The Minister for Finance Michael Noonan T.D. presented his 2016 Budget yesterday which outlined a wide range of changes to the tax system with particular emphasis on personal taxation, initiatives to begin equalising the tax treatment of the self-employed and employees as well as steps to support businesses in Ireland.

The key features of yesterday’s Budget are outlined below.

PERSONAL TAX

Universal Social Charge

Comprehensive changes were introduced to the Universal Social Charge for 2016 which are aimed at reducing the tax burden on low and middle income earners.

The entry threshold for Universal Social Charge (“USC”) will be increased from €12,012 to €13,000.

Otherwise, rates of USC will be reduced as follows:

• Income up to €12,012 – Rates reduced from 1.5% to 1%.

• Income from €12,013 to €18,668 – Rates reduced from 3.5% rate to 3%.

• Income between €18,669 – 70,044 – Rates reduced from 7% to 5.5%

• Income between €70,045 – €100,000 – 8% (no change)

• PAYE Income in excess of €100,000 – 8% (no change)

• Self-employed income in excess of €100,000 – 11% (no change)

The top rate USC exemption will be retained for all medical card holders and individuals aged seventy years and older providing their total income does not exceed €60,000.

 Income Tax

There have been no changes to the income tax rates and bands.

 PRSI (Pay Related Social Insurance) 

Budget 2016 introduced a tapered PRSI tax credit for employees up to €624 per annum.

The entry point to the higher rate of employers’ PRSI of 10.75% will be increased to €376 per week which will be a welcome introduction by all employers.

The reason for this tapered PRSI credit being introduced is to ensure low income earners benefit from the increase to the minimum wage which will take effect in January 2016.

The credit applies to individuals earning between €18,304 and €22,048 per annum and is be subject to a maximum of €12 per week.

Earned Income Tax Credit

In an attempt to equalise the tax treatment of the self employed with employees paid through the PAYE system, the government will be introducing an Earned Income Tax Credit of €550 per annum in 2016.

This new tax credit will be available to individuals who are not eligible for the PAYE Tax Credit including those earning self employed trading or professional income (subject to Income Tax under Cases I and II Schedule D), those in receipt of Case III Schedule D income as well as to business owners who, up to now, didn’t qualify for a PAYE credit on their salary.

 Pensions

There was no reference made to tax relief on pensions in this Budget.

The “additional” pension levy of 0.15% will expire at the end of 2015.

The original 0.6% pension levy ended in 2014.

 Home Carer’s Tax Credit

The Home Carer’s Tax credit increased by €190 to €1,000 per annum.

1. An income tax credit worth up to €5,000 per annum for five years was introduced for family farming partnerships to facilitate the transfer of family farms to the next generation.
2. There was an extension of general and young farmers’ stock relief for a further three years.
3. Profits or gains from the occupation of woodlands are being removed from the High Earners’ Restriction.

Apart from the Earned Income Tax Credit, Budget 2016 announced a number of new tax measures aimed at encouraging and supporting entrepreneurs and small business owners including:

• The introduction of a Knowledge Development Box to provide for a 6.25% corporation tax rate on profits arising to certain IP assets which are the result of qualifying R&D activity that is carried out in Ireland. The Minister stated today that the KDB would add “a further dimension to our ‘best in class’ competitive corporation tax offering, which includes the 12.5% headline rate; the R&D tax credit; and the intangible asset regime.”
• The Start-up Relief from corporation tax is being extended for new start-ups commencing to trade over the next three years.  This relief applies where the total corporation tax payable for a period does not exceed €40,000 and the amount of relief available is linked to employer’s PRSI.
• The amendments to the Enterprise and Investment Incentive Scheme (EII) announced in Budget 2015 took effect from midnight. They have been pending EU State Aid approval for the past year.  These included an increase in the annual limit companies can raise to €5 million and an increase in the lifetime cap to €15 million. Investments in the extension, management and operation of nursing homes will also qualify for the EII.
• The cap on eligible expenditure for Film Relief is being increased from €50 million to €70 million subject to State Aid approval.
• The entry point to the top rate of employer’s PRSI increases by €20 per week to €376 per month.
• Commercial Road Tax is to be simplified and reduced. The current 20 rates are being replaced with 5 rates, which will range from €92 to €900. The new rates will take effect from 1st January 2016.
• The Bank Levy has been extended to 2021 and is expected to yield circa €750 million over the period of extension.
• The scheme of capital allowances for the construction of facilities used in the maintenance, repair, and overhaul and dismantling of aircraft is being amended to comply with State Aid rules. The scheme is also being commenced with effect from Budget night.

 CAPITAL TAXES

• A 20% Capital Gains Tax rate will to apply to the disposal in whole or in part of a business up to an overall limit of €1million in chargeable gains.
• Other than the reduced rate of CGT which applies to the disposal of a business, there has been no change to the Capital Gains Tax rate of 33%.
• The Group A threshold for capital acquisition tax will be increased from €225,000 to €280,000 with effect from 14th October 2015. The Group A threshold typically applies to transfers between parents and their children. The current Class B and Class C thresholds remain unchanged and there has been no change to the CAT rate of 33%.

 Local Property Tax (LPT)

The Local Property Tax revaluation date for the Local Property Tax has been extended from 2016 to 2019. This follows recommendations in the “Review of the Local Property Tax” report which has also recommended exemptions for properties significantly affected by pyrite.

NAMA is to deliver 20,000 houses between now and 2020. 90% of these in the Dublin area and 75% of the overall total will be starter homes.

OTHER CHANGES 

1. The Home Renovation Incentive is being extended until 31 December 2016.
2. The existing €5 Stamp Duty on Debit/ATM cards is to be replaced with a 12 cent charge for ATM transactions.  This is subject to a cap of €2.50 or €5 depending on the card type.
3. The reduced 9% rate for the tourism and hospitality sector will be retained.
4. There will be no changes to the reduced VAT rate of 13.5% or the standard VAT rate of 23% in 2016.

 FINALLY

This is the first time since the Budget in April 2009 that the marginal rate for middle income earners has fallen below the 50% rate.

When faced with a large tax bill and the administrative burden of having to file Tax Returns in two jurisdictions, people always regret not getting professional taxation advice BEFORE they completed the transaction.

