November 2013 Newsletter

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No change to Pay and File Deadline
The Minister for Finance issued a statement on Wednesday afternoon that there will be no changes to the pay and file regime in 2014.
This follows a consultation process on proposals by the government to bring forward the pay and file date from October/November to September or June.
However, according to the Minister’s statement changes to the pay and file regime are still planned and will take effect in 2015. The supporting legislation will be included in next year’s Finance Act.
Reduced Frequency of Filing Tax Returns and Payments
Revenue contacted businesses regarding their eligibility for a reduction in the frequency of filing their VAT, PAYE/PRSI, & RCT tax returns and payments from 1 January 2014.
This will mean that eligible businesses will only have to make payments at the end of each 3, 4 or 6 monthly period, as appropriate.
The criteria for less frequent filings are as follows:
Total annual VAT payments of less than €3,000 are eligible to file VAT returns and make payments on a 6 monthly basis;
Total annual VAT payments of between €3,000 and €14,400 are eligible to file VAT returns and make payments on a 4 monthly basis;
Total annual PAYE/PRSI payments of up to €28,800 are eligible to make payments on a 3 monthly basis;
Total annual RCT payments of up to €28,800 are eligible to file RCT returns and make payments on a 3 monthly basis.
LPT Exemption
The LPT First Time Buyer Exemption extends to all property buyers in 2013, who occupy the property as their main residence. The exemption was originally only to apply to first-time buyers and those who bought new or unoccupied property.
The extension is a result of a legislative drafting error and the impact is that anybody who purchases a property in the period 1 January 2013 to 31 December 2013 and occupies the property as their sole or main residence can claim the exemption from local property tax as provided for in section 8 of the legislation.
According to the Revenue Local Property Tax Manual “properties bought in the period 1 January 2013 to 1 May 2013 by ‘non first-time buyers’ who filed a return and paid LPT for 2013 as they did not realise that the property was exempt are entitled to a refund of the tax paid. Revenue will be contacting those concerned as soon as possible”.
Guidance on new Home Renovation Incentive
Guidance from Revenue on the new Home Renovation Incentive covers general information on the scheme, specific information for homeowners and for builders, and details on how the online system will operate. The guidance is published on the Revenue website.
General Guide to Tax for People with Disabilities
This guide from Revenue sets out details of the credits that may be available and how an individual can claim such credits. Information on exemption from tax for certain income and gains is also covered. The guide, IT12, is published on the Revenue website.
Social Welfare and Pensions Act 2013
The Social Welfare and Pensions Act 2013 (Act No. 38 of 2013) was signed on 9 November, 2013 The Act provides for the abolition of the exemption from PRSI applying to chargeable persons whose only additional income is unearned income i.e. investment income, from 1 January 2014. The Act will be available on the Oireachtas website in due course.
If you have any queries or comments on this newsletter please contact us.

Revenue Contractors Project

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The Revenue Contractors Project is now well underway with a large number of audit notification letters issuing to taxpayers in all Revenue Districts. Under this project the focus is on companies set up by individuals as a vehicle to provide contracting services. Revenue define these as companies “where the main source of income is a contract or contracts for service with a larger company or companies (directly or through intermediaries), the company in question does not appear to have a substantial business separate from these contracts, and in most cases the director(s) are the only employees of the company and pay tax through PAYE.” Experience suggests that this practice is particularly prevalent in certain industries e.g. the software sector.
Revenue are carrying out their review by way of a desk audit of the personal service company and its directors and are looking at a four year period in almost all cases. The main focus of Revenue appears to be on the veracity of expenses claims by directors and other deductions taken by the company from its taxable income.
Practitioner difficulties
The audit notification letters all appear to take a standard form and request a significant amount of detail in respect of the personal service company and its directors. One concern for practitioners and their client’s is the large amounts of information requested in a relatively short period of time. In addition to gathering the requested information the practitioner and client may require time to review the information to determine whether a voluntary disclosure is appropriate. Recognising this burden, Revenue has outlined the following concession:
 “If the taxpayer decides not to make a disclosure, or that there is no disclosure to be made, we agree as a concession applying to this project only that, rather than sending all documentation to the District within 14 days, a letter from the taxpayer saying that there is nothing to disclose, and enclosing a brief reconciliation for the four years in question will be acceptable. A taxpayer should make their best efforts to comply with this requirement within the timeframe. Revenue will not rule out discussion on the contents where that would be helpful.
The reconciliation is required to reflect the fact that these cases have been selected because of the apparently high levels of tax-free deductions from gross income. The reconciliation should show, for each year, the major (5% or more) deductions from gross income to arrive at the salary paid to the contractor(s). A note explaining unusually high expenses should also be included. It may be that the nature of a business is such that expenses that would otherwise appear high are fully justified. We will then consider these reconciliations, and revert with more specific requirements to allow the audit to be conducted.”[1]
The Revenue audit notification letter fails to detail the 60 day extension that can be availed of by taxpayers who wish to make a voluntary disclosure, however, Revenue have also later confirmed that Districts will allow the normal 60 day extension to facilitate the completion of a voluntary disclosure.
Travel and subsistence expenses
 The main focus of the Contractors Project appears to be on expense claims by the directors of personal service companies, particularly travel, subsistence and similar type expenses. Revenue recently published Tax Briefing Issue 03 of 2013 outlining its view on these matters. In the Tax Briefing, Revenue summarise their previously published guidance on expense claims: Statement of Practice SP IT/02/2007 and Revenue Leaflets IT 51 and IT 54.
An area of particular focus for Revenue appears to be the payment of expenses for travel from the base of administration for the service company (typically the home of the director) to the place of work with the company that is engaging the service company. It most cases, the area subject to disagreement is the contention by the director in such cases that their normal place of work is the base of administration for the service company and that by travelling to the base of operation of the engaging company that they are incurring travelling expenses that may be paid to them tax free. Revenue have outlined their view in Tax Briefing Issue 03 of 2013 that it does not accept that the location at which the administration of the service company is carried out and its books kept constitutes a normal place of work of the director. The consequence of this is that any expenses that have been paid by a company for such travel would be regarded as a perquisite[2] of the employment and subject to PAYE/USC.
Record keeping
A lack of focus on good record keeping is an unfortunate characteristic of some small businesses. Where adequate records and supporting documentation are not kept expenses may not be reimbursed free of tax to directors and in this regard the personal service company should have operated PAYE/USC on such payments. This is an area also subject to Revenue’s attention under the Contractors Project. Taxpayers are obliged to keep adequate records for a period of six years under the Taxes Consolidation Act 1997.[3] With regard to mileage payments best practice is to retain the following records:

  • the name and address of the director;
  • the date of the journey;
  • the reason for the journey;
  • the kilometres involved;
  • the starting point, destination and finishing point of the journey.

