Finance Bill Update
This afternoon (08.02.12), Finance Minister Michael Noonan published the Bill which gives effect to the measures announced in December’s Budget.
Well flagged tax incentives aimed at attracting senior multinational executives to Ireland and increased mortgage relief for homeowners under pressure are among the provisions included in the Finance Bill. There were also enhancements to the R & D tax credit regime – now a portion of the credit can be passed to employees involved in R & D. While the much maligned “base year” of 2003 has not been abolished, an amendment has been included in the Bill to provide relief on the first €100,000 of expenditure incurred each year.
The Bill also gives legislative force to the measures announced in the Budget with the provisions governing the increase in the rates of VAT, CGT and the reduction in the rate of Stamp Duty all included in the Bill.
“This Finance Bill is a further step towards economic recovery and regaining our fiscal autonomy. The achievement of these objectives will take time but we are making good progress in implementing our Programme for Government,” said Mr Noonan.
The Economic Impact Assessment on the Abolition of Property Reliefs was also released today. It’s probably cynical, but accurate, to say that it wasn’t an accident that the timing coincided with the publication of the Finance Bill, dampening any public outcry at the recommendations of the report. Broadly speaking, the report recommends that the decision to abolish the property reliefs be repealed and that the reliefs should remain in place. The report does recommend that the High Earner Relief restriction is revisited in the future and any unused accelerated capital allowances will be lost from 2015.
It is expected that the Bill will go through the Oireachtas in the coming weeks. We have provided our initial analysis and some tax tips below which will help you reduce your tax exposure.
As ever, the team in Baker Tilly Ryan Glennon is available to assist you with any queries you may have on the Finance Bill and its impact for you or your company (firstname.lastname@example.org).
Research & Development
Finance Bill 2012 provides for the various changes to the R&D tax credit scheme as announced in Budget 2012.
Qualifying Expenditure on Scientific Research
Under current tax legislation, a 25 per cent tax credit for incremental expenditure on certain R&D activities over expenditure in a base year (2003) defined as the ‘‘threshold amount’’. The Finance Bill amends the calculation of the tax credit as follows:
- The first €100,000 of group expenditure on R&D is now excluded from the incremental basis of calculation. The tax credit will be due on such expenditure at 25 per cent without reference to the 2003 ‘‘threshold amount’’. The tax credit in respect of group expenditure in excess of €100,000 will continue to be allowed on an incremental basis with reference to the 2003 threshold amount.
- A company can surrender all or part of the R&D tax credit, which it could otherwise have used to reduce current corporation tax, to one or more key employees engaged in R&D activities as the company may specify. The key employee can then avail of a reduction in his or her income tax liability as a result of the surrender by his or her employer company. The option to surrender the R&D tax credit will not be available where the relevant key employee is, or has been a director of the employer company or an associated company, or is connected to such a director. This relief will probably be utilized by a significant number of R&D companies.
Finance Bill 2012 also provides for the following amendments and clarifications:
- Expenditure incurred by a company in the managing or control of research and development activities will not qualify for the tax credit unless such activities are carried on by the company itself.
- Expenditure shall not be regarded as qualifying expenditure for the purpose of the tax credit where it has been or is to be met directly or indirectly by grant assistance or any other assistance from the EU or European Economic Area.
- Amounts paid to unconnected third parties to carry out R&D activities are eligible for the tax credit where such expenditure does not exceed 10 per cent of total R&D expenditure by the company or 5 per cent in the case of sub-contracting to universities or third-level education institutions. The expenditure which can qualify for the credit is increased to the greater of the relevant 5 per cent or 10 per cent limits, as appropriate, or up to €100,000 as matched by the company’s own R&D expenditure. This is very welcome.
- Where a company which has made a R&D tax credit claim ceases to carry on a trade and another company commences to carry on that trade and the R&D activities, the successor company may claim any R&D tax credit amounts not used by the predecessor company against corporation tax. This is provided that both companies were members of the same group of companies at the time of the transfer of the trade.
Qualifying Expenditure on Buildings or Structures used for R&D Purposes
Finance Bill 2012 also provides for the following in relation to expenditure on buildings or structures used for R&D purposes:
- Expenditure shall not be regarded as qualifying expenditure for the purpose of the tax credit where it has been or is to be met directly or indirectly by grant assistance or any other assistance from the EU or European Economic Area.