Over the past number of years I’ve been contacted by several Irish citizens returning home from the UK where they’ve lived and worked for a number of years.

In the majority of cases, these individuals have had difficulty selling their UK homes and, as a result, may have rented them out for a number of years until a suitable buyer was found.

Their main question they asked was “Do I have an Irish and a UK Capital Gains Tax liability?”

Up until 5^th April 2015 the UK domestic law did not impose a Capital Gains Tax liability on non residents which meant if you were Irish resident, for example, then you had no exposure to UK CGT on the sale or disposal of a UK asset.  Because the UK domestic tax law didn’t and couldn’t impose a charge to UK CGT on the disposal of the asset by a non-resident then the Double Taxation Treaty didn’t need to be consulted but the individual would have a CGT liability in his/her place of residence.  Under Section 29(2) Taxes Consolidated Acts 1997, an Irish resident individual only paid Capital Gains Tax in Ireland.

From 5^th April 2015 the UK Government amended the taxation of gains made by non-residents disposing of UK residential property.

The New UK Rules

The new CGT charge on non-residents deals with “property used or suitable for use as a dwelling” and will include residential property used for letting purposes.

There are, of course, exclusions for certain types of property in communal use which include boarding schools, nursing homes and certain types of student accommodation.

What differentiates this new charge from the existing ATED-related CGT charge is that all residential property falling within the definition comes within the scope of this new legislation regardless of the value of the property.

The existing ATED-related CGT charge limited the charge to properties where the consideration on sale/disposal exceeded a specified “threshold amount” which for all gains arising on or after 6^th April 2015 is £1m.

So who will be affected by this new charge?

The charge will apply to gains made by

• Individuals
• Trustees
• Closely held non-resident companies
• Funds – to the extent that these gains are not within the ATED-related CGT charge

Who will not be affected by this new charge?

Companies and funds which are not closely-held as well as the majority of institutional investors.

Tax rates (UK)

The tax rates for the new CGT charge on non-residents are the same for UK residents who pay CGT at their marginal rate of Income Tax.

What does that mean?

For taxpayers paying at a Basic Rate, the rate will be 18%

For taxpayers liable at the higher/additional rate, it will be 28%.

For non-residents, the rate will depend on their total UK Income and Gains.

Is there an Annual Exemption?

The annual exempt amount for gains of £11,000 is also be available to non-residents.

Paying and Filing (UK)

In circumstances where the non resident person has an “existing relationship” with HMRC and providing the disposal is not exempt, he/she will be required to file a self-assessment Tax Return following the end of the tax year and make the relevant payment within the usual deadline dates.

A person who does not have an “existing relationship” must submit a Tax Return and make the appropriate tax payment within thirty days.

What about Tax Returns requiring Amendments?

Amendments or changes to these Tax Returns are allowable within the twelve months following the normal filing date for the tax year in which the disposal is made.

In Summary

• For non-residents disposing of UK residential property, Capital Gains Tax was not an issue up until 6th April 2015.

• With the introduction of the new legislation, which takes from 6th April 2015, non resident individuals, trustees and/or closely held companies or funds may be exposed to a UK CGT Charge.

• Non-resident individuals, trustees or closely-held entities can avoid a CGT charge on a disposal of UK residential property where the property qualifies for Principal Private Residence Relief.

• The new legislation governing Principal Private Residence Relief has prevented some non-residents from claiming the CGT relief.

• Under this new rule, a residence will not qualify for PPR for a tax year unless (a) the person making the disposal is tax resident in the country where the property is located for that tax year or (b) the person spent at least 90 days in that property in that tax year. (For further information regarding the amendment to PPRR please contact us)

• Non-residents can defer the payment of the CGT due until the self-assessment filing date provided they register with HMRC.

If you’re a provider of digital services to customers in Japan, please be aware that the changes being introduced on 1st October 2015 may affect you.

Old Rules

Under the Consumption Tax Act (Act No. 108 of 1988), a service rendered in Japan is subject to Consumption Tax which is equivalent to VAT (i.e. Value Added Tax).

The criteria for determining whether a service is rendered in or outside Japan varies, depending on the nature of the service.

Under the current rules (i.e. pre October 2015), the tax treatment relating to the provision of e-commerce services, such as e-books, internet delivery of music, etc. is determined by the location of the service provider.

Therefore, such e-commerce services provided by offshore service providers (e.g. companies located in Ireland) to Japanese customers are not subject to Japanese Consumption Tax under the current legislation.

New Rules

From 1st October 2015 there will be new rules. These will be different for (a) Business to Business services and (b) Business to Consumers services.

If, for example, an Irish company is providing digital services directly to Japanese consumers then the Irish company will be obliged to collect Consumption Tax from its customers in Japan and pay this collected Consumption Tax to the NTA or National Tax Agency.

As a result of this amendment, Irish companies/businesses providing digital services to Japanese customers will be required to file consumption tax returns. If this applies to you, it would be advisable to nominate a Tax Agent (i.e. an agent in Japan who will handle all the tax procedures necessary for foreign companies/sole traders/individuals).

For business to business transactions, a reverse-charge mechanism will be introduced. This requires the recipient of the service in Japan to declare both (a) the taxable sales and (b) the related tax due on its consumption tax return. There will be no obligation for the Irish company to file tax returns in Japan under these circumstances.

What should you do?

1. Identify the type of services you provide i.e. is it Business to Business or Business to Consumer services?

2. If it’s Business to Consumer service then you should contact the NTA’s website and register as a Foreign Supplier as soon as possible or alternatively contact a qualified and professional Tax Agent to handle your tax affairs.

3. You should review your terms and conditions to ensure that these changes are reflected.

4. You should review your processing procedures to ensure the mechanisms are in place for the correct collection of consumption tax.

What to keep an eye out for

You should keep an eye out for similar type emails from your Agents stating the following:

“A recent change to Japan Consumption Tax (JCT) regulations will impact your  account.

Beginning on 1st October 2015, you will be responsible for determining and charging JCT for sales to customers in Japan.

The current JCT rate is 8%.

You will also be responsible for remitting and reporting on any JCT amount to the NTA (Japanese National Tax Agency)

This applies to all digital products sold to customers in Japan, even if your business is not located there.”

