Special TaxFax

Finance (No.2) Bill 2013 was published this afternoon and this special edition of TaxFax provides an overview of the main measures contained therein.

The Bill, its Explanatory Memorandum and other Department of Finance documents are available on the Institute’s dedicated Finance (No.2) Bill 2013 webpage.

The Finance (No.2) Bill 2013 Seminar Tour will run from 19 to 28 November at locations around the country and online.  These comprehensive seminars will provide you with detailed analysis of the key elements of the Bill and the implications for you and your clients.  The seminars will be presented by Marie Bradley (Bradley Tax Consulting), John Cuddigan (RDJ Solicitors) and David Fennell (EY).

Click here for dates and venues and to book online. 

Confirmation of Budget Measures

Tax Package for Building Business & Creating Jobs

Promoting Entrepreneurship

• Entrepreneur Relief: Section 43 provides for a new CGT relief aimed at serial entrepreneurs investing in assets used in new productive trading activities. The measure applies to an individual who has paid CGT on the disposal of an asset and invests in a new business at a cost of at least €10,000, between 1 January 2014 and 31 December 2018. This investment must be disposed of no earlier than 3 years after the date of investment.
  
  The CGT payable on the disposal of this new investment will be reduced by the lower of:
  • the CGT paid by the individual on a previous disposal of assets in the period from 1 January 2010, and
  • 50% of the CGT due on the disposal of the new investment
  
  The assets acquired must be chargeable business assets (including goodwill). Shares will only be included in the definition of chargeable business assets where they are new ordinary shares issued on or after 1 January 2014 in a micro, small or medium sized enterprise, the investor has control of the company and is a full time working director and the company is carrying on a new business. The commencement of this measure is subject to EU State Aid approval.

• Start Your Own Business (SYOB):  Section 6 provides an exemption from income tax for a long term unemployed person (continuously unemployed for the previous 15 months) who is starting a new unincorporated business.  The first €40,000 of profits per annum are exempt from income tax for the first 2 years.  However, USC and PRSI will continue to be payable.

Stimulating Investment

• Employment and Investment Incentive and High Earners’ Restriction (HER): Section 16 removes the initial 30% relief for EIIS investments from the High Earners’ Restriction for 3 years from 16 October 2013 until 31 December 2016. The section also implements the Budget measure to include capital allowances and losses on plant and machinery used in manufacturing trades and claimed by passive investors, as a specified relief for the purposes of the Higher Earners’ Restriction.
   
• Stamp duty: Section 66 provides that transfers of shares of companies listed on the Enterprise Securities Market (ESM) of the Irish Stock Exchange will be exempted from stamp duty (currently 1%). This is subject to a commencement order.

Encouraging Innovation

R&D tax credit: 

Section 21 contains a number of amendments to the R&D tax credit as announced on Budget Day:

• The amount of expenditure eligible for the R&D tax credit on a full volume basis (without reference to the 2003 base year) is being increased from €200,000 to €300,000.
• The limit on the amount of expenditure on R&D outsourced to third parties which can qualify for the R&D tax credit is being increased from 10% to 15%.
• Section 21(1)(c) extends the existing clawback provisions in section 766(7B)(c) in circumstances where a company has made a claim which is subsequently found to be deliberately false or overstated and has surrendered some of that claim to a key employee.  In these circumstances, the Bill provides that the tax foregone can be recovered from the company instead of the employee.  The clawback would take the form of a charge to tax under Case IV in an amount equal to 8 times of the amount surrendered to the employee.

These changes apply to accounting periods commencing on or after 1 January 2014.

Section 13 deals with changes to the R&D relief for key employees introduced in Finance Act 2012.

• • Where an employer surrenders some of their R&D credit to an employee, the employee is entitled to have his income tax reduced by the amount surrendered.
  • The relevant tax year in which the income tax deduction can be taken is the tax year following the year in which the company’s accounting period ends.
  • No reduction in income tax will be given unless the employer has remitted the tax due in relation to the employment under the PAYE system.
  • An individual will be a chargeable person for any year in which relief is used i.e. not just the year relief is claimed but also in years where it is carried forward.

Section 472D TCA 1997 has also been amended to remove the subsection which provides for a clawback of relief from an employee where an incorrect R&D claim is made. Section 21 of the Bill, dealt with above, means that any tax foregone will be recovered from the company.

It had also been announced on Budget Day that ultimately the base year would be phased out entirely over time.  Perhaps unsurprisingly, there was no mention of this in the Finance Bill.

Cash Flow

• VAT cash receipts basis:  Section 61 increases the annual VAT cash receipts basis threshold from €1.25m to €2m with effect from 1 May 2014.

