Annual Conference 2018
Corporate Tax – Big Changes and their SME Impact
Cian Liddy, Director, KPMG
20 April 2018
In the current environment of unprecedented rate of change in tax rules at international level, be it EU, US or OECD as discussed separately by Brendan Crowley and Paraic Waters, it is easy to lose sight of the various changes that apply to the domestic SME sector. This paper highlights the changes that are relevant in this area, as well as some accounting matters that are topical for tax advisers.
One of the areas in which Finance Act 2017 (“FA17”) introduced many changes was in relation to the taxation of profits from property.
7-year CGT exemption
As readers will be aware, FA12 saw the introduction of a new capital gains tax relief for land and buildings, namely s604A, to TCA 1997. The aim of the relief, in a time of limited numbers of property transactions and negative sentiment about the Irish economy more generally, was to stimulate interest in the acquisition of Irish real property, albeit that it applies equally to property throughout the European Economic Area in keeping with our EU obligations.
Broadly, the relief provided that for land acquired between 7 December 2011 and 31 December 2014 and retained for at least seven years, a portion of the gain was relieved from tax. The relieved portion was calculated by assuming the gain arose on a straight-line basis over the period of ownership and relieving the part attributable to the first seven years of ownership.
In the lead up to Budget 2018, some commentators suggested that the requirement for the property to be retained for seven years in order to qualify for any measure of relief (e.g. until 31 December 2021 for property purchased just before the end of the qualifying period) was negatively impacting the property market’s return to normality by creating an incentive for landowners to ‘hoard’ land. In order to address this concern, the relief was changed to provide that only four years of ownership was required in order to qualify for the relief, the four years of ownership for all relevant property having broadly expired by the time FA17 was enacted on 25 December 2017. It will be difficult to gauge definitively whether this amendment will have the desired effect, but it does remove the actual/potential barrier to transactions, arguably without increasing the amount of relief afforded by the Exchequer.
Capital allowances for creches and gyms
Finance Act 2017 introduced a new s843B into TCA 1997 to provide employers with capital allowances on expenditure incurred on buildings used to provide childcare services or a fitness centre to their employees. This section is subject to a commencement order from the Minister for Finance, which has not yet been issued. When in force, capital allowances will be available at a rate of 15% per annum for six years with a final allowance at a rate of 10% due in year seven.
For employers who are individuals, these capital allowances will be considered a ‘specified relief’ for the purposes of s485C TCA 1997 i.e. the limitation on specified reliefs that can be used by high income individuals.
Income tax treatment of landlords
Given the various issues that have been the subject of intensive media commentary in the past 12 months in relation to the functioning or otherwise of the property market, it is perhaps of no surprise that the taxation of landlords has been the subject of some debate. This is particularly pertinent to the attractiveness of rental property investment to landlords given the recently-introduced restrictions on the extent to which residential property rents can be increased – with added restrictions on gross income levels, the focus on tax and other costs to be funded from that income becomes even more acute.
In this regard, the Department of Finance in March 2017 launched a consultation on the tax treatment of landlords, and the “Report of the Working Group on the Tax and Fiscal Treatment of Rental Accommodation Providers” was published in September 2017.
In its report, the Working Group suggested 10 policy options for consideration by Government (see Appendix). One such option was to introduce a deduction for pre-letting expenditure for previously vacant properties. In FA17, the Government moved to adopt this option with the introduction of s97A to TCA 1997 in respect of expenditure incurred on or before 31 December 2021. Section 97A TCA 1997 provides that for a property that has been vacant for at least 12 months, expenditure incurred prior to the first letting of that property after the passing of FA17 will be deductible for Case V purposes if it would have qualified for deduction under s97(2) TCA 1997 if it had been incurred on or after the day it was first let. The amount of this additional deduction is capped at €5,000 per property. The deduction will be clawed back if the property ceases to be let as a residential premises within four years of the first letting after the passing of FA17.
It should also be remembered in connection with the taxation of landlords that the phased restoration under s97(2J) TCA 1997 of full mortgage interest deductibility in respect of residential properties continues, with 85% of such interest deductible for 2018.