With regard to the reimbursement of actual expenses vouched by receipts, the company should retain such receipts, together with details of the travel and subsistence expenses incurred.
Close service company surcharge
If the personal service company is carrying on a profession, providing professional services or holding an office or employment the profits of the company may be subject to the close service company surcharge. Half of the undistributed profits of such a company are subject to a surcharge of 15%. If the directors of such companies are unaware of this surcharge and the profits of the company are large, the tax underpayment can be quite significant.
It is often not clear whether a company is carrying on a profession or providing professional services. Case law has found[4] that profession involves an occupation requiring either intellectual skill, as in painting, sculpture or surgery or skill controlled by the intellectual ability of the operator. Revenue have outlined in Tax Briefing 48 the activities that in its view amount to a profession[5] (note the list is not exhaustive).
Audit of the personal affairs of the director
While the details Revenue are requesting in respect of the personal tax affairs of the directors are not as detailed as that requested from the company, the level of information required is still quite onerous. It is clear that Revenue’s recent trawl of the tax affairs of landlords has yielded dividends and the same methodology appears to be now applied to directors who own rental properties. The focus seems to be on personal investment income that the director may have and how any income producing assets (e.g. rental properties) were acquired and financed. Copies of loan applications and mortgage statements may be sometimes requested.
Penalties
Revenue have stated that they will treat under-declarations of tax arising in personal service companies as stemming from deliberate behaviour. The most significant aspect of this is the level of penalty that attaches to deliberate behaviour vis-à-vis careless behaviour[6]. It is worrying from a macro perspective that Revenue are willing to treat all taxpayers the same, regardless of whether the default is deliberate or not; this is certainly not fair and equitable.
Practitioners are within their right to resist the imposition of penalties for deliberate behaviour where it is clear and arguable that the behaviour that gave rise to the tax default was not deliberate in nature. Deliberate behaviour is not defined for the purposes of the Tax Acts and therefore takes its normal meaning. Revenue regard deliberate behaviour as “either a breach of a tax obligation with indicators consistent with intent on the part of the taxpayer or a breach that cannot be explained solely by carelessness.”   
Careless behaviour is a lack of due care on behalf of the taxpayer that render tax liabilities incorrect. Careless behaviour is distinguished from deliberate behaviour by the lack of intent on the part of the taxpayer to default. ‘Carelessly’ is defined in the Tax Acts as meaning the “failure to take reasonable care”. The test of reasonable care is “whether a taxpayer of ordinary skill and knowledge, properly advised, would have foreseen as a reasonable probability or likelihood the prospect that an act (or omission) would cause a tax underpayment, having regard to all the circumstances”.
Cases should be judged on their merits for the purpose of determining what penalty is appropriate. Although, Revenue appear to have pre-determined the penalty applicable to a case, even prior to the audit commencing. It is understood that only exceptional cases will be considered for reduced penalties and that these cases will require sign off at Assistant Secretary Level.  In any event the level of penalties imposed can be appealed to a court.
Conclusion
It may be worthwhile for practitioners to advise their clients operating via personal service companies not already subject to audit to review their position with a view to determining whether any underpayments of tax have arisen. Practitioners may also wish to review their record keeping procedures to bring them in line, if not already so, with the legal requirements and best practice. The differential in penalties between a prompted voluntary disclosure with deliberate behaviour (50% penalty) and an unprompted voluntary disclosure with deliberate behaviour (10%) should provide sufficient motivation in this regard.
Mark Doyle is a director of Doyle Tax Consultants. He is the author of Capital Gains Tax a Practitioners Guide published by Chartered Accountants Ireland.
E: mark@doyletaxconsultants.ie
Tele: 087 2928769
W: www.doyletaxconsultants.ie
This article first appeared in the August 2013 issue of tax.point.

[1] Chartered Accountants Ireland Tax eNews 15 July
[2] Section 117 TCA 1997
[3] Section 886, 886A TCA 1997
[4] CIR V Maxse, 12 TC 41
[5] Actor, Actuary, Accountant, Archaeologist, Architect, Auctioneer/Estate Agent, Barrister, Computer programmer, Dentist, Doctor, Engineer, Journalist, Management Consultant, Optician, Private School, Quantity Surveyor, Solicitor, Veterinary Surgeon.
[6] See Code of Practice for Revenue audit at page 52

Revenue Review Procedures

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A taxpayer may at some stage be dissatisfied with the handling of their tax affairs by Revenue; naturally most disquiet will arise during the course of a Revenue audit 1 but issues can also arise on foot of other more mundane interaction. Most issues can be resolved amicably and with little fuss, however, on occasion satisfactory resolution is not possible. Perhaps the simplest and most cost effective method of resolving any issues that do arise is through the Revenue Complaint and Review Procedures.
Revenue recently published a revised version of the Revenue Complaint and Review Procedures Leaflet – CS4 which supersedes the Statement of Practice SP Gen/2/99 and is effective from 1 January 2013. CS4 outlines how a Revenue review should be instigated. The procedure is a three step process and can be outlined as follows:

  1. Make a formal complaint to the local Revenue office
  2. If step 1 does not resolve the issue satisfactorily the taxpayer should request a local review to be carried out by the Principal Officer from the local office, or in certain circumstances by the Principal Officer from the relevant regional/divisional office
  3. If step 2 does not resolve the issue satisfactorily the taxpayer can request a review to be carried out by an independent internal or external reviewer

It is important to note that Revenue may refuse to conduct a review where they form the opinion that the review is sought only to hamper an audit or investigation, or to avoid or delay publication of a settlement or where the complaint is considered to be frivolous or vexatious.
If a review gets to step 3 a outlined above the taxpayer has the option of requesting to have the case reviewed by an independent internal or external reviewer (but not by both) who will make a final decision on the issue. The position pre I January 2013 was that taxpayer had the option of requesting a review by an internal reviewer or a joint review by an internal and external reviewer.
In addition to the above procedures taxpayers have recourse to appeal a Revenue decision to the Appeal Commissioners, or make a complaint to the Office of the Ombudsman or to the Equality Tribunal. The review procedures as per CS4 do not interfere with the right of a taxpayer to take a case to the Appeal Commissioners, the Office of the Ombudsman or the Equality Tribunal.

Making a Formal Complaint (Step 1)

A formal complaint should be submitted to the taxpayer’s local Revenue office. Full details of the complaint should be provided. Revenue outlined the following list as illustrative of the information to be provided2:

  •  Full name and address
  •  Any relevant reference numbers e.g. PPSN, VAT Number, etc.
  •  What went wrong?
  •  When did it happen?
  •  What effect did Revenue’s actions have?
  •  All details and facts in support of the complaint, including reference, if relevant, to legislation and case law.
  •  Contact details, if the customer would like to be contacted by telephone. This may help resolve the issue more quickly.

If the complaint is not resolved to the satisfaction of the taxpayer a local review of the case can be requested. There is no set time limit for requesting a local review. However, a request for a local review should be made without unreasonable delay.

Local Review (Step 2)

A local review is to be carried out by the Principal Officer of the local Revenue office handling the case. If a taxpayer does not wish to raise their concerns with the local office the taxpayer can request to have the local review carried out by a Principal Officer in the regional office.
A request for a local review should be submitted in writing, by post or secure email to the chosen Principal Officer3. Emails relating to review requests can only be sent via Revenue’s Secure Email Service.
The Principal Officer handling the review examines the case based on the information supplied by the taxpayer and the Revenue documentation to reach a decision. The Principal Officer will then issue a letter to the taxpayer stating the outcome of the local review. The letter will detail how the outcome was reached with reference to tax legislation and/or case law where appropriate.

Internal or External Review (Step 3)

If the outcome of the local review is not to the satisfaction of the taxpayer a request can be made to have the case reviewed by an independent internal or external reviewer who will make a final decision on the issue. A taxpayer has 30 working days from the date of the local review decision to request either an internal or external review. Such a request should be made to:

  •  (By Post) – The Review Secretariat, Office of the Revenue Commissioners, Dublin Castle, Dublin 2

or

The Review Secretariat manages the administration of the internal and external review procedures.
The internal or external reviewer will consider the review based on the information submitted by the taxpayer and the pertinent Revenue documentation. The reviewer examines the case based on the information supplied by the taxpayer and the Revenue documentation to reach a decision.
The reviewer will then issue a letter to the taxpayer stating the outcome of the review. The letter will detail how the outcome was reached with reference to tax legislation and/or case law where appropriate.

Criteria for Conducting Reviews

The following criteria will apply (where applicable) in a local or internal/external review4

  •  Assess if the customer’s rights under the Customer Service Charter have been fully respected.
  •  Assess if the customer has fulfilled their responsibilities under that Charter.
  •  Evaluate whether administrative procedures outlined in Revenue’s Tax and Duty Manuals, Codes and Statements of Practice have been followed correctly. Examine if Revenue gave due consideration to the customer’s viewpoint.
  •  Consider if Revenue adopted a reasonable approach in dealing with the customer.
  • Examine if the Revenue official’s conduct in dealing with the customer was appropriate.
  • Evaluate if the Revenue official applied Revenue powers fairly.
  • Ensure that any technical or legal approaches adopted are not manifestly incorrect or unreasonable.