- Where a company which has made a R&D tax credit claim ceases to carry on a trade and another company commences to carry on that trade and R&D activities and the building or structure to which the claim relates is transferred to the successor company. The building or structure must continue to meet all the requirements of a qualifying building in the hands of the successor and, at the time of the transfer both companies must be members of the same group of companies. The successor company may claim any tax credits not used by the predecessor company against corporation tax.
Where a company makes a claim for payable tax credits for expenditure on scientific research, buildings used for R&D or where unused tax credits are surrendered to key employees and the amounts in either case are found not to be due, the amounts may be recovered by an assessment to tax under Case IV of Schedule D and interest and penalties will apply.
These provisions apply in respect of accounting periods commencing on or after 1 January 2012, with the exception of the provisions relating to payments to unconnected parties and third level education institutions which apply in respect of accounting periods ending on or after 1 January 2012.
Relevant Contracts – Construction/Meat/Forestry Industry
Finance Bill includes a number of clarifications regarding the new RCT regime that came into operation on 1 January, including the following:
- A penalty up to €5,000 will apply where a principal fails to notify Revenue in advance of making a payment to a subcontractor.
- RCT applies where a relevant contract is entered into for the installation, alteration or repair of systems of telecommunications.
It is welcome that the new RCT regime is being monitored and tweaked, as it has been a major impact on many businesses.
Film Investment Relief
Under current legislation, relief is given where a company or individual invests in a qualifying film that is produced by a qualifying company. On completion of the film the company must provide the Revenue Commissioners with a compliance report.
- Under the Finance Bill, a penalty will be imposed on the directors or secretary of the company where a compliance report is not filed with Revenue within 6 months after the completion of the film.
- In addition, the Bill states that a company shall not be a qualifying company where any amount of the sums invested by the investors are repaid before the Revenue Commissioners have notified the qualifying company in writing that a compliance report has been received.
Renewable Energy Generation Projects
Relief available for companies for investments in renewable energy generated projects, on which the Minister has given a certificate, has been extended by 3 years, and will now expire on 31 December 2014.
Deposit Interest Retention Tax (DIRT)
Finance Bill 2012 confirms the 3% increases in the rates of DIRT.
Deposit interest received from non-EU countries will be will be taxed at 30 per cent where the recipient is a standard rate taxpayer and makes a timely return of the income and at 41 per cent where the recipient is a higher rate taxpayer, or has not made a timely return of the income.
Interest Payments to Connected Persons in Non-DTA Countries
Under Finance Bill 2012, where a ‘qualifying company’ pays interest to a connected person who is resident in a territory with which Ireland does not have a tax treaty, a proportion of the interest paid will not be considered to be a distribution. As such, the company will be able to claim a tax deduction in relation of the proportion of the interest. The deductible amount will be the amount of the interest that will be taxed in the recipient country provided that the tax rate application in that country is not less than 12.5%.
A ‘qualifying company’ is one who advances money in the ordinary course of a trade carried on in the State and for which any interest payable in respect of money so advanced is taken into account in computing the income of its trade.
Transactions in Emissions Allowances
A tax deduction is available to a company for expenditure incurred for the purposes of the trade on the purchase of emissions allowances and that amounts received or receivable for the disposal of purchased allowances are deemed to be trading receipts of the trade in computing the company’s trading income.
- A double deduction is available in computing the profits of a trade of farming for the increase in the rate of carbon tax on farm diesel which is due to come into effect on 1 May 2012.
- A ‘qualifying farmer’ is entitled to enhanced stock relief of 100% for a period of four years commencing in the year he or she becomes a ‘qualifying farmer’.
- An enhanced 50% rate of stock relief is available for partners in registered farm partnerships and a 100% rate of stock relief for certain ‘qualifying farmers’, who are partners in such partnerships.
- This scheme of stock relief is subject to clearance with the European Commission under State Aid rules. It will come into operation on such day as the Minister for Finance may appoint by Ministerial Order. The relief will apply until December 2015.
As announced by Minister Noonan on Budget Day, the Finance Bill does not propose any change to the existing income tax rates, bands or credits. In real terms, this is a reduction in bands and credits as they ought to increase in line with inflation.