Other taxes on landlords
One item that had been repeatedly debated with various clients from its introduction in 2009 to its abolition in 2013 was the deductibility for Case V purposes of the Non-Principal Private Residence (“NPPR”) charge. Section 97(2)(b) TCA 1997 permits the deduction for Case V purposes of any sum borne by the person chargeable “in respect of any rate levied by a local authority”. The NPPR charge did not fit neatly within this definition because the charge was fixed by national legislation, albeit that it was collected by local authorities and retained by local authorities for their use.
In February 2017, the High Court in a case referred by the Appeal Commissioners determined that the NPPR charge did constitute a rate levied by a local authority that was deductible from rental income under s97(2)(b) TCA 1997. Unfortunately for landlords however, this position was short-lived. On foot of an appeal by Revenue, the Court of Appeal considered the issue further and allowed Revenue’s appeal as set out in eBrief 119/17. In so doing, the Court relied on the meaning of the word ‘levy’ and pointed to the absence of any role for local authorities in determining whether to raise the charge, the amount of that charge, or even to vary the amount charged. On this basis, the Court concluded that the charge could not be said to be ‘levied’ by any local authority, a pre-condition for the deductibility of the charge under s97(2)(b) TCA 1997.
While it could be argued that the above Court of Appeal decision is of limited relevance given the abolition of the NPPR charge in 2013, the structure of the successor charge, Local Property Tax, bears a number of similarities to the NPPR charge. A particularly important distinguishing feature in the context of the above Court of Appeal decision however, is the discretion afforded to local authorities under s20 of the Finance (Local Property Tax) Act 2012 to vary the rate of charge using a local adjustment factor of up to 15%. Debate is likely to continue on whether this distinguishing feature is sufficient to support the deductibility of Local Property Tax liabilities under current law. Interestingly, one of the policy options proposed in the September 2017 report mentioned above was “introducing Local Property Tax deductibility for landlords”.
However, of more importance to all Local Property Tax payers will be the outcome of the expected changes in the method for calculating the liability itself. The base valuation of the relevant property (as at 1 May 2013) and the rate of charge is unchanged since the charge was introduced, despite the original intention that valuations would be revised every three years.
FA17 introduced a number of changes relating to the taxation of farmland, some administrative and others more substantive in nature.
On the administrative side, farmers qualifying for CGT relief on farm restructuring under s604B TCA 1997 for disposals made on or after 1 July 2016 have some additional reporting requirements. These requirements oblige the farmer to disclose the amount of the gain relieved under that section, together with the value(s) of the land concerned at date of acquisition and disposal, and the incidental costs incurred.
The income tax relief afforded to written leases of farmland for definite terms of at least five years was also subject to some minor amendments in FA17. The anti-avoidance provisions included at s664(7) TCA 1997 preclude the application of the relief to farmers who enter back-to-back leases e.g. Farmer A leases Farm A to Farmer B, while Farmer B simultaneously leases Farm B to Farmer A. This anti-avoidance provision has now been widened to cover circumstances where connected parties are involved e.g. there is both a lease of land from Farmer A to Farmer B, and Farmer A simultaneously obtains a lease of land from person(s) connected to Farmer B. Darragh Duane is discussing the farming stamp duty measures introduced in FA17.
FA17 introduced a number of anti-avoidance provisions that could be loosely grouped together as ‘anti-swamping provisions’. As readers will be aware, the scope of the charge to Irish tax for non-residents on chargeable gains is limited to those arising on the disposal of various Irish-situate assets, commonly referred to as ‘specified assets’, including unquoted shares deriving their value or the greater part of their value from such assets.
FA15 introduced subsection (1A) to s29 TCA 1997, which provided that in considering the extent to which share value is derived from Irish specified assets, transfer(s) of money into the relevant company with a main purpose of avoiding tax (e.g. by removing the disposal from the scope of Irish tax for a non-resident disponer) should be disregarded. FA17 has now extended this provision for disposals occurring on or after 19 October 2017 such that transfer(s) into the company of assets other than money may also be disregarded where a main purpose of such a transfer is the avoidance of tax.