A number of Revenue Guidance Documents have been introduced following Finance Act 2014 being signed into law on 23^rd December 2014.

This article will be focusing on the following documents:

1. Transfer of a Business to a Company (Section 600 Taxes Consolidation Act 1997 Relief and Assumption of Business Debt) – eBrief no. 111/14 (24^th December 2014)
2. Deduction for Income Earned in Certain Foreign States (Foreign Earnings Deduction) – eBrief no. 106/14 (24^th December 2014)
3. Guidance on Compensation Payments under Section 2B of Employment Permits Act 2003 – eBrief no. 112/14 (24^th December 2014)
4. Guide to the Capital Acquisitions Tax Treatment of receipts by children from their parents for their support, maintenance or education – eBrief no. 109/14 (24^th December 2014).
5. Relevant Contracts Tax – Revised Penalties from 1^st January 2015 for the failure of a Principal Contractor to operate R.C.T. correctly on relevant payments to a contractor – eBrief no. 110/14 (24^th December 2014)
6. Capital Gains Tax – Finance Act 2014 – Vodafone Shareholders – eBrief no. 107/14 (24^th December 2014).

1. Transfer of a Business to a Company (Section 600 Taxes Consolidation Act 1997 Relief and Assumption of Business Debt) – eBrief no. 111/14 (24^th December 2014)

 Section 600 TCA 1997 provides that Capital Gains Tax on the transfer of a business and all its assets to a company may be deferred providing four conditions are met:

1. The business is transferred as a going concern
2. The transfer is for bona fide commercial reasons and not for the purposes of tax avoidance
3. All the assets of the business, excluding cash, are transferred and
4. The consideration consists wholly or partly of shares in the company.

Any liabilities taken over are to be treated as cash consideration but in practice, Revenue may no enforce this rule in circumstances where:

1. The transfer is in exchange for shares only and
2. The liabilities are genuine trade creditors i.e. in cases where the business assets exceed its liabilities and the only other consideration is the assumption by the company of liability for bona fide trade creditors.

Revenue has clarified in this eBrief that bona fide trade creditors will not be treated as other consideration for the transfer.  By this, they mean genuine trade creditors who provide goods and/or services to the business.

The Revenue Concession does not apply to business debts such as bank loans or tax liabilities.

2. Deduction for Income Earned in Certain Foreign States (Foreign Earnings Deduction) – eBrief no. 106/14 (24^th December 2014)

The Foreign Earnings Deduction (F.E.D.) was introduced in Finance Act 2012.

It was designed to encourage and incentivize individuals who perform their duties of employment in the specific countries Ireland was targeting for the purposes of business development and export growth.

In 2012 this tax relief applied to Irish resident employees who carried out significant duties in Brazil, Russia, Indian, China and South Africa.

From 2013 to 2014 the list of countries was extended to Egypt, Algeria, Senegal, Tanzania, Kenya, Nigeria, Ghana and the Democratic Republic of Congo.

According to this eBrief the number of relevant states now include: Japan, Singapore, South Korea, Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Indonesia, Vietnam, Thailand, Chile, Oman, Kuwait, Mexico and Malaysia.

Prior to Finance Act 2014 the rules for claiming the relief were as follows:

1. The individual was required to exercise the duties of his/her employment for at least sixty days in the above mentioned countries i.e. those listed from 2012 to 2014.
2. Each visit must consist of four days to be considered for F.E.D. Relief.
3. The formula to determine the deduction was as follows:

Employment Income   x  Qualifying Days

                                        Total Days

4. The deduction was capped at €35,000.
5. “Qualifying Days” related to days carrying out the duties of employment and did not include days travelling.

Finance Act 2014 introduced the following changes for the years 2015, 2016 and 2017:

1. The required number of qualifying days abroad dropped from sixty to forty days.
2. The length of time spent working abroad was reduced from four days to three days.
3. The time spent travelling from Ireland to a relevant state or from a relevant state to Ireland or to another relevant state is deemed to be a “Qualifying Day.”

By “Qualifying Day” we mean a day, the whole of which is spent in a relevant state for the purposes of carrying out the duties of an office or employment.

Other Points to Consider

1. Employment Income includes stock options but excludes pension contributions, tax deductible expense payments, benefits-in-kind, termination payments, etc.
2. There is no tax relief from PRSI.
3. There is no tax relief from Universal Social Charge.
4. The relief does not apply to those working in the civil and public services.
5. The Relief is not available in respect of income from an office or employment which is chargeable on the remittance basis.
6. The Relief is not available in respect of income which qualifies for:

a)      Section 472D – Research and Development Credit

b)      Section 825C – Special Assignee Relief Programme

c)      Section 822 – Split Year Residence Relief

d)     Section 825A – Relief for Income Earned outside the State.

3. Guidance on Compensation Payments under Section 2B of Employment Permits Act 2003 – eBrief no. 112/14 (24^th December 2014)

 The best starting point in relation to understanding the tax treatment of awards/settlements is Section 192(A) Taxes Consolidation Act 1997.  It can be summarised as follows:

• If the award/settlement relates to a loss of wages/salary such as a Payment of Wages Claim or an Unfair Dismissal Claim then it is liable to tax.  In other words, if the award/claim relates to financial loss then it’s taxable.
• If the award/settlement relates to compensation for a breach of the employee’s statutory entitlements (i.e. which are not deemed to be remuneration or arrears of wages) then the payment is not taxable.  In other words, it’s exempt from tax if it relates to an infringement of the employee’s rights.

Now that we’ve established that the main distinction between a taxable award/settlement and a tax exempt award/settlement is the distinction between wages/salary and compensation, let’s look at Section 2B of the Employment Permits Act 2003.  This piece of legislation was introduced to prevent or at least deter employers from employing foreign nationals without a valid employment permit.

How does it work?

It allows the foreign national to take a civil action against his/her employer for compensation in relation to work done or services carried out even if there is no legal contract in place.

 As the compensation is not deemed to be for an infringement of a right, rather, it’s considered to be the reimbursement of a salary or wages then it is liable to tax.

 The compensation is calculated by a court order based on a national minimum hourly rate of pay (or any rate of payment which is fixed under, or pursuant to, any enactment).

 What is the tax treatment?