Shadow Economy Issues
 

A number of VAT “anti-fraud” measures are included in the Bill:

• Sections 58 & 59: Businesses which have not paid for supplies (in full or part) on or before the last day of the third VAT period following the “initial period” (broadly speaking, a 6 month period), will be required to reduce their deductible VAT accordingly.  The deductible tax can subsequently be increased in the period in which the consideration is paid.

Tourism and Hospitality Sector

• VAT 9% rate:  Section 56 provides that the reduced rate of 9% VAT for tourism-related goods and services is being retained.

Construction and Building Sector

• Living City Initiative:  Section 31 extends the “Living City” urban regeneration initiative to include residential properties constructed up to and including 1914.  The Bill provides that the relief will apply in certain special urban regeneration areas to be set out in an Order by the Minister.  In his Budget speech, the new areas mentioned by the Minister were the cities of Cork, Galway, Kilkenny and Dublin. 
  
  These amendments (and the original provisions) will be commenced by Order of the Minister for Finance.
   
• Home Renovation Incentive: A new Home Renovation Incentive scheme was announced in the Budget for homeowners who carry out repair, renovation or improvement work on their principal private residence in 2014 and 2015.  In the Bill, this timeframe has been brought forward to run from 25 October 2013 to 31 December 2015 (Section 5). In addition, qualifying expenditure incurred between 1 January 2016 and 31 March 2016 can be treated as having been incurred in 2015 where planning permission had been granted before 31 December 2015.
  
  Relief will be available in the form of an income tax credit of 13.5% on qualifying expenditure over €5,000 and up to a maximum of €30,000. Work qualifying for relief includes building extensions, window fitting, plumbing, tiling and plastering carried on by tax compliant builders. The credit will be split over the two years following the year in which the work is carried out and any grant aid, compensation or tax relief received will reduce the relief available.  The home owner must be LPT compliant to avail of the credit and Revenue’s on-line systems will track information on contractors involved and the works being carried out.
   
• CGT Property Incentive Relief:  Section 42 provides that the CGT incentive relief (for the first 7 years of ownership) on properties purchased between 7 December 2011 and 31 December 2013, is being extended to include properties bought up to 31 December 2014.

Farming, Agriculture and Food Sector

• VAT flat-rate addition:  Section 62 increases the farmers’ flat-rate addition from 4.8% to 5% with effect from 1 January 2014.
• CGT retirement relief:  Section 41 extends the CGT retirement relief to include disposals of leased farmland in circumstances where, among other conditions, the land is leased under a minimum lease of 5 years, and the subsequent disposal of the farmland is to a person other than a child of the individual disposing of the land. 
• Young Trained Farmers:  Section 65 extends the eligibility for Young Trained Farmers relief by adding three more qualifying courses to the list of relevant qualifications required for the Stamp Duty relief for the purchase of agricultural properties. Section 20 has the same effect for stock relief. Section 20 also attaches certain conditions to the special 50% rate of stock relief for registered farm partnerships. 

Film industry

• Eligible individuals: Section 24 extends the definition of “eligible individual” (i.e. an individual employed on the production of a qualifying film) to effectively  include non-EU individuals, by removing the Irish/EU residence requirements that have been there.  Section 25 provides for the introduction of a withholding tax on payments to non-residents.   These measures are subject to EU State Aid approval and Commencement Order. 

Other Budget Measures

Tax credit changes

Section 7 provides for the replacement of the One-Parent Family tax credit with a new Single Person Child Carer Tax Credit from 1 January 2014.  The value of the credit and the additional standard rate band will continue to apply.  However, as announced in the Budget, the new credit will only be available to the principal carer of the child.

Section 8 of the Bill contains the restrictions announced to medical insurance tax relief. The amount of medical insurance premiums which can qualify for relief at the standard rate will be capped at €1,000 per adult insured and €500 for a child. No tax relief will be available on any excess over these amounts. The section applies to contracts entered into or renewed on or after 16 October 2013.

Top slicing relief abolished

Top slicing relief on ex-gratia payments of €200,000 or more was abolished in Budget 2013. Section 4 of the Bill now provides that the relief is abolished entirely for all ex-gratia lump sum payments made on or after 1 January 2014.

DIRT (Deposit Interest Retention Tax)

Section 23 sets out a number of changes to DIRT.  As announced in the Budget, the standard DIRT rate will increase from 33% to 41%.  The higher DIRT rate of 36% will also be abolished, so that all deposit interest will be liable at 41%. These changes will apply to payments made on or after 1 January 2014. The exemption for interest on “special term accounts” will be abolished for accounts opened after Budget night and credit union “regular share accounts” will be subject to DIRT on interest/dividend payments made after 1 January 2014.