FA15 did not make a similar amendment to the chargeable gains withholding tax provisions in s980 TCA 1997. This has now been addressed in FA17. It will be interesting to see how this operates in practice, as a purchaser of unquoted shares from a non-resident vendor is arguably now required to not only determine if the greater part of the value of those shares is derived from Irish specified assets, but also to consider the purpose of any previous transfer of assets into the company.
The participation exemption under s626B TCA 1997 has also been amended in line with the above. Disposals by a parent company of shares deriving their value from Irish specified assets do not qualify for the participation exemption. Subsection (3B) has now been introduced for disposals made on or after 19 October 2017 such that the exclusion from s626B TCA 1997 is aligned with the general scope of capital gains tax under s29 TCA 1997.
Finance Act 17 included a number of initiatives with the intention of incentivising environmentally-friendly economic activity.
In this regard, both the CGT retirement relief (s598 TCA 1997) and CAT agricultural property relief (s89 CATCA 2003) were amended to provide that land on which solar panels are installed can qualify as a ‘qualifying asset’ and ‘agricultural land’ respectively, provided that the area of land on which they are installed does not exceed half the total area of land concerned. Other changes to s598 TCA 1997 are discussed by John Heffernan.
The acceleration of capital allowances on energy-efficient equipment such that a full deduction is available in the first year in which the equipment is brought into use was due to expire on 31 December 2017. This has been extended in the FA for a further three years to cover expenditure incurred on or before 31 December 2020.
As the number of electric/hybrid cars on our roads has increased, two benefit-in-kind concerns arose and were addressed by FA17. The first concern related to the potential benefit-in-kind charge on the expense incurred by corporate employers in providing facilities for the electric charging of vehicles. FA17 introduced subsection (5H) to s118 TCA 1997 to provide that no BIK arises in respect of such an expense, provided all employees and directors of the body corporate can avail of the facility.
The second concern was a perceived need to incentivise the use of electric cars over those with conventional motors. In this regard, s121 and s121A TCA 1997 were amended to provide that no BIK will arise in respect of the provision to an employee of a vehicle that derives its motive power exclusively from an electric motor. The legislation provides that this exemption applies only to an electric vehicle provided in the 2018 calendar year, but Minister Donohoe has announced (i) that this exemption will continue for 2019, and (ii) that a complete review of the system for assessing BIKs on company vehicles will be undertaken in the near future. This is to be welcomed in light of the complexity and stringent record-keeping requirements of the current system, and any simplification would be particularly welcomed as we enter the new era of real-time PAYE reporting from 1 January 2019. PAYE Modernisation is covered by Pat O’Brien.
Key Employee Engagement Programme
One of the signature initiatives included in FA17 was the introduction of the Key Employee Engagement Programme (“KEEP”) to allow SMEs to compete with larger enterprises in terms of the share-based remuneration that could be offered.
Traditionally, SMEs have been slow to implement share-based remuneration schemes, meaning that they have difficulty in competing for talent, particularly with quoted enterprises who can provide a ready market in the shares awarded and can avail of the economies of scale necessary to ensure the success of the scheme.
John Heffernan is separately looking at the benefit of this scheme to participants, so I do not propose to duplicate here. Instead, we will look at some aspects of the scheme from the SME employer’s point of view.
In order to avail of the scheme, an employer must fall within the definition of a ‘qualifying company’. This is defined in the new s128F(1) TCA 1997 as a company that:
“(a) is incorporated in the State, or in an EEA state other than the State, and is resident in the State, or is resident in an EEA state other than the State and carries on business in the State through a branch or agency,
(b) exists wholly or mainly for the purpose of carrying on a qualifying trade on a commercial basis with a view to the realisation of profit, the profits or gains of which are charged to tax under Case I of Schedule D,
(c) throughout the entirety of any relevant period—
(i) is an unquoted company none of whose shares, stock or debentures are listed in the official list of a stock exchange, or quoted on an unlisted securities market of a stock exchange other than—
(I) on the market known as the Enterprise Securities Market of the Irish Stock Exchange, or
(II) on any similar or corresponding market of the stock exchange—
(A) in a territory other than the State with the government of which arrangements having the force of law by virtue of section 826(1) have been made, or
(B) in an EEA state other than the State,
(ii) is not regarded as a company in difficulty for the purposes of the Commission Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty,
(d) at the date of grant of the qualifying share option—
(i) is a micro, small or medium sized enterprise within the meaning of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium sized enterprises, and
(ii) the total market value of the issued but unexercised qualifying share options of the company does not exceed €3,000,000”.