 The tax treatment of these compensation payments is covered by two new provisions:

1. Section 124A Taxes Consolidation Act 1997 and
2. Section 5A of Section 192(A) TCA 1997

which were introduced by Section 37 of the Employment Permits (Amendment) Act 2014.

If compensation payments are made to individuals under Section 2B of the Employment Permits Act 2003 they are liable in full to PAYE and the Universal Social Charge.

They will not be liable to PRSI as they are not treated as “reckonable emoluments” as defined in the Social Welfare & Pensions Act 2012.

4. Guide to the Capital Acquisitions Tax Treatment of receipts by children from their parents for their support, maintenance or education – eBrief no. 109/14 (24^th December 2014).

As you are all aware, Capital Acquisitions Tax is the tax levied on gifts and inheritances received by individuals where the value of the gift/inheritance exceeds that individual’s lifetime tax free threshold amount.

Section 82(2) of the Capital Acquisitions Tax Consolidation Act exempts from tax “normal and reasonable” payments (in money or monies worth) made by the disponer during his/her lifetime for the support, maintenance or education of his/her

• Children or
• Civil Partner’s children or
• A person to whom the individual stands in loco parentis or
• A dependent relative of the disponer

While carrying out compliance programmes, the Revenue Commissioners identified ways in which this exemption was being abused.  As a result, Section 81 Finance Act 2014 amended Section 82 Taxes Consolidation Act 1997 to ensure that where there is a need to provide for the support, maintenance and education of children the exemption is confined to the following:

• A minor child of the disponer or of the civil partner of the disponer or
• A child of the disponer or of the civil partner of the disponer who is under twenty five years of age and is in full time education or
• A child, regardless of age, who is permanently incapacitate by reason of physical or mental infirmity from maintaining himself/herself.

So what do we mean by “normal and reasonable” payments?

 Revenue’s view is that “normal” refers to the nature of the payment or expenditure.  Examples include the payment of fees and accommodation costs for a dependant child attending college.

“Reasonable” refers to the financial circumstances of the disponer.  Even though there is no ceiling on the value of what can be provided by way of maintenance or support, the exemption will not apply if the disponer makes payments which are disproportionate to his/her means.

Back to the eBrief:

 Section 82(2) does not cover all payments by a parent to a child.  Revenue does not accept that gifts to a child who is financially independent are exempt from Capital Acquisitions Tax nor does it accept that gifts of a capital nature are tax exempt.

Examples of non-exempt benefits/gifts/payments are as follows:

1. House purchase
2. Free use of a house
3. The deposit on a house in excess of €3,000
4. money if in excess of €3,000 per annum

 Summary

So what benefits/gifts/payments are tax exempt?

1. The non exclusive occupation of the family home by a child who is a family member.
2. Free use of a house by a child attending university who is not more than twenty five years old providing the support and maintenance falls within the “normal and reasonable” provision.
3. The cost of family functions paid by a parent.  For example, a wedding paid by a parent.
4. Payments to cover the child’s normal costs associated with attending college including rent, food, clothing, educational material, tuition fees, transport costs, pocket money, etc. to a child under the age of twenty five years.

5. Relevant Contracts Tax – Revised Penalties from 1^st January 2015 for the failure of a Principal Contractor to operate R.C.T. correctly on relevant payments to a contractor – eBrief no. 110/14 (24^th December 2014)

Before we examine this guidance document, I will briefly explain the Relevant Contracts Tax system in Ireland.

 What is Relevant Contracts Tax (R.C.T.)?

 R.C.T. is a tax that applies to the following industries in Ireland:

1. Construction
2. Forestry
3. Meat Processing

 R.C.T. applies to payments made by a Principal Contractor to a Subcontractor under a Relevant Contract i.e. a contract for a Subcontractor to carry out relevant operations for the Principal Contractor.

Important Points to Note:

1. An employment relationship does NOT exist i.e. the Subcontractor is NOT an employee of the Principal Contractor.
2. The Subcontractor provides his/her own labour or the labour of other individuals when carrying out the relevant operations for the Principal Contractor.

So, how does this tax work?

 Before 31^st December 2011, the Principal Contractor was required to deduct withholding tax from the gross payments made to a Subcontractor under a relevant contract and submit this tax to the Irish Revenue Commissioners on the Subcontractor’s behalf.  At the time there was only one rate and that was 35%. 

The Principal provided the Subcontractor with a Certificate outlining the tax paid on his/her behalf (Form RCTDC 45) and the Subcontractor could then receive a credit or in some cases a refund of this tax withheld once he/she filed an annual Income Tax Return.

The Principal was required to file a monthly Return of tax deducted (RCT 30) and pay the relevant RCT deducted to Revenue.  The Principal Contractor was also obliged to file an Annual Return of Gross Payments and Tax Withheld on an RCT 35 which had to be filed by 23^rd February following the year end.

If, however, the Subcontractor had a Certificate of Authorisation or a C2, the Principal could pay the Subcontractor without deducting R.C.T.

On 1^st January 2012 the rules changed with the introduction of three rates of withholding tax:

1. Zero rate for Subcontractors who previously held a C2
2. 20% for Subcontractors who were registered for tax and had a record of substantial tax compliance
3. 35% for Subcontractors in all other situations.

 Back to eBrief 110/14

Section 17 Finance Act 2014 introduced a revised sanction for situations where the Principal Contractor fails to operate RCT on relevant payments to Subcontractors.  The level of penalty will depend on the percentage of tax withheld from the Subcontractor’s payments.

From 1^st January 2015 the Principal will be liable for the following penalties in the event of non operation of R.C.T.:

1. If the Subcontractor is registered with Revenue and usually liable to a deduction of zero percent, the Principal will be liable to a civil penalty of 3% of the relevant payment.
2. If the Subcontractor is registered with Revenue and is tax compliant and therefore liable to a RCT deduction rate of 20% then the Principal will be liable to a civil penalty of 10% of the relevant payment.
3. Where the Subcontractor is registered with Revenue but is not tax compliant and, as a result, all payments are liable to an RCT deduction rate of 35%, the Principal will be liable to a civil penalty of 20% of the relevant payment.
4. Where the Subcontractor is not registered with Revenue i.e. the individual to whom the payment was made is not known to Revenue, then the Principal will be liable to a civil penalty of 35% of the relevant penalty.