Relief on loans to invest in a partnership being phased out

Section 3 provides that tax relief for interest on loans used to acquire an interest in a partnership (section 253 TCA 1997) is to be phased out over 4 years. There will be no relief for new loans taken out from 15 October 2013. Those claiming relief currently will be able to claim relief until 1 January 2017.  However, relief will be only available on a reducing basis, i.e. 75% in 2014, 50% in 2015, 25% in 2016. This restriction will not apply to certain farm partnerships.

Pensions

Section 18 of the Bill deals with pensions. As announced in the Budget, the Bill provides that the Standard Fund Threshold (SFT) is to be reduced from €2.3 million to €2 million from 1 January 2014.  Individuals with pension rights in excess of this new lower limit on 1 January will be able to claim a Personal Fund Threshold (PFT) subject to a maximum of €2.3 million.

Also announced in the Budget, the current single valuation factor of 20, used to place a capital value on Defined Benefit pension entitlements is being replaced with a range of higher factors. These factors vary depending on the age when the pension is drawn down.  The age related factors are set out in a table at Page 35 to the Bill.

Section 782A allows members of occupational schemes the option to withdraw up to 30% of the accumulated value of certain additional voluntary contributions. The Bill provides that the option may be exercised notwithstanding the rules of the retirement benefits scheme or PRSA contract concerned. This provision is being introduced to address concerns that the existing override provisions in the section were insufficient to allow withdrawals where trust deeds or contract terms prohibited them.  This change applies to options exercised on or after 27 March 2013.

Section 776 is also being amended on a point of clarification as regards the Incentivised Scheme of Early Retirement for public servants.

Stamp duty - Banking sector

Section 68 provides for a levy on the banking sector to apply for the period 2014 to 2016. The levy will amount to 35% of the DIRT paid by the relevant financial institutions in 2011.  It will operate for 3 years and will be payable on 20 October 2014, 2015 and 2016.

Section 33 removes the restriction on the use of corporation tax losses by NAMA institutions for accounting periods commencing on or after 1 January 2014.

Pension levy

Section 67 provides that the current 0.6% levy on pension fund assets, introduced to fund the 2011 Jobs Initiative, will increase to 0.75% in 2014. This levy will be abolished from 31 December 2014 but a levy of 0.15% on pension funds will be payable in 2015.

Company tax residence
 

Section 38 of the Bill introduces the change announced by the Minister on Budget Day to company tax residence rules. The change has effect where an Irish incorporated company is managed and controlled in another Treaty State or EU Member State (i.e. a relevant territory) and is not regarded as tax resident in any territory.  This arises because:

• It is not resident in the other relevant territory, as it is not incorporated there, and
• It is not resident in Ireland because it is not managed and controlled here.

In this case, the company will be regarded as resident in Ireland for tax purposes.

The amendment applies from:

• 24 October 2013 for companies incorporated on or after that date; and
• 1 January 2015 for companies incorporated before 24 October 2013.

New measures not contained in the Budget

A number of measures not contained in the Budget have been included in today’s Finance Bill:

Income tax

Retirement relief for sports people

Section 15 provides that when computing the income tax deduction available under 480A TCA 1997 the sportsperson can take into account the income arising in any 10 of the 15 years prior to retirement. Currently, the legislation provides that the deduction is based on the 10 years to retirement.

The Bill also provides that the sportsperson does not have to be Irish resident at the time of retirement to claim the relief. The person can be resident in an EEA or EFTA state.

PSWT and Doctors

Section 17 makes a number of changes to PSWT. In particular, the Bill proposes to clarify how PSWT applies where doctors are engaged as employees, providing medical services on behalf of their employers. Section 522 TCA 1997 has been amended to specify that payments can be made by insurers to the employer of the practitioner providing the medical services, or to the practitioner. This is something the Institute has sought in our representations to Revenue.

The section also includes some additional bodies and corporate vehicles on the list of accountable persons subject to PSWT, for example 51% subsidiaries of bodies already liable to PSWT.

IQA on state pension assessable on pension beneficiary

Section 12 provides that where a person has a State pension and an additional payment is made by the Department of Social Protection in respect of a qualified adult dependent; this additional income (“increase for a qualified adult” (IQA)) will be assessable on the beneficiary of the pension.

Grants under JobsPlus tax exempt

Section 2 provides that payments made to employers, on or after 1 July 2013, under the “JobsPlus” employment scheme are to be disregarded for tax purposes.