It is worth spending some time looking at the various elements of this definition.
Paragraph (a) is unlikely to be of significant cause for difficulty. Paragraph (b) requires that the SME is carrying on a ‘qualifying trade’. This term is largely defined by what is not included i.e. it means trading activities, apart from:
“(a) adventures or concerns in the nature of trade,
(b) dealing in commodities or futures in shares, securities or other financial assets,
(c) financial activities,
(d) professional services companies,
(e) dealing in or developing land,
(f) building and construction,
(g) forestry, and
(h) operations carried out in the coal industry or in the steel and shipbuilding sectors”.
The meaning of ‘financial activities’ is in turn defined (at s488 TCA 1997 as regards the Employment and Investment Incentive Scheme) as “the provision of, and all matters relating to the provision of, financing or refinancing facilities by any means which involves, or has an effect equivalent to, the extension of credit….”.
‘Professional services’ meanwhile is defined, probably with less controversy or scope for misinterpretation, as:
“(a) services of a medical, dental, optical, aural or veterinary nature,
(b) services of an architectural, quantity surveying or surveying nature, and related services,
(c) services of accountancy, auditing, taxation or finance,
(d) services of a solicitor or barrister and other legal services, and
(e) geological services”.
Paragraph (c) is equally unlikely to cause much difficulty but must be satisfied throughout the period from the grant of the option to the date on which the option is exercised. In effect, this means that any company seeking to list their shares on a stock exchange should ensure that KEEP participants are afforded the opportunity to exercise their options in advance of the listing.
Paragraph (d) includes limits on the size of the company and the value of the issued but unexercised share options. There are a couple of points to be noted here:
- Compliance with this element is to be assessed at the time of granting the option only i.e. growth of the company after option grant does not affect this condition.
- The SME definition from 6 May 2003 means that the company concerned should have:
- fewer than 250 employees, and
- annual turnover not exceeding €50m and/or an annual balance sheet total (gross assets) not exceeding €43m.
- The market value limit is by reference to the value of all issued but unexercised qualifying share options concerned, not the shares themselves.
- The market value limit of all “issued but unexercised qualifying share options” is not necessarily confined to share options that qualify for KEEP. In fact, all share options that would have qualified for KEEP if they had been issued on or after 1 January 2018 and before 1 January 2024 should be taken into account. This may be of limited implication in practice as it has been customary for employers implementing share option schemes to grant ‘nil cost’ options, rather than the ‘market value’ options that fall within KEEP. However, it is something that should be reviewed for each company seeking to avail of the scheme.
Apart from the legislative provisions underpinning KEEP itself, there are some other items that warrant mention and should be borne in mind when advising clients:
- Revenue, in consultation with TALC, are in the process of drafting guidance on the operation of the KEEP scheme. In particular, given the requirement for the option price at date of grant to be no less than the market value of the underlying shares at that time, it is hoped that some clarity and ‘safe harbour’ approaches to valuation will be set out in that guidance to ensure that the costs of compliance with this requirement do not jeopardise SME’s willingness to participate in the scheme.
- There does not appear to be any restriction on having a separate class of ordinary share in the employer company that would be used for KEEP options.
- The allotment of shares on foot of the exercise of share options will attract an obligation to make some filings to the Companies Registration Office (CRO). These filings are likely to result in public disclosure of the value placed on the shares. For business owners concerned about the confidentiality/privacy of such information, this would need to be flagged upfront.
- Irrespective of the accounting treatment of the option grant and exercise, deductions for corporation tax purposes will be limited under s81(2)(n) TCA 1997 to expenditure actually incurred on the acquisition of such shares for bona fide commercial purposes. In practice, where new shares are allotted to satisfy the exercise of KEEP share options, this means that it is unlikely that corporation tax deductions will be available.