What about filing obligations?

In all the above four situations the Principal Contractor will be required to submit an Unreported Payment Notification to Revenue.

6. Capital Gains Tax – Finance Act 2014 – Vodafone Shareholders – eBrief no. 107/14 (24^th December 2014).

 On 14^th May 2014 the Irish Revenue Authorities issued a detailed Tax Briefing outlining the tax treatment of the Vodafone Return of Value to its Shareholders.  I wrote an Explanatory Blog, which was published on this site on 16^th May 2014, outlining the comprehensive guidance on the calculation of the base cost for Capital Gains Tax purposes.  In my Blog, I discussed the Income Tax Treatment for shareholders who opted for “C Shares”:

“individuals who opted for the ‘C Shares’ received a dividend from Vodafone which consisted of (a) a cash amount and (b) shares in Verizon.

The individual was then required to include both amounts in his/her annual Income Tax Return i.e. (a) the cash actually received and (b) the market value of the Verizon Consideration Share Entitlement received.

Income Tax, P.R.S.I. and the Universal Social Charge were then levied on this dividend.”

On 23^rd December 2014 Revenue issued additional guidance on the tax treatment where Returns of Value of €1,000 or less were received by Vodafone shareholders.  eBrief 107/14 contains details of a tax relieving measure which was introduced by Section 48 Finance Act 2014.

What is this Tax Relieving Provision?

 Section 48 Finance Act 2014 allows individuals who received a “Return of Value” payment of €1,000 or less under the terms of the Return of Value to be treated as having received a Capital Sum which, if the individual had acquired the Vodafone shares as a result of originally investing in Eircom back in 1999, would result in a NIL Capital Gains Tax liability.

It should be noted that individuals can opt to have the payment treated as income should they wish in which case the payment sum would be liable to Income Tax, PRSI and the Universal Social Charge.

What are the filing requirements?

 In situations where Vodafone shareholders made a capital loss on the “Return of Value” of €1,000 or less and providing these individuals had no other chargeable gains arising in the 2014 tax year, then there is NO requirement to file a Tax Return in relation to the Vodafone “Return of Value” unless of course, these individuals are otherwise required to do so under a different section of the Taxes Consolidation Acts 1997. 

Why is this provision so beneficial to Taxpayers?

The loss arising on the “Return of Value” can be carried forward and written off against gains that may arise in the future resulting in a reduced Capital Gains Tax liability in that tax year.

Any other points to consider?

 If a taxpayer prefers to have his / her “Return of Value” of €1,000 or less treated as Income, this information must be included in his / her annual Income Tax Return as outlined in Revenue’s Tax Briefing dated 14^th May 2014.

The Corporation Tax (Northern Ireland) Bill was published on 8^th January 2015.  The British Government hopes the Bill will be passed before the UK General Election in May.

The Bill, if passed, would allow Northern Ireland to apply its new Corporation Tax rate on most trading profits from April 2015.

The current rate paid by companies in Northern Ireland is 21% while the rate in the Republic of Ireland is 12½%.

According to the UK Government Press Release “if the rate was lowered, around 34,000 businesses in Northern Ireland would stand to benefit including 26,500 SMEs.”

Theresa Villiers, the Secretary of State for Northern Ireland believes the Corporation Tax Bill has the potential “to create thousands of new jobs and stimulate crucial growth in the Northern Ireland Economy.”

It is important to remember that even if the Bill is passed, the headline UK Corporation Tax rate will continue to apply to profits from a non-trading source (i.e. property) and the UK will retain power over the Corporation Tax base including Allowances and Reliefs.

The design of the Bill reflects the following principles: 

1. It must be attractive to businesses i.e. the legislation includes a special regime for smaller companies to ensure proportionate administrative burdens.
2. It must encourage genuine economic activity in Northern Ireland.
3. It must satisfy the E.U.State Aid Rules.
4. It must keep the costs of the N.I. Executive proportionate and to a minimum.

Profits from some trades will remain in the UK main regime including:

1. Lending & Investing Activities
2. Asset Management
3. Finance Leasing
4. Long Term Insurance
5. Reinsurance Activities of both life and general insurance.

The UKs Oil and Gas Tax Regime will remain part of the UK regime.

Budget 2015 was announced today.

Here is a brief Summary of some of the Taxation Measures for introduction in Ireland in 2015

INCOME TAX

 There will be an increase in the standard rate band of income tax by €1,000 from €32,800 to €33,800 for single individuals and from €41,800 to €42,800 for married one earner couples.

There will also be a reduction in the higher rate of income tax from 41% to 40%.

Artists’ Exemption

 The threshold for the artists’ exemption will be increased by €10,000 to €50,000.

 The Exemption is also being extended to non-resident artists i.e. to individuals who are resident or ordinarily resident in another Member State or in another EEA State.

Foreign Earnings Deduction

 FED is being extended for a further 3 years until the end of 2017 and qualifying countries have been extended to include Chile, Mexico and certain countries in the Middle East & Asia.

 Other changes are as follows:

• The number of qualifying days abroad is being reduced from 60 to 40
• The minimum stay in a country is reduced to 3 days and
• Travelling time is being included as time spent abroad.

 Special Assignee Relief Programme

 The main points are as follows with other details being provided in the Finance Bill:

• SARP is being extended for a further 3 years until the end of 2017 and the upper salary threshold is being removed. 
• The residency requirement is being amended to only require Irish residency and the exclusion of work abroad is also removed.
• The requirement to have been employed abroad by the employer is being reduced to 6 months.

Employment and Investment Incentive

The EII is being amended: 

• to raise company limits
• increase the holding period by 1 year and
• include medium-sized companies in non-assisted areas and internationally traded financial services (These measures are subject to approval from the European Commission).

Hotels, guest houses and self-catering accommodation will remain eligible for a further 3 years and the operating and managing of nursing homes will be included for 3 years.

Seed Capital Scheme

This scheme will now be known as “Start-Up Relief for Entrepreneurs” (SURE).

It has been extended to individuals who have been unemployed up to 2 years.

Rent-a-Room Relief

 The threshold for exempt income under this scheme has been increased from €10,000 to €12,000 per annum.