Health expenses – educational psychologist

Section 9 of the Act has revised section 469 TCA 1997 to update the definition of “educational psychologist”.  The definition of “speech and language therapist” has been removed.

Garda Reserve – annual allowance exemption

Section 10 provides for an exemption from income tax on an annual allowance paid to Garda Reserve members.

Refund of college fees – notification procedure

Section 14 amends section 473A TCA 1997 (relief for fees paid for third level education) so that where fees on which relief is claimed are refunded or partly refunded the claimant must notify Revenue of this within 21 days of receipt of the refund.

ESOTs

Under section 19, former employees can avail of tax relief on the value of shares appropriated via an employee share ownership trust (ESOT) for up to 20 years, increased from 15 years.

Corporation tax

Foreign interest and royalties

Section 77 TCA 1997 provides relief where a company’s trading income includes foreign-sourced royalties or interest from which foreign tax was deducted, by allowing that income to be reduced by the relevant foreign tax in relation to that income.  Section 32 of the Bill effectively clarifies that the reduction for relevant foreign tax cannot create a loss for tax purposes.

This applies to accounting periods beginning on or after 1 January 2014.

Group relief

Section 34 amends section 411 TCA 1997, which deals with corporation tax group relief. The amendment deletes some wording to clarify that, in determining whether a group relationship exists where a company is quoted on a recognised stock exchange, it is the direct or indirect parent of the subsidiary company that must be quoted on a recognised stock exchange.

This change applies to accounting periods commencing on or after the date of the passing of the Act.

Exit tax – deferral option

Section 35 inserts a new section 628A TCA 1997.  Section 627 TCA 1997 provides for an exit tax where a company ceases to be resident in Ireland.  In response to recent ECJ decisions, the new section 628A TCA 1997 amends these exit tax provisions to allow migrating companies to elect to defer the immediate payment of the exit tax where a company migrates its tax residency to another EU or EEA Member State on or after 1 January 2014. The exit tax may be deferred and paid in 6 equal annual instalments or within 60 days of the disposal of migrated assets.  Interest is payable on the deferred exit tax at a rate of 0.0219% per day.

The amendments provide for immediate crystallisation of the exit tax on the occurrence of certain events, such as the appointment of a liquidator to the migrating company, or the company ceasing to be tax resident in an EU or EEA Member State.

This section comes into operation on 1 January 2014.

REITs

Section 36 makes some language and technical amendments to the Real Estate Investment Trusts (REITs) legislation.

Non-commercial State bodies – The Teaching Council

Section 37 includes The Teaching Council in the list of certain non-commercial State bodies that qualify for exemption from certain tax provisions.  The exemption takes effect from 28 March 2006, the date on which the body was established.

Capital gains tax

Persons chargeable – anti-avoidance

Section 29 TCA 1997 was previously amended in Finance Act 2013 to introduce an anti-avoidance provision in situations where a non-domiciled individual transfers his/her gains or amounts derived from such gains to his/her spouse or civil partner.  The amendment in section 39 of the Bill clarifies that any amounts received or treated as received in the State on or after 24 October 2013, which derive from the earlier transfer shall be treated as received in the State by the non-domiciled individual.

Acquisition, enhancement and disposal costs - debt relief

Section 40 amends section 552 TCA 1997 to provide that where borrowed money is used to acquire or enhance an asset, the debt is not repaid, and some or all of the debt is released, the amount of debt so released will not be allowed as a deduction in computing a chargeable gain or loss on a later disposal of the asset.

If any such debt is released in a later year than the year in which the asset is disposed of, the amount of the debt released in that year will be deemed to be a chargeable gain in that year.

VAT 

Section 63 of the Bill provides that the VAT rate on the supply of horses (not for the food chain) and greyhounds has been increased from 4.8% to 9%. Insemination services for horses and greyhounds are chargeable at 13.5%, while the supply of horses for food purposes or agricultural production remains taxable at 4.8%.

These changes were required following infraction proceedings taken successfully by the EU Commission against Ireland in relation to the application of VAT to transactions involving horses and greyhounds
Section 57 provides that VAT incurred on services related to the transfer of a business can be deducted (based on general deductibility principles).

Section 60 of the Bill extends the legislation introduced in Finance Act 2013, which renders receivers and mortgagees in possession as responsible for the obligations of an owner under the Capital Goods Scheme. Section 60 is extending these provisions to receivers and mortgagees appointed before 27 March 2013 and requires the owner to provide the capital goods record to the receiver/mortgagee within 60 days of enactment. The measure will be effective from 1 May 2014.