- The tax benefit of the KEEP scheme to participants relies on the proceeds received from disposal of the KEEP shares being treated as a capital receipt subject to capital gains tax. For many SMEs, a ready market for their shares is not available and the obvious means for allowing employees to realise the value of their KEEP shares is to have the company redeem them. It is likely that this would not be effective as the redemption proceeds would be considered a distribution in accordance with s130 TCA 1997 and would not be excluded from such treatment by s176 TCA 1997. Accordingly, in advance of implementing a KEEP scheme, an SME should think carefully of the exit strategy that will be available to participating employees. In his paper and session, John Heffernan discusses some of key challenges of the scheme for family businesses, as well as the FA17 amendments to s135 TCA 1997 that will be relevant to reviewing exit strategies.
Finance Act 2017 and Companies Act 2014
Intangible assets and intellectual property
Some changes to the tax treatment of intangible assets/intellectual property were introduced in FA17.
The most significant of these changes was the re-introduction of the previous 80% cap on capital allowances available under s291A TCA 1997 in respect of intangible assets. As readers will be aware, s291A(6) TCA 1997 previously restricted the aggregate capital allowances on intangible assets and interest incurred in connection with the provision of an intangible asset, for any year to 80% of the trading income from the activities of (i) selling goods or services that derive the greater part of their value from the relevant intangible assets, or (ii) managing, developing or exploiting such intangible assets. This restriction was abolished by FA14 for accounting periods commencing on or after 1 January 2015, such that the aggregate deduction available could be up to the full amount of the relevant trading income.
The same restriction has now been re-introduced, in line with the recommendations of the Coffey Report, in respect of expenditure incurred on or after 11 October 2017.
While the principle of having the restriction only affect future expenditure is to be welcomed, it does inevitably lead to some uncertainty in requiring taxpayers to apportion on a just and reasonable basis the relevant income attributable to expenditure incurred before and after that date.
One other amendment introduced to s291A TCA 1997 is to clarify that a trade that consists wholly of the activities described above should be treated as a ‘relevant trade’ for the purposes of the restrictions on deductions described above.
Another relief related to intangible assets that was amended slightly in FA17 is the Knowledge Development Box (KDB). Under this relief, an effective corporation tax rate of 6.25% can be achieved in respect of trading income attributable to qualifying intellectual property assets. It would appear that the legislation as previously drafted enabled relief for losses and charges incurred in the KDB trade to be offset at a rate of 12.5%, notwithstanding that corresponding profits would be subject to a rate of 6.25%. This anomaly has now been rectified by the amendment of s769K TCA 1997 to effectively allow relief only on a value basis.
Companies Act 2014 amendments
Following the consolidation of the various Companies Acts from 1963 onwards into the new Companies Act 2014, a number of provisions in TCA 1997 that refer to the Companies Acts needed to be updated.
- FA17 addressed the update of these references including for example: the replacement of references to a company’s ‘memorandum and articles of association’ with references to a company’s ‘constitution’; and
- changing the references for ‘holding company’ and ‘subsidiary’ definitions from Companies Act 1963 to the Companies Act 2014 equivalents.
More substantive changes, such as clarifications on the application of stamp duty exemptions to the new types of merger transaction envisaged under Companies Act 2014 have been covered in Darragh Duane’s session.
Interest as a charge relief
One of the corporation tax measures in which practitioners can face considerable interpretation difficulties in advising clients is regarding the availability of relief for interest as a charge under s247 TCA 1997.
However, aside from the interpretation issues that arise whenever practitioners deal with provisions of this complexity, a practical issue that has been of concern to taxpayers and the subject of much engagement with Revenue was the availability of relief for ‘multi-tiered holding company’ structures. For example, these can arise where taxpayers take over an existing structure and could cause difficulty in securing the deduction under s247 TCA 1997.
FA17 sought to address this issue for loans made on or after 19 October 2017 by introducing the concept of an ‘intermediate holding company’ into s247 TCA 1997. I do not propose to go into significant detail on the section here, as each case will need to be considered on its own merits, and a full review of the relief would require more time than we have available to us in this session.