Water Charges

Tax relief at 20% will be provided on water charges, up to a maximum of €500 per annum.

 This relief will be paid in arrears

 Home Renovation Incentive

 The HRI Scheme has being extended to include rental properties owned by landlords subject to income tax.

UNIVERSAL SOCIAL CHARGE

Incomes of €12,012 or less will be exempt from the Universal Social Charge.

 In situations where the annual income is in excess of €12,012 the tax will be calculated as follows:

€0 to €12,012 @ 1.5%

€12,013 to €17,576 @ 3.5%

€17,577 to €70,044 @ 7%

€70,044 to €100,000 @8%

For individuals with PAYE income in excess of €100,000 per annum they will be liable to USC @ 8%.

 Self-employed individuals with income in excess of €100,000 will be liable to USC @ 11%

 There will be an extension of the exemption from the 7% rate of USC for medical card holders whose total income does not exceed €60,000 (who will now pay a maximum rate of 3.5% USC).

 Individuals aged 70 years and over whose total income is €60,000 or less will pay a maximum rate of 3.5% USC.

CAPITAL GAINS TAX

Property purchase incentive

 The incentive relief from CGT (in respect of the first 7 years of ownership) for properties purchased between 7 December 2011 and 31 December 2014 is not being extended beyond 31 December 2014.

 Where property purchased in this period is held for seven years the gains accrued in that period will not attract CGT.

 Windfall tax

Windfall tax provisions introduced in 2009 are being abolished from 1^st January 2015.

This relates to provisions which apply an 80% rate of tax to certain profits or gains from land disposals or land development, where those profits or gains are attributable to a relevant planning decision by a planning authority.

CORPORATION TAX

R&D Tax Credit

 The 25% tax credit applies to the amount of qualifying R&D expenditure incurred by a company in a given year that is in excess of the amount spent in 2003 (base year).

 This 2003 base year restriction is now being removed from 1 January 2015.

 Three Year Relief for Start-up Companies

 This relief from corporation tax on trading income (and certain capital gains) of new start-up companies in the first three years of trading has been extended to new business start ups in 2015.

A review of this measure will take place in 2015.

Capital Allowances for the Provision of Specified Intangible Assets

 This provides capital allowances for expenditure incurred by a company on the provision of certain intangible assets for use in a trade.

 The use of such allowances in any accounting period is currently restricted to a maximum of 80% of the trading income from the relevant trade in which the assets are used.

 This 80% restriction on aggregate allowances (and any interest expense incurred on borrowings to fund the expenditure) will be removed.

Accelerated Capital Allowances for Energy Efficient Equipment

This is a measure to incentivise companies to invest in energy efficient equipment was due to expire at the end of 2014 however it is being extended to the end of 2017

DEPOSIT INTEREST RETENTION TAX

First time buyers DIRT relief has been introduced which is a relief from DIRT on savings used by first time house buyers towards the deposit on a home.

OTHER AREAS

There have also been changes to Agri-Taxation in terms of Income Tax, VAT (Increase in the Farmer’s Flat Rate Addition from 5% to 5.2%), Capital Gains Tax (Relief for Farm Restructuring), C.G.T. (Retirement Relief), Capital Acquisition Tax (Agricultural Relief) and Stamp Duty (Agricultural leases and Consanguinity Relief).

The 2010 Finance Act introduced a fixed pay and file date for all gifts and inheritances with a “valuation date” after 14^th June 2010.  As a result, the Capital Acquisitions Tax year runs from 1^st September to 31^st August in the following year.

 C.A.T. arising on gifts/inheritances, where the “valuation date” falls within the twelve month period ending on 31^st August in a particular tax year, must be paid and filed with Revenue by the 31^st October of that year.

 What do we mean by “Valuation Date”?

 The “valuation date” is the date on which the property making up the gift or inheritance is valued.  The “valuation date” for a gift is the date the individual receives the gift but determining the “valuation date” for an inheritance is far more complex.

 Section 30(4) Capital Acquisitions Tax Consolidation Act 2003 defines the valuation date as the earliest of the following:

1. the date on which the Executor is entitled to retain the inheritance for the benefit of the beneficiary or
2. the date on which the inheritance is retained for the beneficiary or
3. the date of delivery to the beneficiary i.e. the date on which the inheritance is paid over or transferred to the beneficiary.

 In many estate cases, the date of the grant of probate or grant of administration is generally taken to be the “valuation date.”

The situation can be more complicated in the following situations: 

• where the asset passes automatically on the death of an individual by operation of the law (e.g. where joint property passes by survivorship) or
• where there are several valuation dates for different bequests.  For example some assets may be distributed before the grant of probate which would mean the “valuation date” is the date of transfer or payment and other inheritances, such as the reside, would be valued after the date of grant.

Common Problems

 The main problems for Tax Practitioners and Accountants are as follows:

• The very short time frame between a valuation date in, say, August and the pay and file date of 31^st October in the same calendar year.  In situations where the valuation date is the grant of probate it may not be possible for the Executors to extract sufficient cash before the deadline date.
• The value of the assets can fluctuate greatly between the date of death and the valuation date.  This is especially relevant to property and share values so particular attention should be given to the correct valuation of these assets.
• In the event of a date of death valuation, a beneficiary may not have sufficient information to establish whether or not there is a liability to C.A.T. until after the pay and file deadline.

A date of death valuation arises in the event of a beneficiary having an immediate entitlement to an inheritance. This could arise if a remainder interest is taken on the death of a life tenant or if there is an inheritance of a joint tenant by survivorship.

Compliance

 An IT38 Return should be filed if:

(a) the beneficiary has a CAT liability or

(b) the benefit exceeds 80% of the Tax Threshold Amount.

IT38s must be filed by 31^st October along with any CAT due.

 An IT38 in paper form can only be filed if the individual is not claiming any reliefs or exemptions other than the small gift exemption of €3,000.

 Where other reliefs or exemptions are being claimed then it is essential that the Return is filed electronically through the Revenue Online System in which case the pay and file deadline will be 13^th November 2014.

 Tax Thresholds

 Group A – €225,000 – Generally from parents to children

Group B – €30,150 – In general from brothers, sisters, aunts, uncles, etc.