Other Options

Appeal Commissioners

Under Irish tax law there is an independent appeal process available to taxpayers to appeal against assessments and determinations by Revenue. A taxpayer can make an appeal by giving notice in writing to the relevant Revenue Inspector who will then arrange for the listing of the appeal with the Appeal Commissioners.

Ombudsman

A taxpayer can make a complaint to the Office of the Ombudsman if they are unhappy with the way that Revenue handled their tax affairs. The Ombudsman examines complaints from members of the public who feel they have been unfairly treated by certain public bodies. The Office of the Ombudsman has indicated that before a person makes a complaint to the Ombudsman that they should firstly make a complaint directly to the public body concerned5.

Equality Tribunal

The Equality Tribunal handles complaints of alleged discrimination under equality legislation. The Equal Status Act 2000 legislates against discrimination in the provision of services that are provided to the public. Discrimination on the basis of any of the following is outlawed by the Equal Status Act:
The grounds are gender, marital status, family status, sexual orientation, religious belief, age, disability, race, colour, nationality, ethnic or national origins and membership of the traveller community. If a taxpayer is unhappy with their treatment by Revenue and suspects that Revenue are in breach of the Equal Status Act a complaint can be made to the Equality Tribunal.

Internal Reviews in 2011 (Per Revenue Annual Report 2011)
Cases Internal Joint 2011 Total Internal Joint 2010 Total
Number received 22 63 85 20 51 71
Number finalised 20 54 74 19 44 63
Decision upheld 13 42 55 7 35 42
Decision revised/partly revised 2 8 10 8 7 15
Withdrawn or agreed prior to being sent to Reviewers 5 4 9 4 2 6

 

Complaint Statistics

It is interesting to read the statistics published by the Revenue in their 2011 Annual Report pertaining to the outcome of complaints made during 2011 (note that the joint review option is no longer available). Of the 74 cases finalised in 2011, 55 cases were upheld in Revenue’s favour, 10 cases were revised or partly revised and 9 cases were withdrawn or agreed prior to review (table below). These statistics would indicate that there is little merit in making a complaint and proceeding with the review procedure.
As noted earlier in the article it is also possible to make a complaint to the Ombudsman. Revenue’s 2011 Annual Report provided the following statistics relating to complaints made to the Ombudsman:

Total Completed and Outcome Number of Complaints
Not Upheld 22
Withdrawn 56
Discontinued 17
Assistance Provided 16
Partially Resolved 1
Resolved 6
Total 118

Out of the total complaints of 118 dealt with in 2011, it would seem  that 22 were upheld in Revenue’s favour and that 23 had some form of resolution in favour of the taxpayer with the balance of the complaints not proceeding. The annual report does not provide any background as to why a complaint was withdrawn or discontinued. It could be that the taxpayer resolved the dispute with Revenue by other means or that they decided not to pursue the matter further.

Conclusion

While the statistics outlined above for taxpayer success in the review procedure or with the Ombudsman are not overly encouraging it would seem that a case with merit should have success. At the very least a taxpayer should be able to gain some assurance that their case has been dealt with within the law and in line with proper Revenue procedures and practice.
Furthermore, the costs of making a Revenue complaint (e.g. professional fees) are likely to be less than pursuing the matter by other means e.g. through the Courts.
Mark Doyle is Director of Doyle Tax Consultants Ltd
Email: mark@doyletaxconsultants.com
Tel: 087-2928769
This article first appeared in the January issue of Chartered Accountants Ireland monthly tax journal tax.point. 
_____________________________________________________________________________________________________
1. See section 4.10.1 of the code of Practice for Revenue Audit regarding requesting a review of the conduct of a Revenue audit
2. Outlined in section 1 of the Revenue Complaint and Review Procedures Leaflet – CS4
3. Appendices B(i) and B(ii) of the Revenue Complaint and Review Procedures Leaflet – CS4 contain the email addresses of the Principal Officers handling the reviews in the local and regional offices.
4. Outlined in section 3 of the Revenue Complaint and Review Procedures Leaflet – CS4
5. www.ombudsman.gov.ie

Tax consequences on the surrender of a commercial lease

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As businesses work their way through the current economic malaise they are assessing their long term future and  addressing issues that are likely to present trading difficulties. One such difficulty can often be an onerous lease entered into at a time when rents were high and commercial space at a premium. The solution for a business in such circumstance can often be the surrender of the lease to the landlord; however, this can result in a surrender payment being made to the landlord. The tax consequences of the surrender of a lease are worth considering.
A surrender of a lease is a mutual acceptance by landlord and tenant of the end of the lease i.e. both the landlord and tenant agree the terms on which the lease will be given back to the landlord.
For the purposes of this article it is assumed that the payment on surrender of the lease is made by the tenant solely for the surrender rather than to discharge a different liability such as unpaid rent or dilapidations.
 
INCOME TAX AND CGT
The taxation of the surrender payment is dependent on a number of different factors such as the terms of the lease and the remaining duration of the lease. Where a surrender payment is made under the terms of the lease the payment will be treated as if it were a premium received by the lessor for the disposal of their interest in the lease. Section 98 Taxes Consolidation Act 1997 provides that a premium will be partly subject to income tax and partly to CGT. The split of the premium proceeds between income tax and CGT is determined by a formula:
Premium * (n -1)/50
This is best illustrated by way of example.
A landlord grants 25 years lease to a tenant, the lease provides for a surrender of the lease after 10 years for a payment of €10,000. After 10 years the tenant surrenders the lease. The computation is as follows:
Subject to income tax
Payment on surrender                €10,000
€10,000 * (10-1)/50                      €1,800
Subject to income tax                  €8,200
Subject to CGT                            €1,800
Schedule 14 Taxes Consolidation Act 1997 provides that the amount of the premium subject to CGT is deemed to arise from a separate transaction (i.e. not from the surrender) and is to be regarded as proceeds received for the disposal of
the lessors interest in the lease. As the landlord is unlikely to have any base cost in his interest in the lease no deduction from the consideration is likely to be available.
The taxation of a surrender payment that is not within the terms of the lease is a different matter. It would appear that such a surrender payment is not within the ambit of either section 98 Taxes Consolidation Act 1997 or schedule 14 Taxes Consolidation Act 1997. The legislation under section 98 reads “where under the terms subject to which a lease is granted”; while schedule 14 contains similar wording. The key point is that the surrender payment is not within the terms of the lease and thus outside of the scope of these sections. The taxation of the surrender payment must therefore be reviewed under normal CGT principles.
On surrender the landlord will have derived a capital sum from an asset and the provisions of section 535 Taxes Consolidation Act 1997 will apply. The key point is to determine from which asset the capital sum is derived; is the capital sum derived from the right to rent under the lease or is it derived from the landlords interest in the land? This is not an easy question to answer. Absent the landlords interest in the land no lease would exist however, without the lease there would be no surrender payment.
If it can be maintained that the surrender payment is derived from the landlord’s interest in the land then it will amount to a part disposal of the land and it may be possible to utilise some of the base cost of the land against the surrender proceeds thereby reducing the gain. HMRC in their guidance note CG71280 put forward the proposition that a surrender payment made outside the terms of the lease should be regarded as a capital sum derived from the landlord’s interest in the property rather than the lease itself. This is the more favourable view for the taxpayer of how a surrender payment should be treated for CGT purposes.
Revenue have published extensive guidance notes dealing with a number of different scenarios involving the taxation of leases; the reference to surrender payments outside of the terms of the lease reads as follows “Where a payment, which is not made under the terms subject to which the lease is granted, is received by a lessor for the surrender of a lease, the amount received should be treated as a part disposal of the lessor’s interest.” The reference to the lessor’s interest is vague. It would seem that by making reference to a part disposal occurring, the reference to the lessor’s interest is the interest the lessor has in the land rather than the interest in the lease; this is because following the surrender the lease no longer exists and therefore there can be no part disposal of the lease.
The alternative view is that the surrender payment is a capital sum derived from the right of the landlord to receive rent under the lease rather than from the landlord’s interest in the property. If this is the case it may not then be possible to offset a portion of the base cost of the landlord’s interest in the property against the capital sum received for the surrender.
 
