REVENUE GUIDANCE DOCUMENTS FOLLOWING FINANCE ACT 2014

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.