Group C – €15,075 – Gifts/inheritances from other people deemed to be “strangers in blood.”

 Are there any penalties for late filing?

 If you are up to two months late filing your Tax Return there will be a 5% surcharge of the amount of tax payable up to a maximum of €12,695.00.

 If you file your Return after that a 10% surcharge will be levied up to a maximum amount of €63,485.00.

 What about interest?

 Interest of 0.0219% per day or part of a day will be applied to all late payments of Capital Acquisitions Tax.

If you’ve already made or about to make a disposal of a capital asset (e.g. certain shares, an investment property, a business, etc.) anytime  between 1^st January and 30^th November 2014 you will be obliged to pay your Capital Gains Tax by 15^th December 2014.

 If you decide to wait and dispose of your asset between 1^st December and 31^st December 2014 then your payment will be due by 31^st January 2015.

 What happens if you miss these deadlines?

 Interest of 0.0219% per day will be applied to all late payments of Capital Gains Tax.

 What happens if you make a gain in the first part of the year and a loss in the second part?

 Even if you’ve made an overall loss for the year, you will be obliged to pay the Capital Gains Tax arising on any gain you’ve made in the first part of 2014 by the specific payment date being 15^th December 2014.

 You can then submit your claim for a tax refund in January 2015 if a loss arises in the second part of the year.

 Any tax saving tips?

 Plan the timing of your disposals so that capital gains and capital losses arise in the same period thereby enabling you to offset the losses against the gains and effectively reduce any potential tax liability.

 This can be very useful from a cash flow point of view.

 What about filing obligations?

 You must include details of all your capital acquisitions and/or disposals made in 2013 in your 2013 Income Tax Return. 

 This Return must be filed with Revenue by 31^st October 2014.

 There is an extension to 13^th November 2014 if you are using the Revenue Online System (ROS).

 What happens to individuals who are not obliged to file an Income Tax Return?

 You may file a CG1 Form which can be downloaded from the Irish Revenue website www.revenue.ie

 As with the Income Tax Return, the due date for filing is 31^st October 2014.

 Please be aware, there is no facility to file this Form online which means the 13^th November 2014 extension does not apply to the CG1 Form.

Are there any penalties for late filing?

 If you are late filing your Tax Return but manage to do before 31^st December 2014 there will be a 5% surcharge of the amount of tax payable up to a maximum of €12,695.00.

 If you file your Return after 31^st December 2014 a 10% surcharge will be levied up to a maximum amount of €63,485.00.

The High Earner’s Restriction was introduced in the 2006 Finance Act with effect from 1^st January 2007.  The objective was to limit the use of certain tax reliefs and exemptions and to ensure that high income individuals who were eligible for these “specified reliefs” paid an effective tax rate of at least 20%.

 Changes were introduced by Finance Act 2010 which extended the scope of the restriction to ensure these individuals now pay an increased effective rate of 30%.  From 2010 onwards, the High Earner’s Restriction applies to a much greater number of tax payers which we can see from published figures (*Dáil PQ 25 March 2014)

To whom does the High Earner’s Restriction apply?

 From 2010 the restriction applies to an individual who meets all three of the following criteria:

1. The individual’s Adjusted Income (being the Taxable Income before applying the Specified Reliefs) for the tax year is greater than or equal to the “Income Threshold Amount.”  In general this figure is €125,000 but it may be less depending on whether the individual has ring-fenced income (E.g. Irish Deposit Interest that has suffered Deposit Interest Retention Tax; payments and gains relating to certain foreign life policies; certain offshore payments and gains; gross deposit interest arising in an E.U. member state with an Irish tax rate equal to the D.I.R.T. rate, etc.) and
2. The total Specified Reliefs used by the high earner is greater than or equal to the “Relief Threshold Amount” of €80,000 and
3. The aggregate specified reliefs used by the individual are less than 20% of the Adjusted Income.

How do we calculate the tax?

1. Compute the Taxable Income (ignoring the restriction) (T)
2. Identify any Ring fenced Income (R)
3. Identify the Specified Reliefs used in the calculation of the Taxable Income (S)
4. Compute the Adjusted Income (A) using the formula: A = T + S – R
5. At this point you should check whether you meet all the three criteria necessary for the restriction to apply.  If the answer to one or more questions is NO then the restriction does not apply to the tax year in question.
6. If the answer to all three questions is YES, compute the “Recalculated Taxable Income” using the formula: T + (S – Y) where Y = the greater of (i) the Relief Threshold Amount of €80,000 or (ii) 20% of the Adjusted Income.

The effect of the High Earner’s Restriction is to increase the individual’s taxable income liable to Income Tax at the normal rates.

Example 

Mr A has the following income for 2013:

• Case I Trading Income                                   €200,000
• Case V Rental Income                                    €300,000

He also has Section 23 Type Property Relief of €300,000

Steps:

1. Calculate the Taxable Income (T) 

Case I Trading Income                                         €200,000

 Case V Rental Income                  €300,000

Section 23 Relief                          (300,000)                   Nil

 Taxable Income (T)                                              €200,000

2. Calculate (R) – Mr A has no Ring fenced income

3. The Specified Reliefs (S) = €300,00

4. The Adjusted Income (A) is calculated using the formula

A = T + S – R              €200,000 + €300,000 – Nil = €500,000

5. Does the High Earner’s Restriction Apply
   1. Is (A) i.e. €500,00 greater than or equal to €125,000                   – YES
   2. Is (S) i.e. €300,000 greater than or equal to €80,000                    – YES
   3.  Is 20% of (A) i.e. €100,000 less than the Total SpecifiedReliefs i.e. €300,000                                                                              – YES 

      Therefore, the Higher Earner’s Restriction applies.

       

6. Recalculate the Taxable Income using the formula T + S -Y where Y = 20% of (A) i.e. €500,000 x 20% = €100,000

(T) i.e. €200,000 + (S) i.e. €300,000 – (Y) i.e. €100,000 = €400,000

7. The excess specified reliefs of €200,000 (i.e. €300,000 – €100,000) are available to be carried forward to the next tax year.

 Carry Forward of Excess Reliefs (S.485F TCA 1997)

 Any “unutilised reliefs” in the tax year in question can be carried forward for offset against the individual’s total income in subsequent tax years.