STAMP DUTY
The surrender of a lease, if it is in writing, is a form of conveyance. If the landlord pays the lessee to give up the lease there may be a conveyance on sale with stamp duty payable by the lessor. It may be possible to surrender a lease without documenting it; the tenant could hand over the keys and cease occupation. If there is a written record of the oral surrender, it is subject to stamp duty as a conveyance on sale. Where the lessee pays the lessor to surrender the lease there is no conveyance on sale and no liability to stamp duty should arise.
 
VAT
The VAT treatment of the surrender of a lease is a complex area. It is assumed in this article that the lessee is surrendering a long lease entered into before 1 July 2008 and that the lessee has full VAT recovery; as this is likely to be the most common case encountered in practice. Under the present VAT rules such a lease is regarded as a “legacy lease”. The surrender of a legacy lease is regarded as a supply of goods if the surrender occurs within 20 years of the creation of the lease. The landlord is obliged to account for VAT on the surrender on the reverse charge basis; the amount of VAT is calculated by reference to the VAT which originally arose on the creation of the lease as adjusted for the remaining Capital Good Scheme life of the property. There is a formula to calculate the tax payable:
T x N/Y
T = total tax incurred on the acquisition of the lease.
N = the number of full intervals, plus one, that remain in the adjustment period for the person making the assignment or
surrender at the time of making the assignment or surrender, and
Y = the total number of intervals in the adjustment period for the person making the assignment or surrender (cannot exceed 20).
The taxable amount is the tax payable amount re-grossed @ 13.5%. Any reverse premium payable by a tenant to a landlord in respect of the surrender of a legacy lease is considered outside the scope of VAT. The VAT chargeable on such an assignment or surrender is restricted to the amount calculated using the formula as outlined above.
 
DEDUCTIBILITY OF SURRENDER PAYMENT FOR LESSEE
It would seem that a payment to surrender a lease may not be deductible for tax purposes in computing the profits of a trade. Where the taxpayer’s trade is not a trade of buying and selling leases, a lease is a capital asset. The costs of acquiring or disposing of a lease may therefore be on capital account. Some consideration should be given to the deductibility of the lease payment and in this regard case law can be a useful aid. The case of Bullrun v CIR is relevant. Bullrun (a U.S. partnership) leased premises in London for a period of 10 years. The annual rent was £550,000 for five years following which it could be reviewed upwards. After four years the rent payable under the lease exceeded the market rent for similar premises and Bullrun wished to surrender the lease. Bullrun had claimed to deduct the amount paid by them to surrender the lease for tax purposes on the basis that the lump sum payment made to extinguish recurring revenue payments was prime facie a revenue payment. HMRC successfully argued that a surrender payment was not available as a trading deduction for tax purposes.
 
CONCLUSION
The taxation consequences of the surrender of a commercial lease can be quite complex; a full review of the terms of the lease is required before determining the tax position
 
This article first appeared in the March issue of taxpoint magazine
Contact Mark Doyle
 
 

Buyback by a Company of its Own Shares

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Whether it be in the context of succession planning, a disgruntled shareholder or a marriage break-up the ability of a company to buyback its own shares is a useful mechanism for Irish businesses. Broadly, any repayment over and above the amount which the company received for a subscription of shares is treated as a distribution and subject to income tax at marginal rates. If certain conditions are met, however, the shareholder may avail of capital gains tax treatment on the buyback. This can be beneficial where the shareholder would be otherwise unwilling to exit the company due to the prospect of a significant income tax charge on a share buyback.
 
Main legislative provisions
S176 – 186 TCA 1997 contain the legislative provisions pertaining to share buybacks by unquoted companies. The main conditions for relief are that:

  1. the company must be a trading company or the holding company of a trading company;
  2. the shareholder participating in the share buyback must be both resident and ordinarily resident in the State in the tax year in which the share buyback takes place;
  3. the shareholder must own the shares for a period of at least five years ending on the date on which the disposal;
  4. the share buyback must be for the benefit of the company’s trade;
  5. the participating shareholder’s remaining shareholding in the company after the buyback (expressed as a percentage of the company’s issued nominal share capital) must not exceed 75% of what it was pre the buyback; and
  6. the shareholder must no longer be connected with the company (broadly after the transaction the shareholder and his associates must own less than 30% of the company).

For the purposes of tests 5 & 6 above the interest in the company held by persons associated with the disposing shareholder are deemed to be held by the disposing shareholder. An associate includes a husband or wife (that are living together) and a minor child of the disposing shareholder (there are other provisions in relation to controlled companies, estates etc. but these are beyond the scope of this article).
Effectively the associated persons provision prevents a shareholder whose spouse holds a substantial interest in the company availing of capital gains tax treatment on a share buyback. Where a buyback is undertaken a return of the details must be made to Revenue (Form AOS1). Any payment made by a company for the purchase of its own shares is not deductible against profits of the company for tax purposes.
 
Trade benefit test
As noted above, in order to qualify for capital gains tax treatment, the buyback must be wholly or mainly undertaken to benefit the company’s trade. The test would not be met where, for example, the sole or main purpose of the buy-back is to benefit the shareholder or to benefit a business purpose of the company other than a trade. Revenue outlined in Tax Briefing 25 that they will normally regard a buy-back as benefiting the trade where:

  • the purpose is to ensure that an unwilling shareholder who wishes to end his/her association with the company does not sell the shares to someone who might not be acceptable to the other shareholders; or
  • there is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company’s trade and where the effect of the transaction is to remove the dissenting shareholder.

Examples of this would include:

  • a controlling shareholder who is retiring as a director and wishes to make way for new management;
  • an outside shareholder who has provided equity finance and wishes to withdraw that finance;
  • a legatee of a deceased shareholder, where she/he does not wish to hold shares in the company; and
  • personal representatives of a deceased shareholder where they wish to realise the value of the shares.

 
Generally Revenue expect the exiting shareholder to dispose of their entire interest in the company but are willing to accept, in certain circumstances, a shareholder retaining some shares for sentimental reasons or for genuine business reasons e.g. where the impact of the disposing shareholder exiting completely would be negative for the company’s business. Where doubt exists as to whether a buyback would benefit a company’s trade a Revenue advance opinion can be sought.
 
Retirement relief
The Finance Bill 2010 introduced an amendment that provides that an individual can come within the scope of the retirement relief provisions on the proceeds of a disposal of shares pursuant to a redemption by a family company of its own shares. It was generally accepted that an individual could avail of retirement relief from capital gains tax on the buyback of their shares provided that all other conditions for relief were met before this provision was introduced.
 
Stamp duty
If a stock transfer form or other instrument of transfer is executed in the course of a share buyback transaction, Revenue consider that stamp duty will be chargeable in the same manner as a normal transfer of a company’s shares. It is common practice when dealing with share buybacks for a contract for the sale and purchase by the company of the shares to be created and thereby avoid the creation of any stock transfer form or other instrument which transfers legal title to the shares. If the contract does not itself give rise to a conveyance, the contract itself will not be stampable. Revenue in their Stamp Duty Work Manual and Practices note:
“The shares can be bought back on foot of a contract or share purchase agreement. If the shareholder and the company enter into an agreement and the shareholder simply hands over the share certificates to the company there is no need for a stock transfer form and no duty can be charged. The share purchase agreement is not chargeable to duty as it falls outside the scope of s31, Stamp Duties Consolidation Act 1999 (stamp duty on contracts)”.
 
Company law
It is worth noting some of the company law requirements of undertaking a share buyback:

  • the shares must be repurchased out of profits available for distribution. In addition, there is a provision which allows the company to use the proceeds of a share issue made solely for the purpose of funding the re-purchase;
  • a special resolution by the members of the company in a general meeting must be passed. It should be noted that the purchase is ineffective if any member of the company holding shares who will be affected by the share buyback votes in favour of the resolution and the resolution would not have been passed without his/her votes;
  • once the shares are repurchased the company has two options. It may either cancel the shares or hold them as treasury shares;
  • the shares to be repurchased must have been fully paid up; and
  • the company must deliver a return to the Companies Registrar outlining the number and class of shares purchased, their nominal value and the date upon which they were delivered back to the company.