Universal Social Charge
The Finance Bill provides for the Budget announcement to increase the exemption threshold for the Universal Social Charge from €4,004 to €10,036 with effect from 1 January 2012.
Finance Bill 2012*
|2%||€0 to €10,036|
|4%||€10,037 to €16,016|
*A lower USC rate will be applied to income earners over 70.
**Once €10,036 is exceeded, USC will be applied on the entire income.
A new legislative provision has also been introduced whereby certain individuals, whose annual income for the tax year is €100,000 or more, will be liable to an additional 5% USC charge on any part of their income which is sheltered by specified property reliefs.
The Bill contains a number of technical amendments in relation to the application of the USC to exclusion orders and relief clawback.
Reliefs, Exemptions and Credits
Mortgage Interest Relief
As per the Budget, a new rate of mortgage interest relief of 30% will apply for first time buyers who took out their first mortgage between 2004 and 2008 inclusive. This increased rate will apply from 2012 to 2017 inclusive. Readers will be aware that the Revenue Commissioners and lending institutions are currently updating their systems to make the appropriate adjustments in this regard. (The detail is important here – the definition of ‘first time buyer’ needs to be carefully examined.)
The Bill also makes provision for the Budget announcement that mortgage interest relief will be available at 25% for first-time buyers who purchase property this year and at 15% for non-first-time buyers who purchase this year.
Mortgage interest relief will no longer be available to house purchasers who purchase a property after the end of 2012. The relief will be fully abolished from 2018.
TAX TIP: First time buyers considering purchasing a property should do so prior to the end of 2012 to avail of mortgage interest relief.
Special Assignee Relief Programme (SARP)
The SARP offers a tax break to certain skilled individuals coming to Ireland to work in the Irish based operations of their employer company.
Employees signed up for at least one year and a maximum of five years will be exempt from income tax on 30% of salary between €75,000 and €500,000 . This is a welcome move and is similar to a Dutch scheme which means that assignees with special skills are taxed on only 70% of their income.
The programme will apply for the 2012, 2013 and 2014 years of assessment.
Tax Deduction for Performing Duties Abroad
For the years of assessment 2012, 2013 and 2014 individuals who temporarily perform their duties in Brazil, Russia, India, China or South Africa may be entitled to a limited tax deduction subject to meeting certain criteria, for example the employee must spend at least 60 days in Ireland developing markets in for these countries.
Relief for Third Level Education
The first €2,250 and €1,125 of fees per claim in respect of full time courses and part time courses will not qualify for tax relief.
Removal of Tax Exemption
The Bill gives effect to the removal of the 36 day tax exemption for illness benefit and occupational injury benefit payable by the Department of Social Protection.
Age Related Relief for health insurance premiums
The Age Related Tax Credit (ARTC) credit will now be in five year bands for individuals aged between 60 and 84 years with a separate band for individuals aged over 85 years. Notably the credits remain the same for all age groups with the exception of those aged between 70 and 80 years; the credit has decreased by €50 to €900. This is the final year of the ‘interim’ based tax scheme. These measures are in line with the announcements made by the Minister for Health in late 2011.
Share Based Remuneration
The Bill contains a number of technical amendments in relation to the application of the USC to share based remuneration.
Additionally, where a director or employee deferred the payment of income tax on share option gains the Bill provides that half of the gain arising on the disposal of any other shares (after paying any income tax, USC and PRSI) must be offset against the outstanding income tax liability until the liability has been cleared.
The Bill provides for a refund of income levy and USC where shares are forfeited.
Where an employer remunerates an employee by way of shares if the employee has not returned to his employer the appropriate amount of income tax due, the employer will now be entitled to withhold or sell sufficient shares to meet that income tax liability.
Start Up Exemption:
The exemption from Corporation Tax of trading income and certain gains of new start-up companies in the first three years of their trading is being extended to those companies who commenced trading in 2012, 2013 and 2014.
Companies that qualify will be fully exempt from corporation tax on trading profits and chargeable gains on the disposal of assets used for the new trade where the total amount of corporation tax for the year does not exceed €40,000.