That said, the principles underpinning the changes are such that:
- relief should continue to be available for structures that would have qualified under the pre-FA17 regime
- relief should be extended to situations where the monies are used, via any number of intermediary holding companies, to subscribe for shares or lend to companies that exist wholly or mainly for the purpose of carrying on a trade or trades
Given the continuing complexity of the relief and the likely materiality of the conclusion, it is recommended that the availability of this relief is considered in advance of making the relevant share capital subscription/loan, and again each year when claiming the deduction.
Employment and Investment Incentive and Seed Capital reliefs
An amendment to the above reliefs was introduced to FA17 at Committee Stage, which amends s488 and s492 TCA 1997 and is to have effect from 2 November 2017. The amendments expand the category of person considered to be connected with the relevant company to all individuals where the individual, or an associate of the individual, possess or are entitled to acquire any of the issued ordinary share capital of the company, the loan capital and issued share capital of the company, or the voting power in the company. The amendment was introduced to align the relief with EU General Block Exemption rules introduced in 2015.
Previously, an individual could qualify for EII relief on an investment in a company where they held less than 30% of its issued ordinary share capital, loan capital plus issued share capital or voting power in the company. However, the 30% limit was not applied where the total issued share capital plus loan capital of the company was less than €500,000 at the time of the investment. In addition, the holdings of relatives were not considered in determining whether the 30% limit had been breached.
Revenue are currently updating their manual to reflect these changes, but have confirmed that all shares issued under these schemes prior to 2 November 2017 will continue to be processed under the previous rules. We understand that the scheme is currently being reviewed.
Definition of a chargeable gains group
FA17 introduced various changes to Part 20 TCA 1997 to more closely align the definition of a group for chargeable gains purposes to that applying for corporation tax loss relief purposes.
Previously, only companies that were tax-resident in the EU and the European Economic Area were considered to be part of the chargeable gains group. This definition has now been extended to companies that are resident in any territory with which Ireland has a double tax agreement and formally extends, what has been, for the most part Revenue practice, as regards:
- intra-group transfers of assets other than trading stock,
- the exit charge arising when a company ceases to be a member of a chargeable gains group.
The assets transferred must remain a chargeable Irish asset in the hands of the recipient. As the amendments were made specifically to s617 and s623 TCA 1997 as opposed to changing the definition of a chargeable gains group in s616 TCA 1997, it means that other parts of the chapter such as s618/s619 TCA 1997 do not benefit from the changes.
NB the definition of a chargeable gains group for the purposes of s626B TCA 1997 was already wider than that applying for the above provisions.
Anti-avoidance – domestic provisions
These provisions seek to disallow the relevant relief in respect of:
- goodwill disposed of directly or indirectly to a company where the individual concerned is connected with the company immediately following the disposal; and
- shares/securities in a company disposed of directly or indirectly to another company where the individual is connected with the first mentioned company immediately following the disposal.
This disallowance does not apply where “it would be reasonable to consider that a disposal of such assets is made for bona fide commercial reasons and does not form part of any arrangement or scheme the main purposes or one of the main purposes of which is the avoidance of liability to tax”.
In addition, a further amendment to s599 TCA 1997 will preclude taxpayers trying to artificially increase the €3m limit on disposals qualifying for retirement relief after the age of 66 where the disposals are split as follows:
- Up to €3m of value transferred directly to a child of the taxpayer; and
- Up to €750,000 of value transferred to a company controlled by that child.
Section 598 TCA 1997 was also amended by the introduction of subsection (7C) with effect from 2 November 2017 such that a gain relieved from tax under s600 TCA 1997 on the transfer of business assets to a company cannot then qualify for relief under s598 TCA 1997. Again, this exclusion of relief does not apply where it would be reasonable to consider that the disposal on which relief under s598 TCA 1997 is sought is made for bona fide commercial reasons and does not form part of any arrangement or scheme the main purpose or one of the main purposes of which is the avoidance of liability to tax.
Anti-avoidance – EU rules
In continuation of a theme of aligning provisions across the tax code, FA17 introduced amendments to s579, s579A, s590, and s806 TCA 1997 i.e. all of the provisions dealing with transfers of assets abroad.
With effect from 1 January 2018, the exclusion from the application of these anti-avoidance provisions will relatively consistently depend on the taxpayer being in a position to demonstrate that ‘genuine economic activities’ are carried on in the relevant Member State of the European Economic Area.