 
Conclusion
As noted above it is possible to obtain Revenue approval on the buyback and this added comfort is worth pursuing where possible. All of the conditions for the relief must be satisfied before relief is available.
 
This article first appeared in the March 2010 issue of Tax Point
Contact Mark Doyle
 
 

Holding Assets Tax Efficiently

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The tax position of an investor can vary significantly depending on the particular way in which assets are held. The differential between the rates of income tax, corporation tax and CGT means that the choice of vehicle to hold the asset is important. There are also a number of reliefs from tax such as the participation exemption that may influence the vehicle chosen to make the investment.
Common ways of holding assets
The most common alternatives given to an individual seeking to make an investment is to either hold the asset in their own name or to hold it via a company that they control. Although it is less common, it may also be worth considering utilising a trust, investment undertaking or partnership to hold assets and for a very limited number of individuals offshore structures may be appropriate; this is really dependent on the individual’s personal circumstances.
Hold personally or via a company – the main tax considerations
General
An individual who holds an asset personally will likely be subject to CGT at the new rate of 30% (effective for disposals made after 6 December 2011) on any capital gains made on a disposal (assuming the investment is not a fund of some form). Any income generated by the investment would be subject to income tax at the individual’s marginal rate of tax (circa 50% in most cases). Similarly a company will be subject to corporation tax on chargeable gains at a rate of 30%, any income generated by the investment is likely to be subject to corporation tax at 25% plus the close company surcharge on any undistributed after tax income.
The double charge to tax
The main tax drawback associated with holding assets via a company is the double charge to tax on the sale of an asset and extraction of cash from the company. This is best illustrated by way of an example.
Example
Martin wishes to acquire an asset, the purchase price of the asset is €500,000 and he expects to sell the asset for €1,000,000 in due course. If Martin holds the asset personally his tax position will be as follows on a sale:
 
Proceeds  1,000,000
Less:
cost 500,000
Gain 500,000
CGT @ 30% (ignore annual exemption)  150,000
Net proceeds available after tax = 850,000
Now assume that Martin decides to incorporate a company to acquire the asset; he provides the purchase monies to the company by way of a subscription for share capital. The tax position of the company on sale is as follows:
Proceeds 1,000,000
Less:
cost  500,000
Gain 500,000
CT @ 30%  150,000
Net proceeds available after tax = 850,000
Assuming that the company will be liquidated, Martin’s tax position on liquidation would be as follows:
Proceeds 850,000
Less: subscription for share capital 500,000
Gain 350,000
CGT @ 30% (ignore annual exemption) 105,000
Net proceeds available after tax = 745,000
It can be taken from this that Martin would have been €105,000 better off by investing personally rather than via a company. However, it cannot be assumed that holding assets personally is always the best way forward. The following are among the many factors also to be considered:
Availability of reliefs
Where there are reliefs available from tax these should be factored into the decision making process. For example, participation exemption relief may allow a parent company realise gains on certain shareholdings free from corporation tax on chargeable gains. Also, where the return on investment is to be made by way of dividend payments from an Irish close company, it may be possible (subject to appropriate elections being made) for such dividends to be received by a company free from tax completely. Both of these reliefs are not available to individuals.
Capital losses
Where an individual has unrestricted capital losses or holds a company with capital losses, it may be worth structuring the investment in a manner such that the losses can be used to shelter any gain arising. It is not possible to transfer the capital losses of an individual to a company or vice versa.
Financing the investment
One of the most important aspects of the decision making process is how the finance for the investment is to be provided. Where the investor is required to drawdown bank debt or draw funds from their personal trading company some income tax cost may be associated with either the financing of the debt or the cash extraction from the personal trading company (i.e. the investor may have to increase their salary of take a dividend). Broadly, to extract €1,000,000 from a company could cost an investor the same again in income tax.
To avoid the need to draw funds from the personal company it may be possible to incorporate a new investment company which would in turn drawdown the bank debt or take a loan from the personal trading company. It may be necessary to put in place a “Golden Share” type arrangement to avoid a breach of company law by the making of connected party loans.
Partnerships, trusts and investment undertakings
It is possible on occasion for an investor to achieve a more tax efficient structure by holding assets in partnerships, trusts and certain investment undertakings. These structures are particularly useful where there are long term succession plans in place or where the individual is considering making very substantial investments. The tax issues involved are quite complex and the day to day operation of the structures is not as straightforward as personal ownership or ownership via a company.
Offshore structures
In the vast majority of cases offshore structures are to be avoided. Typically these structures involve the set-up of a company or trust in a tax haven such as the Isle of Man or the Channel Islands. There is a raft of tax anti-avoidance legislation which seeks to remove any Irish tax benefits that would be associated with an offshore structure. For example, gains realised by an offshore company will be attributed to and taxed on its Irish resident members under section 590 TCA 1997. The maintenance of offshore structures is complex and oftentimes very costly. Typically such structures are only considered by non-Irish domiciled individuals.
This article  first appeared in the January 2012 issue of Tax Point
Contact Mark Doyle
 
 

Topical Tax Issues

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Economic uncertainty and changes to tax laws have altered the thinking of many tax advisors. Some structures used in the past are now defunct and new considerations have to be taken into account when advising clients, as Mark Doyle explains.

With many individuals having experienced dramatic changes in their financial situation as a result of the global financial crisis, there are new challenges for tax advisers. Some key considerations to take into account are set out below.

SUCCESSION PLANNING

In succession planning, the solvency position of the successor is becoming increasingly relevant. There is little to be gained from passing assets to a successor who is insolvent since, if a creditor decides to take action against the successor, the asset transferred may well be seized and sold in an effort to recoup debts.The situation of the successor may be hopeless if their debt burden is too high. There is no perfect solution to this problem. However, parents will often wish to help the child in difficulty, particularly if their day-to-day financial position is tight. Consideration could be given to:

➤ The use of certain trusts;

➤ The possibility of making the transfer of assets revocable;

➤ Transferring assets to the spouse or children of the successor. Clearly a lifetime transfer of assets is under

the control of the parents. However, it is important to review the will of the parent to ensure that, on death, the assets do not unwittingly pass to an insolvent child. It is commonplace to find that a will is drafted without any consideration for the financial position of the beneficiary. As with lifetime transfers, the use of trusts, etc can be consid- ered as a means of warehousing assets until such time as the financial position of the beneficiary is settled. There is a big push from advisors to encourage their clients to transfer assets to their children while tax reliefs are generous. Although there are some merits to this approach, tax should not be the prime driver behind succession planning and all even- tualities must be considered.

FINANCING PRIVATELY HELD COMPANIES

It is common for the shareholders of pri- vately held companies to provide working capital finance to their company by way of loan. In most cases the loan is provided on an informal basis with little or no docu- mentation. Where the shareholder suffers a loss on this loan no tax relief is available as the loss is generally not an allowable loss for capital gains tax purposes.

It is often suggested that the loan should be converted into share capital such that when the company is liquidated the share- holder would realise an allowable loss for capital gains tax purposes. In many cases such a scheme is likely to fail by reason of section 547 (2) TCA 1997 which, in the case of an insolvent company, is likely to determine the base cost of the shares allotted on the conversion of the loan as nil. Consideration should be given to docu- menting the making of a loan and including in the terms rights that are likely to make the loan a ‘debt on security’, e.g. the loan should be convertible to shares, capable of increasing in value, marketable, etc. If a loss were realised on the loan it should be possible to offset the loss against certain capital gains. In this way the shareholder could gain some relief for their loss.