At the current rate of corporation tax, i.e. 12.5%, this equates to €320,000 of profits per year. Where corporation tax for the period is between €40,000 and €60,000, marginal relief will apply. No relief is available where the corporation tax liability for the period exceeds €60,000.
This relief will apply for three years from the commencement of the new trade. Therefore, the company could shelter from tax up to €960,000 of trading profits over a three year period. In order to avail of this relief, significant PRSI payments must be made by the company.
Group relief is extended to ensure that two Irish resident companies who are members of the same group can pass losses through a company resident in a treaty country where the company is in the same group. This is in line with other amendments to the tax legislation to ensure that Ireland complies with EU law.
Extension of Unilateral Credit Relief:
Irish resident companies can now claim unilateral credit relief for foreign withholding tax suffered on leasing payments in a country with which Ireland does not have a tax treaty. This is useful for Irish companies undertaking operations in emerging market countries such as Brazil.
Extension of the 12.5% Rate to Certain Foreign Dividends:
The 12.5% rate applicable to dividends received from trading profits of companies resident in treaty countries has been extended to include those countries which have ratified the convention on Mutual Assistance in Tax Matters.
Capital Gains Tax
The Bill gives legislative force to the proposed increase in the CGT rate from 25 to 30% effective from 7 December 2011.
Irish Situate Assets:
Shares in an Irish incorporated company will be treated as located in Ireland for CGT purposes regardless of where the share certificate is held. This is a potentially significant change. We will be investigating this matter further in due course. The section applies to disposals made after 8 February 2012.
As announced in the Budget, the government has reduced the amount of qualifying retirement relief for individuals who are 66 (or over) from €750,000 to €500,000. The reduced limit applies to disposals to persons other than a child or qualifying niece or nephew and applies to disposals made after 1 January 2014.
The Budget also proposed an upper limit of €3 million on retirement relief available on a disposal to a child of the disponer. The restriction applies to disposals made by individuals who are 66 or over and applies to disposals made from 1 January 2014.
Tax Tip: If you are planning on passing your trade or shares in a family company on to the next generation consider executing this transaction in advance of the 1 January 2014 deadline. Whereas 2014 may seem like a long way away, our experience is that these types of transaction take some time to organize and implement – it is best if action is taken now.
European properties purchased between 7 December 2011 and 31 December 2013 will be exempt from CGT where the property is held for more than 7 years. If the property is held beyond the 7 year period, the portion of the gain attributable to the 7 year period will not attract CGT.
Property Based Incentives – Economic Impact Assessment
The proposals in Budget 2011 and Finance Act 2011 sought to restrict the use of property reliefs through a ring fencing approach and targeted a yield of €60 million in its first year. They were not implemented pending further investigation. This would have amounted to an effective termination of property reliefs for many individuals. The Government today published the Economic Impact Assessment of Potential Changes to Legacy Property Reliefs (“EIA”). This impact assessment has enabled the Government to understand the possible costs to the State, as well as the impact on individuals and economic sectors, of a change in law relating to the use of reliefs. The consultation paper identified possible adverse economic impacts on cash flows and solvency relating to individual investors, as well as deadweight costs on the wider economic economy through possible loss of economic activity.
The EIA identified two investor groups:
|Non Professionally Advised||Professionally Advised or Professional Investors|
|Loosely defined as those with income below the High Earners Threshold (i.e. €80,000) and who invested mainly in buy to let residential property schemes (i.e. Section 23 and Section 50 Schemes).||Broadly described as investors with income generally in excess of €100,000, most of whom will be captured by the High Earners Restriction and were the primary investors in accelerated capital allowances schemes.|
|These assets tend to be low yielding due to location and are now characterised by high levels of negative equity.||A key characteristic of professionally advised investors is that many of them are employers and business owners.|
|Almost 42% of all claims in 2007 for tax relief under the student accommodation scheme came from investors with income less than €100,000.||The EIA noted that while this group may be able to sustain further restrictions on the use of property reliefs, the cash flow is likely to be diverted from productive uses such as enterprise and job creation.|
|Reliefs to small investors should not be restricted. This is expected to greatly assist individuals in continuing to meet mortgage payments. It is possible that this policy could be reviewed in 2015.|
|A separate treatment of Section 23 and accelerated capital allowances reliefs is recommended as schemes that offered accelerated capital allowances were less accessible to investors who did not have recourse to professional advice.|
|Wait for data on the additional yield achieved in 2010 from the change to the High Earners Restriction before implementing any further policy responses in relation to the legacy property relief schemes.|
|Modify the High Earners Restriction to restrict the use of property reliefs in a given year. As the High Earners Restriction is currently silent on what reliefs are restricted, a possible proposal would be to introduce a property specific restriction.|
|Introduce a levy on the income that is sheltered from property based reliefs by individuals with income in excess of a threshold, be it €100,000 or €125,000. This will allow the reliefs to be used as expected – though at a
reduced rate as per the High Earners Restriction – and instead levy the individual’s income.
