges of Trade? – p 108
What are the Badges of Trade? – 6 Tests ‐ p 108
Badges of Trade ‐Tests
1. The subject Matter of realisation 2.Length of period of ownership3.Frequency of number of transactions 4.Supplementary work on property realised5.Circumstances of the trade 6.Motive
Badges of Trade ‐Question John Burke is a vintage car enthusiast. He has always kept up to
three such vehicles at any one time and used them occasionally to take part in vintage car rallies. John retired in February 2019 and decided to become more involved with his hobby. John used some of his retirement package to purchase four vintage cars for €9,500and spent €22,000 overhauling them. John sold two of the cars in October 2019 for €49,000. John used some of the proceeds of the sale to purchase three more cars, which he hopes to overhaul and sell in the next few months.
Requirement: State, giving reasons whether John should be regarded as
carrying on a trade in respect of his vintage car activities.
Employed v Self Employed
What are the tests to determine whether a person is an Employee or Self Employed? p 66
Employed v Self Employed
In most cases it will be clear whether an individual is employed or self‐employed. However, it may not always be so obvious, which in turn can lead to misconceptions in relation to the employment status of individuals.
6
Sample Question‐ Income Tax
Income Tax‐ Self employed Or Not
What are the factors that would be considered when trying to determine whether or not an employment existed ?
Employed‐v‐Self Employed‐question
What are the differences from an income tax and PRSI perspective, of being treated as an employee compared to being treated asself‐employed?
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Schedule D CASE I/IIChapter 6
Schedule D C1/II income
Schedule CASE I/II – trade /profession
What is Basis of Assessment for Case I/II for sole trader?a) Ongoing business – 12 months ended in yearb) Commencement rules – first 3 yearsc) Cessation rules – final 2 yearsd) Short lived business – 3 tax yearse) Change of Accounting date – and as a result financial
statements accounts can be more or less than 12 months
Question ?
Toby had started his own GP practice on the 1st May 2017 and his tax adjusted profits have been as follows:‐• Year ended 30th April 2018 €90,000• Year ended 30th April 2019 €75,000
Compute Brian’s Schedule D Case I for all years to 2019inclusive, taking account of all statutory claims.
Q: Case I Expenses to allow
Expenses must past a fundamental test before being allowed for CASE I / II Schedule D
Which of these describes that test?(a)Wholly and exclusively(b)Wholly and necessarily(c) Wholly, exclusively and necessarily
Tax Adjusted Profits• Add back non allowable CASE I Schedule D EXPENSES
– Capital– Not for trade– Specifically disallowed
• Watch leases/HP/Motor Leases
• ALSO addback PRIVATE Expenses for Trader
• NOTE: May allow Pre‐Trading Expenses – p116
• DEDUCT NON CASE I INCOME –– CASE III,IV,V , Sch F, PROFIT on disposal of assets
Q: Addback
Capital AllowancesChapter 7
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Capital Allowancespage 132
• You will recall that expenses of a capital nature are not deductible for income tax purposes.
• One such capital expense not deductible is depreciation.– We always addback
• However, tax legislation provides for a specific deduction for certain types of capital expenditure provided certain conditions are met.
• Tax depreciation is such a deduction and is called Capital Allowances/ Wear & Tear
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Availability of Allowances
The most common form of capital allowance is the annual wear and tear allowance granted for :
– Motor vehicles, (restrictions apply)– Vans– Plant and machinery,– fixtures and fittings etc.,which are used for the purpose of a trade.
Also Accelerated Capital Allowances due for minimum spending on new energy efficient equipment ‐ page 208
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Terms to know
Some TERMS re Capital allowances• T.W.D.V. (Tax Written Down Value) .• Net of VAT – IF VAT registered calculate using amount NET of Vat (except Cars)
• Balancing Allowance – Additional Capital allowance due if sale price less than TWDV
• Balancing Charge – Claw back Capital allowance if sale price greater than TWDV
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Conditions to claim
Having established if items qualify as a Plant or Machinery the following conditions then need to be satisfied:1) The qualifying asset must be owned by the company2) The qualifying asset must be IN USE wholly and exclusively
for the purpose of the trade3) The qualifying asset must be in use at the end of the
relevant accounting period.