UNWINDING PATENT STRUCTURES

The abolition of tax relief on patents has generated discussion between advisors and clients. In many cases patents were licensed under long-term agreements with signif- icant royalties. The operation of a patent structure can now lead to unwanted tax costs.A common structure would have been for a patent company to license its patent to a connected manufacturing company; the difficulty is that the rate of tax applicable to the profits of the patent company may be 25% (depending on the trading status of the company) while the manufacturing com- pany would only receive relief for royalties paid at the standard rate of 12.5%. Clearly this is not attractive. For a number of reasons it may not be advisable, or possible, to simply cease charging for the use of the patent.

Some companies have chosen to unwind and migrate their patent structure to jurisdictions offering attractive patent regimes such as Luxembourg. Clearly this option will not suit most Irish businesses.

One solution would be for the patent holder to dispose of the patent to the patent user. Although there is an element of doubt about the tax treatment of a sale of a patent due to the provisions of section 757 TCA 1997, the author understands that it is the view of the Revenue Commissioners that the outright sale of a patent should be regarded as subject to capital gains tax rather than income tax under case IV. This should be confirmed on a case by case basis.

Where the patent company and manu- facturing company are members of the same capital gains tax group it should be possible to transfer the patent free from capital gains tax.Where the companies are not members of the same group, and where the sale of the patent would realise a chargeable gain, it may be advisable to firstly reconstruct the share ownership of the companies to bring them together in a group prior to transferring the patent. In cases where the patent is held by an individual, the opportunity to dispose of it to a company and extract cash at capital gains tax rates is attractive.

Section 101 SDCA 1999 should provide relief from stamp duty on the transfer of the patent.

FINANCING PERSONAL DEBT

The income tax cost of financing personal debt on property and investment assets is proving prohibitive.These investments were made during a rising property market and often without consideration as to how the debt would eventually be repaid absent a sale of the property. A sale of the property may now not be possible or desirable due to significant negative equity. Banks are now pressing borrowers for interest and capital repayments which may have to be financed by the client from their own personal income or reserves; this brings with it significant tax costs.To repay €1m of capital will require approximately €2m of income before tax.

It is worth considering whether it is possible to restructure the financial affairs of the client to reduce the tax burden associated with paying down their debt. Where the borrower has a degree of flexibility around his/her financial affairs (for example, if he or she is a shareholder or director of a privately held company) it is worth considering transferring the asset and debt into their trading company or a related company financed by the trading company. It should then be possible to finance the repayment of the debt out of income taxed at corporation tax rates (likely to be 12.5%) rather than at income tax rates (circa 50%). Clearly this represents a significant saving.

The main point to note is that the company cannot pay over the odds for the asset trans- ferred to it, i.e. the value of the property should at least equal the outstanding debt. If this is not the case and the debt exceeds the asset value, then only a portion of the debt should be transferred. The consent of the bank to the transfer is likely to be required. It would seem that the position of the bank is strengthened significantly as the borrower’s ability to repay their debt is enhanced. In practice banks are willing to facilitate a reorganisation provided that their position is not compromised. The share- holder may consider taking an option to acquire the property back from the company at some stage in the future; in this way it should be possible to ensure that future uplifts in property value accrue to the shareholder and not the company.

Where there is new money coming to the table it is possible to negotiate a debt write-down with certain banks. In one particular case involving a very weak borrower, the bank compromised their debt by almost 90% where the borrower’s father agreed to discharge a portion of his debt.The borrower also held onto the property in this case as the bank could simply not warrant the cost of appointing a receiver, holding and then selling the property.

The issues examined above are common to many Irish businesses and advisors should keep them in mind when dealing with clients. Careful planning at the outset can avoid unwanted financial and tax costs in the future. The tax analysis outlined above is high level in nature and all potential tax liabilities or opportunities may not have been identified.Tax and legal advice should be sought when advising clients on such matters.

Mark Doyle, ACA is a Director in the Capital Taxes department of Grant Thornton and is the author of the forthcoming book Capital Gains Tax: A Practitioner’s Guide to be published by Chartered Accountants Ireland.

Tax and Personal Debt

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It is not uncommon for an advisor to be faced with a client with significant personal debt issues. Often the debt was drawn down to finance investments in property at home or abroad. These investments were made during a rising property market and often without consideration as to how the debt would eventually be repaid absent a sale of the property. A sale of the property may now not be possible or desirable due to significant negative equity. Banks are now pressing borrowers for interest and capital repayments which may have to be financed by the client from their own personal income or reserves; this brings with it significant tax costs.
It is worthwhile considering whether it is possible to restructure the financial affairs of the client to reduce the tax burden associated with paying down their debt. The following example examines how such a restructuring may be undertaken.
 
Example
Pat purchased a number of residential properties which he lets out, the original cost of the properties amounted to €3m. The properties are now valued at approximately €2m. To purchase the properties, Pat borrowed from the bank. The outstanding debt now amounts to €2m as Pat made a number of capital repayments over the years. Pat is now under significant pressure to increase his capital repayments on the loan as well as discharging the interest costs. Pat is the sole shareholder in his trading company (“TradeCo”), the company is profitable and is Pat’s main source of income. Pat is taking significant drawings from TradeCo to fund his loan repayments. Payroll taxes must be operated at source which is adding to Pat’s cash-flow difficulties. To finance €2m of capital repayments on his loans Pat must draw approximately €4m from TradeCo and suffer €2m in tax (assuming a tax rate of 50%). Clearly this is not sustainable or efficient.
 
PROPOSED RESTRUCTURING
It is proposed that the following steps be taken:

  • Pat incorporates a new company (“NewCo”), Pat is the sole shareholder;
  • Pat disposes of his properties to NewCo and repays his bank debt. It may be possible for NewCo to assume Pat’s debt in consideration for the property transfer, however, in practice a drawdown of fresh facilities by NewCo is the most likely route forward;
  • TradeCo takes a Golden Share in NewCo, this will allow for inter-company loans without breaching company law;
  • TradeCo loans funds to NewCo to service its debt.

 
By packaging the asset and debt into NewCo, Pat now enjoys a much more manageable situation. To finance the loan repayments NewCo can simply draw funds in the form of a loan from TradeCo, there is no longer a need for Pat to draw a salary from TradeCo to finance his loan repayments. The advantage is that the debt could be serviced by TradeCo out of income taxed at 12.5% rather than financing the debt from income subject to tax at circa 50%. The consent of the bank to the proposed transfers is likely to be required. It would seem that the position of the bank is strengthened significantly as Pat’s ability to repay his debt is enhanced. In practice the banks are willing to facilitate a reorganisation provided that their position is not compromised.
 
A high level tax analysis of such a reorganisation is outlined below.
 
CAPITAL GAINS TAX
Pat will realise a significant loss on the disposal of the properties to NewCo. As the loss would be incurred on a sale to a connected party, section 549 TCA 1997 will ring-fence the loss for use only against future gains on a disposal by Pat to NewCo.
 
STAMP DUTY
Prior to Budget 2011 stamp duty presented a significant obstacle to the completion of these reorganisations as invariably the client would not have sufficient funds to finance the duty arising. Budget 2011 reduced the rate of stamp duty on residential properties; stamp duty at 1% will apply on all sales of residential properties up to a value of €1m, where the value exceeds €1m a 2% rate of duty will apply on the value over €1m. Where the consideration for the transfer is the assumption of a debt by NewCo section 41 SDCA 1999 may have application. Where property is conveyed and the debt is a mortgage, duty is charged on the higher of:

  • The value of the mortgage debt assumed plus any consideration paid, or
  • The equity of redemption. Where the value of the mortgage assumed is greater than the value of the property (i.e. a negative equity situation) Revenue may, in practice, limit the duty to the value of the property provided a good case can be made to do so.

Where the duty arising is significant it may be possible to “rest in contract”.
 
VAT
On the basis that the properties in question are residential properties and that Pat had no waiver of exemption in place, there should be no VAT implications on the transfer of the properties to NewCo.
 