Accordingly, the Finance Bill sets out to make a number of changes to the legislation dealing with certain property incentive reliefs.
- All of the restrictions to the tax relief for lessors (commonly known as Section 23-type relief) which were introduced in the Finance Act 2011 have been repealed. Therefore, claims for relief are not ring fenced to the rental income from the specific property.
- The restriction on the use of certain losses has been repealed.
- With effect from 1 January 2015, investors in accelerated capital allowance schemes will no longer be able to use any capital allowances beyond the tax life of the particular scheme where that tax life ends after 1 January 2015. Where the tax life of a scheme has ended before that date no carry forward of allowances into 2015 will be allowed.
- Previously, the interaction between the application the High Earners Restriction in the context of a ‘‘clawback’’ of Section 23-type relief caused an individual to be reclassified as a high earner when, in fact, they were not. Provisions are included in the Bill for a series of technical amendments to address this unexpected interaction. The result is that individuals that seek to deleverage either at their own initiative or under the instructions of their credit institution should not fall within the remit of the High Earners Restriction and in the process incur a tax liability far in excess of reliefs used during their ownership of the property.
Transfer of assets on death of ARF owner
The transfer of ARF assets on the death of an ARF owner to a child of the owner aged over 21 is subject to a final liability tax. The rate of this tax is being increased from 20% to 30%.
Approved Retirement Funds (ARFs)
The annual imputed distribution which applies to the value of assets in an ARF each year is being increased from 5% to 6% in respect of ARFs with asset values in excess of €2 million on 30 November each year. The 6% rate applies to the entire aggregate value of the ARF and not just the portion that exceeds €2 million. The new provision applies to ARFs created on or after 6 April 2000 (when the existing gross roll-up regime for ARFs was introduced) and to PRSAs vested on or after 7 November 2002 (the date of introduction of PRSAs) where the ARF/PRSA holder is 60 years of age or over for the whole of a tax year. The new regime will apply for the tax year 2012 and subsequent tax years.
Personal Retirement Savings Accounts (PRSAs)
The annual imputed distribution provisions which apply to ARFs will also apply on the same basis to “vested” PRSAs, where the assets are retained in the PRSA rather than being transferred to an ARF. “Vested” PRSAs are PRSAs from which retirement benefits have commenced to be taken, usually in the form of the “tax-free” retirement lump sum. The provisions will include an increased deemed distribution percentage of 6% for “vested” PRSAs with assets in excess of €2 million.
Where an individual owns more than one “vested” PRSA or ARF, or owns both “vested” PRSAs and ARFs, the deemed distribution will apply to the aggregate of the assets in all of that individuals PRSAs/ARFs where the combined value of assets in “vested” PRSAs and ARFs exceed €2 million. This appears to close an area of ‘pension planning’ that has been popular in recent years.
Standard Fund Threshold (SFT)
The Finance Bill provides for new arrangements for the more flexible recovery of the tax payable on the chargeable excess over the SFT of €2.3m. Where the capital value of an individual’s pension benefits at retirement exceeds the reduced SFT of €2.3 million, or a higher Personal Fund Threshold (PFT) if applicable, a chargeable excess arises which suffers an immediate ring-fenced tax charge of 41 percent, with further tax implications when the individual’s pension benefits are drawn down. Currently, the administrator of a pension scheme is obliged to pay any tax due on a chargeable excess ‘‘upfront’’ and to recover it from the benefits paid to the individual under the scheme. The new arrangements provide a more structured and flexible reimbursement regime with the changes coming into effect from 8 February 2012.
