BASIL HOLDING COMPANY
You are a tax adviser working for Donnelly Tax Partners. You have just had a meeting with Billy Basil the CEO of one of the firm's largest clients, theBasil Group and he is looking for taxation advice on a number of issues.Billy Basil began the meeting by summarising the background of the group as follows:
Billy and his wife Michelle own equal shares in BASIL HOLDING COMPANY ("BHC"). They acquired 100 €1 shares each in 2004. The holding company in turn owns the following companies:
100% of DILL Limited, a company in the manufacturing sector;
85% of THYME Limited, a logistics and distribution company;
75% of TARRAGON Limited, a company in the retail sector;
25% of CHILE Limited, a US manufacturing company.
Billy is considering some restructuring and would like your advice in this regard.
A UK investment company has offered BHC €600,000 to acquire its shares in THYME. €600,000 equates to the value of the company's net assets. Billy has provided you with THYME draft summarised statement of Financial Position (see Appendix One). BHC acquired its shareholding in THYME in 2005 for €267,000. In 2010 DILL transferred a storage warehouse to THYME. The warehouse was worth €160,000 at the time of the transfer and is currently worth €200,000. Billy would like to know the taxation implications of the sale of THYME should it take place on 31 December 2015.
DILL is undergoing an expansion and requires an additional storage unit for its raw materials. TARRAGON currently has some spare capacity in one of its units. Billy is interested in the VAT implications of transferring this unit from TARRAGON to DILL. TARRAGON acquired this unit directly from a property developer in October 2009 for € 794,500 (inclusive of VAT) and has occupied the property up until 30 November 2015. TARRAGON recovered 100% of the VAT on acquisition. Alternatively he would like to know the taxation implications if TARRAGON were to lease the unit to DILL. You can assume that both transactions would take place on 31 December 2015.
DILL has just been selected for Revenue Audit for all tax heads for 2014. Billy is concerned that the financial accountant for DILL is drinking on the job. He has identified some issues which he would like you to address:
(i) The financial accountant paid the three senior managers in DILL their annual bonus of €20,000 each on 15 November 2014. The accountant did not deduct any payroll taxes from these payments. The senior managers are top rate tax payers.
(ii) DILL supplies and installs storage units for its clients. Regardless of the cost of the materials and the cost of the labour, VAT at 13.5% is charged on all invoices.
(iii) An employee of DILL was seconded to work in Spain for 4 months in 2014 and the foreign earnings deduction was applied to her salary as a result.
(iv) DILL purchased a software package from a UK company. The UK Company did not charge VAT on the invoice and as a result the financial accountant in DILL ignored the invoice.
APPENDIX ONE
DRAFT Summarised Statement of Financial Position for THYME for 31 October 2015
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Non-Current Assets
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Land
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310,000
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Buildings
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200,000
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Other Non-Current Assets
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80,000
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Current Assets
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430,000
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TOTAL ASSETS
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1,020,000
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Long Term Loan
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-250,000
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Current Liabilities
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-170,000
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NET ASSETS
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600,000
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REQUIREMENT:
(i) Discuss the all the taxation implications of BHC selling its shares in THYME.
(ii) Identify and discuss the VAT implications of transferring the unit free of charge from TARRAGON to DILLor alternatively leasing the unit from TARRAGON to DILL.
(iii) State your strategy for minimising penalties in a Revenue audit and explain in general terms the requirements that must be met and the benefits of this strategy.
(iv) Explain the tax underpayments (if any) and penalties which you would expect to arise in respect of issues (i) to (iv) above.
Professional presentation of assignment referenced in accordance with the Harvard Referencing System.