This wording is designed to align with the 2006 European Court of Justice decision in the seminal Cadbury Schweppes case. In that case, the taxpayer contended that a right to freedom of establishment was infringed by the UK controlled foreign companies’ regime. While the Court agreed that establishment in a particular territory for the purpose of benefiting from more favourable legislation does not in itself constitute abuse of the freedom of establishment that could justify a restriction on such right, the restriction could be justified where the arrangement was ‘wholly artificial’ or did not involve the undertaking of ‘genuine economic activities’ in the territory of establishment.
Mergers and divisions under Companies Act 2014
Companies Act 2014 introduced the possibility for Irish-incorporated companies to merge for the first time in Irish domestic law. This can be done in three ways:
- Merger by absorption
- Merger by acquisition
- Merger by formation of a new company
These new types of transactions necessitated a considerable review of stamp duty law. FA17 introduced a number of amendments in this area, which are discussed separately by Darragh Duane.
The changes introduced under FA17 for other tax heads include the following confirmations:
- The successor company in each case should be considered the original creditor for the purposes of s541 TCA 1997.
- The transfer of all assets and liabilities effected under a merger should be considered to be the transfer of a business for the purpose of s617 TCA 1997 where the transferor company carried on a business prior to the merger.
- ‘Relevant business property’ for CAT business property relief purposes transferred to a successor company as a result of a merger or division should not be regarded as having been sold i.e. the merger/division should not trigger a clawback of relief under s101 CATCA 2003.
- Similarly, the transfer of assets as a result of a merger/division should not be regarded as a disposal for the purposes of s104 CATCA 2003 i.e. the transaction should not in itself trigger a clawback of the CGT-CAT same event credit.
In addition, various amendments were introduced to provide that the successor company in such transactions should step into the shoes of the transferor company for tax fling obligations, liability for taxes, and entitlement to lodge appeals under the Taxes Acts.
Close company issues
FA17 did not involve significant amendment of the close company provisions set out in Part 13 TCA 1997. However, developments in other areas of the legislation have an impact in this area and are therefore worth mentioning briefly.
Directors’ loan debtors are a common sight on many close company balance sheets. Many of these give rise to a BIK taxable under s122 TCA 1997. Previously, the taxable amount for BIK purposes was the difference between the amount of interest payable on the loan, and the amount determined by applying the specified 4%/13.5% rate. With effect from 25 December 2017, the amount to be compared with the specified rate interest is the amount of interest actually paid by the director/employee in the relevant calendar year (see also eBrief 39/18).
It is also worth mentioning that the PAYE modernisation program due to go live from 1 January 2019 will result in more visibility for Revenue on the BIK amounts subject to PAYE in each pay run throughout the year. More details on this are provided in the separate PAYE session of this conference.
Accounting items topical for CTAs
Audit and accounts filing thresholds
A matter of significant importance to any SMEs is the extent to which their accounting results and associated information is available to the public via the CRO. It is therefore worthwhile reminding ourselves of the changes to audit and filing thresholds introduced in the Companies (Accounting) Act 2017.
In some ways, the relevant thresholds have been simplified as the same thresholds now apply to determine if a company qualifies as a small company, can avail of the audit exemption, can file abridged accounts, and can avail of an exemption from consolidation if head of the group. To qualify for all of these items, the company must meet the same two of the following three conditions for the current and preceding accounting year:
- Turnover of less than €12m net/€14.4m gross
- Balance sheet total of less than €6m net/€7.2m gross
- Fewer than 50 employees.
Importantly however, a holding company can only qualify as a small company if the entire group would meet the conditions above.
Previously, businesses who breached the above thresholds sought to minimise their accounts filing obligations by using Irish-incorporated unlimited liability companies (“ULC”). This will no longer apply where the group concerned involves limited liability companies as follows:
- Where an Irish-incorporated ULC is a subsidiary of a limited liability undertaking, wherever established, the Irish ULC will be required to file their accounts with the CRO for accounting periods commencing on or after 1 January 2017.