If the company satisfies the above they will be entitled to “Wear and Tear” Allowances on the asset
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Wear and Tear Allowance
• The annual write off for plant and machinery bought on/after 4 December 2002 is12.5%
• The allowance is computed on a straight line basis (i.e. same amount each year – if 12 months)
• NB:‐ Only apportion if AP less than 12 months ‐ morelater
• Ascertain COST less any Grants and VAT [if entitled to VAT input]
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EXAMPLE 1
• Manufacturing Company , AP year ended 31 December.
• Machine purchased on 28 January 2017
• Cost €39,360 VAT inclusive 23%
(a) What is the VAT exclusive cost for W&T?(b) What is W&T and TWDV for each of first 3 years?
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EXAMPLE 1 continued
€Cost of machine 28/1/17 32,000 (a)Wear and Tear 1 at 12.5% 31/12/17 (4,000) (b)T.W.D.V at end year 31/12/17 28,000Wear and Tear 2 at 12.5% 31/12/18 (4,000) (b)T.W.D.V at end year 31/12/18 24,000Wear and Tear 3 at 12.5% 31/12/19 (4,000) (b)T.W.D.V at end year 31/12/19 20,000
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Motor Vehicles
• The rate of wear and tear for motor vehicles is also 12.5% ona straight line basis from 4 December 2002.
• However, like motor leases that we looked at in lecture 9 the cost available for capital allowance purposes is restricted in the case of motor vehicles – depending on Co2 emissions
• Reminder: The following rates apply (same as those above for lease restriction for CARS):
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Motor Vehicles
As discussed in previous lecture ( Leases) allowances for cars are based on their relevant carbon dioxide (CO2) emissions level
Categories A/B/C ‐ up to 155 g/km emissions ‐ capital allowance is €24,000 regardless of the cost of the vehicle.
Categories D/E ‐ 156 ‐ 190 g/km emissions ‐ capital allowance is the lower of 50% of €24,000 or the cost of the vehicle.
Categories F/G ‐ above 190 g/km emissions ‐ no capital allowances.
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Motor Vehicles
CAT A/B/C car based on €24,000 –irrespective of cost If bought for €30,000 will be treated as costing €24,000 for
capital allowances purposes. If bought for €20,000 will also be treated as costing €24,000
CAT D/E car– cost is based on ½ cost of car to max of 12,000 (i.e. max 24,000 X ½). ‐ If Cost is > 24,000 then W&T is based on cost of 12,000 ‐ If Cost is < 24,000 then W&T is based on ½ cost of car.
CAT F/G : NO W&T due
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Example ‐Category A, B or C cars
• When Car is Category A,B or C – always use€24,000 ‐no matter what the actual cost‐Electric cars ?
• Car cost €20,000 then wear and tear is:€24,000 X 12.5% = €3,000
• If car cost €27,000 the same wear and tear is due €24,000 X 12.5% = €3,000
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EXAMPLES ‐Category D or E cars
• When car is D/E : Get ½ cost of car – max €24,000 X ½= €12,000( x 12.5% )
• Car cost €20,000 then wear and tear is:• €20,000 X ½ = €10,000 (X 12.5% = €1,250 W&T)
• If car cost €30,000 then wear and tear is :€24,000 (max) X ½ = €12,000 (X 12.5% = €1,500)
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Balancing Adjustment: arises
The following events trigger the computation of aBalancing Adjustment: Charge/Allowance
1. The sale or transfer of ownership of the asset2. The asset ceases to be permanently used for the
purpose of the trade3. There is a permanent cessation of the trade
No balancing charge will arise on the disposal of plant and machinery where the disposal proceeds are less than€2,000.
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Balancing Allowances/ Charges
• When an asset, which has qualified for capital allowances, is sold its TWDV* will not usually equal the sale price
• [*TDWV is the portion of cost which has not yet been relieved by capital allowances].
• If the sales price exceeds the TWDV, the excess is assessed as a Balancing Charge
• If the sale price is less than the TWDV, a further capital allowance known as a Balancing Allowance is granted
29
Dealing withBalance Adjustments
• If Balancing Allowances then treat as additional capital allowances
• If Balancing Charges then treat as trading receipts (i.e. clawback of allowances previously claimed).
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Follow on –Example slide 22
Cost of machine 32,000Wear and Tear 1 at 12.5% (4,000)T.W.D.V at end year 1 28,000Wear and Tear 2 at 12.5% (4,000)T.W.D.V at end year 2 24,000Wear and Tear 3 at 12.5% (4,000)T.W.D.V at end year 3 20,000If Sale proceeds 25,000Balancing Charge 5,000
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DisclaimerCare has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate.To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication.Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation of the information contained in these lectures or in its use.