Revenue and administrative issues

New self-assessment regime clarifications

Section 70 makes some technical adjustments in relation to the “full” self-assessment regime applicable from 1 January 2013.  Section 959V TCA 1997 has been expanded to clarify the circumstances in which a return can be amended. It also clarifies that an amendment for CGT is not available under this section.

Repayments of tax

Section 71 deals with the procedures for making a claim for repayment of tax arising from an error or mistake in a filed return, under the new self-assessment regime. In order to make the claim for repayment, both the return and the self-assessment for the period of claim must be amended.

The section also confirms that Revenue can check repayments of tax, after a refund has been made.

Revenue powers on penalties

Section 74 updates Revenue’s powers to mitigate fines, penalties etc.  It amends section 1065 TCA 1997 to clarify that Revenue may (at their discretion) stay or compound any proceedings for the recovery of any fine or penalties, and mitigate penalties before or after judgment. However, Revenue’s power to order that an imprisoned person be discharged before their prison term expires has been removed.  The change applies to all taxes.

Statement of Affairs – Amendments

Section 960R TCA 1997 concerns Revenue’s power to require a taxpayer to provide a Statement of Affairs where the taxpayer has failed to discharge an outstanding tax liability. Section 75 of the Bill clarifies the information that must be provided in the statement. It also defines “market value” for the purposes of valuing assets. A 30 day time limit to submit the statement is being introduced.

Currently, the taxpayer must sign a declaration that the statement is to the best of the person’s knowledge, information and belief correct and complete. A statutory declaration to this effect will now be required. 

Taxpayer confidentiality and third party service providers

Section 76 extends Revenue’s confidentiality provisions to third party service providers engaged by Revenue.

Notice of Attachment – can issue electronically

Section 1002 TCA 1997 allows Revenue to issue a Notice of Attachment to a third party to collect a tax debt. Section 77 will allow Revenue to issue these notices electronically.

Additions to list of treaties and agreements

Section 78 adds Ireland’s new Double Taxation Agreement with the Ukraine and information exchange agreements with Dominica and Montserrat to Schedule 24A of the TCA, to give them force of law.

RCT

Section 26 relates to Revenue’s right to establish the correct amount of RCT due, where a return is filed late.

Additional measures

Interest payments to group companies – relief from withholding tax

Section 22 amends section 246 TCA 1997 to allow a treasury company to make a payment of interest free of withholding tax to another group company which is resident in the State.  The definition of “group” for these purposes is the same as that set out in section 411 TCA 1997 for the purposes of group relief, with the exception that the shareholding requirement is 51% instead of 75%.

These changes apply to interest paid on or after 1 January 2014.

FATCA

Finance Act 2013 introduced provisions giving effect to the FATCA agreement signed between Ireland and the United States.  The provisions allow Revenue to exchange information with the United States authorities.  Section 27 of the Bill corrects the deadline for transmitting information to the United States authorities and confirms that the deadline is 9 months following the end of the tax year to which the relevant return relates.

Foreign tax relief

Section 28 makes various amendments to Schedule 24 TCA 1997, including:

• An amendment to the effective tax rate calculation where an individual is subject to the high earners’ restriction. The effective rate should be calculated as the tax payable after the application of the high earners’ restriction divided by the individual’s adjusted income.
• An amendment to provide that, for the purposes of corporation tax, the reduction allowed for excess foreign tax cannot create a loss.
• An amendment to enable unrelieved foreign tax on leasing income to be carried forward into future accounting periods.

Securities issued by Irish Water

Section 29 provides that interest on any securities issued by Irish Water may be paid without deduction of tax and that such securities will not be chargeable assets for CGT purposes.  These provisions apply to securities issued by Irish Water on or after 24 October 2013.

Life assurance policies and investment funds

Section 30 introduces a single rate of exit tax of 41% to apply to payments from life assurance policies and investment funds, in place of the existing rates of 33% and 36%. The section also increases the higher rates applying to investments in Personal Portfolio Life Policies (PPLPs) and Personal Portfolio Investment Undertakings (PPIUs) from 56% to 60%, and from 74% to 80%.  The rate changes take effect from 1 January 2014.

Schedule for passage of Bill through Oireachtas

We understand that the following is the likely schedule for the passage of Finance (No.2) Bill 2013 through the Oireachtas:

• 6 and 7 November - Second Stage
• 26, 27 and 28 November - Committee Stage
• 4 and 5 December - Report Stage
• 11 and 12 December - Bill referred to Seanad
• The Bill is likely to be enacted before the end of the year