Dual Private & Public Sector Pension Arrangments
In situations where individuals have dual private sector and public service pension arrangements difficulties arise from the operation of the SFT regime and significant chargeable excesses could arise in certain circumstances on affected individuals in the public service. The Finance Bill introduces a one-off opportunity for individuals who meet the conditions to encash their private pension rights, in whole or in part, from age 60, with a view to avoiding or minimising the chargeable excess that would otherwise arise when the public service pension crystallises. The exercise of the option will attract tax at the point of encashment on the full value of the rights at a ring-fenced rate of 41 per cent plus USC.
Value Added Tax
The Bill extends the VAT reverse charge mechanism to supplies of construction services between connected individuals. The amendments provide for the application of a reverse charge in the situation of an accountable person partaking in a business in the State, who provides construction services to a connected person in the continuance of business. In such cases the recipient of the service will account for VAT on construction services on a reverse charge basis.
The Bill includes the change to the VAT rate from 21% to 23%, effective from 1 January 2012.
Interestingly, the Bill updates the definition of bread to ensure that the zero rate applies to certain products that are commonly accepted as being bread, including bagels, baps, blaas, naan breads and pita bread, but which were previously not specifically included in the zero rate.
The Finance Bill, following the Budget announcement, states that a single rate of stamp duty at 2 per cent now applies to all non-residential property transactions as of 7th December 2011. It also confirms that consanguinity relief will be abolished in 3 years’ time.
There have also been several technical amendments to the Stamp Duties Consolidation Act 1999 which provide for the stamp duty exemption to be extended to cover company mergers, transfer of Irish assets between offshore funds within EU and Treaty countries in cases of reconstructions, and the cross-border mergers of investment funds among others.
The trading of greenhouse gas emissions is now also exempt from stamp duty.
There have been significant changes to levies on private health insurance. As of 1 January 2012, all new contracts and health insurance renewals will be subject to increased levies: €95 per person under 18 years and €285 for each insured person over 18 years. This levy will become an annual levy starting from January 2013.
In order to modernise the Act, Stamp Duty is to be put on a self-assessment basis. Instruments will be required to be stamped within 30 days of a transaction, the adjudication procedure will be abolished, Revenue will have provisions to make assessments, audit and appeal procedures will be introduced, and other related changes will be made. A date is yet to be specified as to when these changes will take effect. This will be a significant change to how stamp duty is administered.
Capital Acquisitions Tax
The main changes to CAT, as was announced in the Budget, are the increase in the rate from 25% to 30% and a reduction in the Group A threshold from €332,084 to €250,000. Group B and Group C tax free thresholds have been rounded up from €33,204 and €16,602 to €33,500 and €16,750 respectively. The indexation of the tax-free group thresholds is now abolished. These amendments are effective since 7 December 2011.
The pay and file date for CAT submissions to Revenue has been changed from 30 September to the 31 October of each year.
The Bill confirms the increase in the carbon tax on petrol and auto-diesel. The carbon tax is increased from €15 to €20 per tonne.
The 25 cent increase in Tobacco Products Tax (VAT inclusive) on a box of 20 cigarettes with pro-rata increases on other tobacco products was also confirmed.
The Bill delivers changes to the law for Natural Gas Carbon Tax. The rate is increased from €3.07 to €4.10 per megawatt hour, with effect from 1 May 2012.
The Finance Bill also introduced the following changes:
- The 6 year record retention period for tax purposes now applies to companies which are liquidated or which are dissolved. The onus is on the liquidator and the company directors immediately prior to dissolution.
- Penalties for making incorrect tax returns, be it deliberate or carelessness have been extended to apply to the domicile levy and the universal social charge.
- An attempt to modernise the assessment of direct taxes has resulted in changes to the Taxes Consolidation Act 1997. The new rules relate to due dates and updated definitions.
- The domicile levy is payable by those Irish-domiciled individuals whose Irish assets exceed €5m, whose worldwide income exceeds €1m and whose Irish income tax for that given year does not exceed €200,000. The citizenship requirement has been removed.
- The list of countries with whom Ireland has a Double Taxation Agreement has been updated to include Armenia, Germany, Panama and Saudi Arabia.