CAPITAL ACQUISITIONS TAX
Private companies are look through entities for CAT purposes (section 43 CATCA 2003). In this case, as TradeCo and NewCo have only one shareholder (Pat), no CAT should arise on the proposed restructuring. However, where there is more than one shareholder involved or where the property is held in joint names etc some of the gift tax issues that could arise include:

  • The transfer of assets into the company (in this case NewCo) at under or over value could give rise to cross gifts between shareholders;
  • If the funds to finance the debt are provided free from interest (in this case by TradeCo) a gift may arise as the property holding company (in this case NewCo) has a free use of money.

 
INCOME TAX
Where a member of a company transfers an asset to that company at overvalue a distribution subject to income tax may arise (section 130 (3) TCA 1997). In this case Pat is transferring the properties to NewCo at their market value; accordingly, no distribution should arise. In practice Pat should obtain an independent valuation from a reputable valuer to support the transaction, where there is any element of doubt more than one valuer could be used. It is commonplace nowadays for the quantum of the debt to exceed the value of the property. It is suggested that in such circumstances the following remedies may be taken to avoid a distribution occurring:

  • An asset with some value may be packaged together with the property to make up the full value of the loan (i.e. the value of the asset is increased to match the consideration), or
  • A portion of the debt may not be transferred to the company (i.e. the consideration is reduced).

 
COMPANY LAW – HIGH LEVEL SUMMARY OF MAIN CONSIDERATIONS
A “Golden Share” arrangement may be required between TradeCo and NewCo to avoid a breach of section 31 CA 1990 by reason of the lending of money from TradeCo to NewCo. A “Golden Share” provides the holder of the share (in this case TradeCo) with the right to control the board of the subsidiary company (in this case NewCo), thus the companies will constitute a group for the purposes of the Companies Act. Section 29 CA 1990 provides that a company cannot enter into any arrangement with a director of the company, unless the arrangement is first approved by a resolution passed by the shareholders of the company. Such a resolution must be made for the purposes of the property transfer to NewCo as the company is entering into a transaction with its director (Pat). A transaction entered into in breach of the above requirement would be voidable by the company subject to certain exceptions.  A solicitor should be consulted to advise on all of the legal aspects of the reorganisation (e.g. security, conveyancing etc).
 
CONCLUSION
The example outlined above may apply to clients with a degree of flexibility with regard to their financial affairs. The tax saving over the life of the loan would amount to circa €1.8m in the example outlined above, clearly this is attractive. Clients with unincorporated businesses may consider incorporation to avail of the benefits offered, alternatively existing “service company” structures could also be adapted to suit. The tax analysis outlined above is high level in nature and all potential tax liabilities or opportunities may not have been identified. Tax and legal advice should be sought before implementing such a reorganisation.
This first appeared in the January 2011 issue of Tax Point
Contact Mark Doyle
 
 

Advising clients in "Post Tiger" days

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Mark Doyle takes a look at the current business environment and points out why it’s not all doom and gloom.
 
The Irish business community is feeling the effects of the recession. Asset values have fallen significantly and cash-flow is the overriding concern. It is not all doom and gloom however. This may be the perfect opportunity to step back for a moment and reassess one’s tax position and take advantage of the new landscape.
This article will focus on some key areas faced by our clients such as falling asset values and deteriorating cash-flow as well as recapping issues faced by professional advisors not seen since the pre Tiger days. It is important that accountants identify opportunities for their clients and add much needed value to their business and finances.
 
Passing Wealth to the Next Generation
The value of assets has plummeted, be it property, business assets or listed investments, now is the time to consider passing such assets to the next generation. All taxes on gifts (CAT, CGT and stamp duty) are based on current market value. Where appropriate, it may be worth advising clients to consider accelerating any gifts they had planned to make to their children in the future. Gifting at a low value now should have minimal tax costs and will allow wealth to accrue to the children from now on. Valuable CAT thresholds will also be preserved for any further gifts or inheritances received in the future.
 
Crystallising Losses
It is also worth considering crystallising CGT losses on shares at this stage; by locking in CGT losses now, they can effectively create a gross roll up vehicle and
save tax on gains now when cash is tight. Locking in losses is not as straightforward as it seems and advice of a stockbroker should be sought to ensure appropriate commercial exposure is retained. Also consider the following tax provisions:

  •  Connected persons – do not sell the investment to a connected person if you want to be able to offset the loss against other gains.
  • Bed and Breakfast transactions – make sure you do not buy back into shares of the same class in the same company within the next 4 weeks or the loss will not be generally available. Commercial exposure to the shares can usually be maintained by the use of CFDs and other structures.
  • Some investments such as Exchange Traded Funds or iShares are traded on a stock exchange but in general they are still funds. Losses on domestic and most other funds are not allowable CGT losses.

It is possible in certain circumstances to circumvent the connected party provisions; this is particularly desirable where one wants to take advantage of the latent tax losses of an asset while still maintaining control of that asset.
 
Development Land Losses – Individuals & Partnerships
Many accountants will be faced with finalising land dealing accounts for partnerships and individuals and for the first time in many years will be faced by the prospect of losses due to the falling value of land and the stagnating property market. The advisor must then consider how to best utilise those losses.
It is worth noting that taxpayers may elect not to apply the relief in s644A TCA 1997 which applies the 20% tax rate to profits arising on the sale of “residential development land”.
S644A(5) TCA 1997 states the following; “This section shall not apply to profits or gains arising to a person in a year of assessment if that person so elects by notice in writing to the Inspector on or before the specified return date for the chargeable period”
Any losses then arising on residential land may be used to offset total income arising to the taxpayer under s381 TCA 1997.
It is arguable that as s644A TCA 1997 applies only to subject “profits and gains” to the 20% tax rate that no election is required in order to allow any losses to be offset against total income from other sources. This is far from clear-cut.
Even so, it may be best to make the election unless the taxpayer has profits on some residential developments and losses on others in the same year of assessment.
The ability to shelter other income from tax by offsetting losses in this manner is a valuable relief for taxpayers and advisors should be cognisant of this when preparing tax returns for their clients.
Further difficulties arise where partnerships carry on a trade of dealing in land as the limited partnership provisions of s1013 TCA 1997 take effect (note: limited partnership in this context does not only mean a limited liability partnership, in effect almost all partnerships could be caught).
“Limited partner”, in relation to a trade, means –

  • a person who is carrying on the trade as a limited partner in a limited partnership registered under the Limited Partnerships Act, 1907; or
  • a person who is carrying on the trade as a general partner in a partnership, who is not entitled to take part in the management of the trade and who is entitled to have his liabilities, or his liabilities beyond a certain limit, for debts or obligations, incurred for the purposes of the trade, discharged or reimbursed by some other person; or
  • a person who carries on the trade jointly with others and who, under the law of any territory outside the State, is not entitled to take part in the management of the trade and is not liable beyond a certain limit for debts or obligations incurred for the purposes of the trade; or
  • a person who carries on a trade as a general partner in a partnership otherwise than as an active partner (in practice this is the most common limited partner as to qualify as an active partner one must work for the greater part of ones time on the day to day management of the trade; not likely with land development trade).

Thus, limited partner is defined in such terms that all partners participating in a limited way, or with limited liability, are included, whether the limitation is achieved by means of a limited partnership registered as such or by some other means. This is particularly applicable to land dealing partnerships as it would be difficult to contend that a person spends the greater part of their day to time involved in such an activity.
The general rule is that relief is only available for losses against profits of the trade which generated the relief; obviously in a loss making year no relief would be due (relief under s381 TCA 1997 is heavily restricted).
 
It should be noted that terminal loss relief is not restricted under s1013 TCA 1997; if the cessation of the trade or partnership can be engineered correctly losses realised can be carried back against profits of the preceding 3 years. This can represent a significant tax refund in many cases. Specialist advices should be sought to ensure loss relief is maximised as there are a number of hidden traps to avoid.
 