The following points should be kept in mind:

• When the reliefs are carried forward, they are pooled together in a single amount thereby loosing their individual character.
• The excess reliefs will be subject to the same restrictions in the subsequent tax year.
• The excess relief can be offset in the next tax year only after relief has been given for other available tax reliefs.
• Excess specified reliefs will be lost on the death of the individual.
• From 2010 onwards where the excess relief is carried forward for deduction against total income, the excess relief will not be an allowable deduction for calculating PRSI, the Income Levy (when relevant) or Universal Social Charge.

 What items are included in the list of specified reliefs?

 Appendix 3 – list of Specified Reliefs is available on www.revenue.ie and the full list is set out in Schedule 25B of the Taxes Consolidated Acts 1997.

 Here are some of the items included:

• Capital Allowances on Buildings
• Film Relief
• Artist’s Exemption
• Student Accommodation Relief
• Section 23 Type Relief (Property Based Incentives)
• Patent Royalty Income
• Patent Distributions

Examples of what’s not included are:

• Pension Contributions
• Trade Losses
• Capital Allowances on Plant & Machinery except in certain situations where they are claimed by passive traders in a leasing trade
• E.I.I.(Employment Investment Incentive) is no longer a specified relief under Finance (No. 2) Act 2013 where the subscription for eligible shares was made under the scheme between 16/10/2013 and 31/12/2016.
• Medical Expenses, etc.

What about Double Taxation Relief?

 Finance (No. 2) Act 2013 amended how Double Taxation Relief was calculated for those individuals subject to the High Earner’s Restriction.

The formula to be used is:

 Irish Tax (after applying the High Earner’s Restriction)

                      Adjusted Income (A)               

Previously the credit was calculated before applying the High Earner’s Restriction.

 A repayment of an under claimed foreign tax credit is available for individuals who filed a tax return after 1^st January 2008 and who would be entitled to a greater tax credit for double taxation suffered as a result of this new provision than under the pre Finance (No. 2) Act 2013 legislation.

 Compliance Issues

 Any individual subject to the High Earner’s Restriction must file a Form 11 (Self Assessment) and Form RR1 setting out details of the calculations of the H.E.R.

The details to be included in the RR1 Form are:

• The aggregate of the specified reliefs used by the individual in the tax year.
• The individual’s taxable income before the H.E.R.
• The amount of the individual’s recalculated taxable income after the application of the High Earner’s Restriction.

 Following Finance Act 2007, a jointly assessed married couple or civil partnership will be treated as two separate individuals in determining if the restriction applies.

 A single Form RR1 should be completed providing details of the application of the restriction to each spouse or civil partner where relevant.

 Property Relief Surcharge (S.531AAE TCA 1997)

 Finance Action 2012 introduced the 5% Property Relief Surcharge which applies where the individual’s aggregate income (i.e. gross income for Universal Social Charge purposes) is €100,000 pre annum or more and where certain property based incentive reliefs have been claimed in that tax year.

 By property reliefs, we mean Section 23 type reliefs, property based capital allowances, etc.

 The 5% Property Relief Surcharge is collected as additional Universal Social Charge.

 There is an exception to this rule in the case of owner occupiers for residential properties.

 Revenue’s view is that the surcharge does not take into consideration any restriction imposed by the High Earner’s Restriction.  In other words, the surcharge applies to the specific property reliefs which would have been available in calculating the taxable income of the individual had the restriction been ignored.

Example

 Mr A’s income for 2013 was as follows:

 Case V – Rental Income                                 €250,000

 He also has Section 23 Type Relief                €300,000

 The Property Relief Surcharge will be 5% of €250,000 being €12,500

 The surcharge is computed by reference to the S.23 Property Relief used in calculating Mr A’s taxable income before applying the High Earner’s Restriction.

 Conclusion

 This is an area currently under scrutiny by the Revenue Commissioners.  If this is something that affects you, it might be worth reviewing the information contained in the previous tax returns you’ve submitted as well as double checking that your 2013Tax Return, which must be filed by 31^st October 2014, is accurate and correct in line with Finance Act amendments.

The European Court of Justice held that the supply of services by a non-EU Head Office to a branch situated in the E.U. is now liable to VAT where that branch is part of a VAT group.

VAT grouping allows EU member states to treat two or more companies as a single entity for VAT purposes which means transactions between members of a VAT group are normally ignored for VAT purposes.

However, the ruling on this dispute between Skandia America Corporation and the Swedish Tax Authorities means that services previously deemed to be VAT exempt will now be subject to VAT rates of between 15% and 27%.

This decision is of particular relevance to the financial services industry since the products and services they sell (e.g. mortgages and insurance) are largely exempt from VAT.  The ruling means they will now be unable to recover input VAT refunds within the EU resulting in additional costs for banks and/or insurers who have outsourced IT and other services.

The Background: 

• The non-EU head office purchased IT services from a third party and made those services available to its branch which was situated in an EU member state i.e. Sweden.

• The US head office charged the cost of those services to its Swedish branch with a 5% mark up.

• The Swedish branch then provided those IT services to users both within and outside the VAT group.

• The costs charged by the US Head Office to the Swedish Fixed Establishment were disregarded for VAT purposes.

• The Swedish Tax Authorities didn’t hold this view.  Instead they believed the supplies between the US head office and the Swedish branch were liable to Swedish VAT.

• The Swedish Tax Authorities registered the US Head Office as a non established taxable person and raised an assessment for output tax on the supply of services to its Swedish branch.

• Skandia America Corporation appealed this assessment.

• The Swedish Tax Authorities defended its position stating that the branch was part of a VAT group and therefore a separate taxable person for VAT purposes.

• Skandia America Corporation relied on the FCE Bank Principles Case stating that a head office and its branch are part of the same legal entity and therefore no VAT can be due on the recharge.

• The Advocate General concluded that a branch could not be considered a VAT Group member independent of its head office because a branch is not deemed to be a taxable person distinct from the head office.

• On 17^th September 2014, however, the ECJ held that VAT must be charged on services provided by companies by their overseas offices.

The Consequences: 

The consequences of this ruling will be substantially higher tax bills for financial services companies especially in the U.K. which is considered the “Global Financial Services Centre.”