- For accounting periods commencing on or after 1 January 2022, Irish-incorporated ULCs that have a limited liability subsidiary will also be required to file accounts with the CRO.
In both cases, the filing of abridged accounts etc. is subject to the same thresholds set out above for limited liability companies.
Corporation tax treatment of accounting items
FA17 inserted new subsections (3) to (5) into s76A TCA 1997 to deal with the corporation tax treatment of various accounting items for accounting periods beginning on or after 25 December 2017. This was considered necessary to cater for the adoption of new Irish GAAP by Irish companies, and the future amendment of same.
The principles of these new provisions are as follows:
- Adjustments of reserves arising on the first-time adoption of an accounting standard or the amendment of an accounting standard should be treated as a taxable/deductible amount and spread over a period of five years.
- Adjustments of reserves arising for other reasons (e.g. because of a change in accounting policy, other than the first-time adoption of an accounting standard or the amendment of an accounting standard), should be treated as a taxable/deductible amount for the accounting period in which the adjustment is recorded.
Interestingly, the new s76A(5) TCA 1997 prescribes the corporation tax treatment of identified accounting errors. Under s76A(5) TCA 1997, the taxpayer will be required to re-open the relevant tax period to which the error relates and re-calculate the tax due for that period accordingly. This applies irrespective of whether the error is recognised as an adjustment to reserves due to its materiality, or within the current accounting period.
Where the error identified has been ongoing for a number of years, this has knock-on implications for the company’s entitlement to recover any tax overpaid in prior years due to the strict application of the four-year time limit in s865 TCA 1997.
Close company surcharges
A deferred tax requirement that is often overlooked is in relation to close companies with undistributed surchargeable income.
Under paragraph 29.14 of FRS 102, a company is required to measure current and deferred taxes “at the tax rate applicable to undistributed profits until the entity recognises a liability to pay a dividend”. For close companies with surchargeable income, this means that the total tax charge for a given accounting period should include the close company surcharge that will be payable in future if distributions are not made, reduced by the benefit of a liability recognised in the accounts to make distribution(s) in the relevant period.
As a reminder, companies are required under new Irish GAAP to reconcile the expected total tax charge from applying the standard rate of Irish corporation tax to the profit before tax amount, to the total tax charge recognised in the accounts. Accordingly, the only reconciling items to be shown in the financial statements are (i) permanent differences, and (ii) unrecognised timing differences. For example, unrecognised timing differences can arise where a company is not entitled to recognise a deferred tax asset because of insufficient evidence to support the likelihood of recovery of that asset.
Interestingly in terms of the amendments to section 76A TCA 1997 mentioned above, FRS 102 requires separate disclosure of the effect on the tax charge of “changes in accounting policies and material errors”. As noted above, the requirement to re-open prior tax periods applies even if the error identified is immaterial and therefore recognised within the current year income statement.
While the corporate tax and accounting changes affecting SMEs may not attract the level of media attention seen in relation to recent international tax developments, it is clear that significant changes are taking place. Advisers need to be wary of losing sight of the domestic issues in the face of unrelenting international tax items.
Appendix: Policy Options – Report of the Working Group on the Tax and Fiscal Treatment of Rental Accommodation Providers
- Accelerated restoration of full mortgage interest deductibility for landlords of residential property.
- Introducing Local Property Tax deductibility for landlords.
- Enhancing loss relief for landlords (or a sub-set of landlords), to allow relief for rental losses against other income sources in the same year.
- Introducing deductibility for pre-letting expenditure for previously vacant properties.
- Improvements in the collection and sharing of data on the rental accommodation sector.
- Allowing a deduction against rental income for an element of the capital cost of the rental property in the initial years of ownership, with a corresponding reduction in the base cost of the property for Capital Gains Tax purposes on a future disposal.
- Capital Gains Tax relief for properties acquired and retained as rental accommodation.
- Incentive to attract investment capital into the construction of property, in areas of need, to be let at social/affordable rents.
- Review of provisions for the holding of rental property via pension vehicles.
- Consideration of developing a separate method of taxing rental income, for example, a flat tax or a separate rate of tax, as a policy lever to support the sector as a whole or specific sub-sectors (for example, affordable housing/urban housing).