Cash Flow Saving – Review Basis of VAT Payments
Under the invoice basis of accounting for VAT one must pay over VAT for the VAT period in which the invoice is raised. Under the cash receipts basis, one does not account for VAT until receipt of payment for the goods and services supplied. In a time where there is a longer delay in invoices being paid business may consider changing to a cash receipts basis (subject to application to Revenue
Commissioners).
The cash receipts basis applies where:

  • Annual turnover does not exceed or is not likely to exceed 1,000,000.
  • Supplies of goods or services are at least 90% made to unregistered persons or to persons who are not entitled to claim a full deduction of the tax chargeable on the supply to them.

 
Change of Accounting Year-end
A change of accounting year-end can be a useful way of reducing the tax burden for sole traders and partnerships of a profitable period by combing such profits with profits of a less successful period (useful in the current environment when profits are dropping). The extension of an accounting period has the effect of averaging profits over a longer period; this diminishes the tax burden of a more profitable period. This technique requires careful management to ensure the desired result is achieved.
 
Extraction of Investment Assets from a Company
It may be worth considering extracting investment assets from a company into the personal account of the shareholders. There would obviously be a commercial risk attaching to this transaction; the benefit would be that potential future increase in value would accrue to the shareholders and not the company.
 
Conclusion
Advisors should try and bring positive opportunities to their clients – especially within the current economic environment.
 
This article first appeared in Accountancy Plus magazine.
 

Article on retirement relief

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Retirement Relief – Here Today Gone Tomorrow?

Mark Doyle gives a high level outline of the main retirement relief provisions and some planning & pitfall points to note.

There has been much speculation in recent times about the future of many of the tax reliefs currently provided for in the tax legislation. This speculation has been sparked by the Minister for Finance’s comments in his most recent Budget speech:
“The Government is concerned that some of the more expensive tax reliefs, especially for the better off, should be scaled back and the resources used, as appropriate, to protect those taxpayers who are most vulnerable in these times. It is fair and reasonable that those who profited most from the recent good economic times should shoulder a commensurate burden as conditions worsen.”

It is likely that many of the main tax incentives for corporates such as the R&D credit will remain untouched; it is vital that Ireland maintains its attractiveness for foreign direct investment and becomes a knowledge based economy. Instead it is more likely that the individual taxpayer will bare the brunt of the expected removal of reliefs.

CGT Retirement Relief
The retirement relief provisions are contained in sections 598 & 599 TCA 1997. Section 598 provides the main requirements for the relief to apply and imposes the
consideration limit ( 750,000) for disposals to third parties. Section 599 deals with disposals to a child.
The main conditions of the relief are as follows:

    • a) Individual must be at least 55 years of age;
    • b) Disposal assets must be ‘qualifying assets.

Under Section 598(1), ‘qualifying assets’ include:

  • Chargeable business assets of the individual which have been used for the purpose of the trade, profession, farming, office or employment carried on by the individual, his/her family company or a company which is a member of a trading group of which the holding company is the individual’s family company owned for a period of at least 10 years ending with the disposal date.

Shares or securities in a company which:

  • Is the individual’s family trading/farming company (i.e. the individual holds 25% of the voting rights or 10% of voting rights and family members hold 75% of voting rights in total); or
  • A company which has been a member of a trading group, in order to be part of a trading group a 75% shareholding relationship must exist between the parent and subsidiary companies.

Subject to the 10 year rule and the individual has been a working director for at least 10 years (and a fulltime working
director for at least 5 of these).

  • Land, machinery or plant used for the purposes of the company’s trade (subject to 10 year rule). The land, machinery and/or plant must be disposed of at the same time as the shares and to the same person.

There are special provisions relating to farm land. In normal circumstances farm land that was let does not qualify for retirement relief as it is not a chargeable business asset. Disposals of the following should qualify for retirement relief provided the other conditions are satisfied:

  • Land previously used by the vendor for the purposes of farming (10 year rule) – provided the rules of the Scheme of Early Retirement from Farming are met.
  • Payment entitlements.
  • Land which has been let by the individual at any time in the 5 year period ending with the disposal date, where the disposal is a CPO of land for road widening and immediately before the land was first let, the land was owned and used by the individual for the purposes of farming for at least 10 years.
  • Land which has been let by the individual at any time in the 15 year period ending with the disposal date, where the disposal is to a child and, immediately before the lease of land, it was owned and used by the individual for the purposes of farming for at least 10 years.

The current limit of 750,000 is a lifetime limit for an individual in respect of all disposals made after reaching the age of 55. Both the full and marginal reliefs are potentially subject to re-computation, if the taxpayer makes further disposals thereby increasing the aggregate of such disposal proceeds in excess of the current limit ( 750,000). This may result in a clawback of relief already granted in those earlier years.
Disposals to a spouse (normally ignored) are taken into account at market value in determining if the 750,000 ceiling has been exceeded, but disposals to children are ignored for the purposes of the ceiling.
Sections 598 and 599 are independent of each other. A clawback of retirement relief under Section 599 arises if the child, who acquires the qualifying assets, disposes of them within a period of 6 years from date of acquiring same. The tax is calculated in the normal manner ignoring the retirement relief provisions and the child is assessed on this charge. Dependent on the individual situation, it may be possible for relief under section 598 to be claimed where relief is being clawed back on a disposal to a child.

Planning and Pitfalls – Examples

1. Shares in a family trading company

In order to qualify for retirement relief the individual must hold 25% of the voting rights or the individual and his family (as defined) must hold 75% of the voting rights with the individual themselves holding not less than 10% of the voting rights.
Joe incorporated his company in 1970 and trades as a retailer. In 1980 Joe married Anne. Joe decided to gift 50% of the shares in his company to Anne at that time. Anxious to keep control of the company Joe split the shares into voting and non-voting shares and retained all the voting shares for himself.
Joe and Anne are now both 60 years of age and have been full time working directors for more than 10 years. Deciding to retire, Joe and Anne place the company on the market with a sale price of 1.2m. The value of Joe’s shares including the voting rights is 700k and the value of Anne’s shares is 500k.
In this scenario Joe will be entitled to claim retirement relief on the disposal of his shares, however Anne will not be entitled to claim retirement relief as she does not hold any of the voting rights in the company and a charge to CGT will arise. Clearly a tax efficient reorganisation of the shareholding is required; however this is not always simple due to the aggregation of disposals between spouses.
2. Family group of companies

Brian is the ultimate shareholder of a company in a complex holding structure. The structure arose over the course of time for various tax and commercial reasons. The structure is illustrated below.
retire-relief
Essentially Brian holds two separate interests in Tradeco, 50% directly and 50% via Holdco. It is clear that the shares Brian holds directly in Tradeco will qualify for retirement relief. The shares Brian holds in Holdco will not qualify for relief. This is because Holdco only holds 50% of the shares in Tradeco therefore it does not qualify as a holding company of a trading group (75% shareholding relationship required).
Clever and careful planning is required at this stage to reorganise the shareholdings to ensure that 100% of Brian’s interest would qualify for retirement relief.
3. Earlier disposals

Retirement relief claimed on an earlier disposal of qualifying assets can be clawed back where there is a subsequent disposal of qualifying assets to a third party, and the aggregate consideration of all disposals made after the individual has reached 55 years of age, exceeds 750,000.
Brendan is a successful entrepreneur approaching retirement (age 60). In 2007 he disposed of shares in a trading company for 700,000. Brendan in his spare time ran a hobby farm where he kept beef cattle; deciding to move abroad he places his hobby farm on the market and receives an offer of 1.5m. Brendan approaches you for advice on the tax consequences of the disposal.
As the sale of the hobby farm should qualify for retirement relief you point out that because the aggregate disposal of all qualifying assets (the farm and earlier
disposal of shares) exceeds 750,000 retirement relief will not be available. In addition, the relief claimed on the earlier disposal will now be clawed back. Clearly consideration now needs to be given as to how to ensure that this claw back does not arise.

Biography
Mark Doyle (ACA AITI), Capital Taxes, Grant Thornton and is involved in property related transactions, corporate reorganisations, M&A projects, international
tax and tax planning for high net worth individuals. Mark is happy to answer any questions relating to the above article and can be contacted by email.