Tax News

Finance Act 2017 increased the rate of Stamp Duty on all non-residential properties from 2% to 6% and includes non-residential lease premiums.  This 6% rate applies to documents executed on/after 11^th October 2017.

Although transitional measures have been introduced, this higher Stamp Duty rate will apply for conveyances executed from 1st January 2018.

To be able to avail of the previous 2% rate on commercial property (i.e. where contracts were entered into before 11th October 2017), the two following conditions must be met:

1. a binding contract must have been in place before 11th October 2017 and
2. the instrument for the transfer must have been executed before 1^st January 2018.

The increased Stamp Duty rate also applies to certain shares which derive their value or the greater part of their value, directly or indirectly, from Irish non-residential land and buildings.  The 6% Stamp Duty Charge was introduced by Section 31C SDCA 1999 on conveyances/transfers of shares in Irish and non-Irish companies.  The provision also applies to units in an Irish real estate fund, interests in foreign collective investments schemes as well as to interests in a partnership.

This 6% Stamp Duty rate will apply if the result of the transfer is a change in the person/persons having direct/indirect control over the non-residential property and where it would be reasonable to consider that the immovable property concerned was:

1. acquired by the company, IREF or partnership with the sole or main object of realising a gain from its disposal,
2. being developed by the company, IREF or partnership with the sole/main object of realising a gain from its disposal when developed, or
3. held as trading stock by the company, IREF or partnership.

Although the legislation applies to any instrument executed on or after 6^th December 2017, there are transitional provisions, which will limit the Stamp Duty rate to its existing rate (i.e. 1% or qualifying for an exemption) where:

1. A binding contract was entered into before 6^th December 2017,
2. the instrument is executed or the binding contract is completed before 1st March 2018 and
3. the instrument contains a statement certifying that the instrument was solely executed in pursuance of said binding contract which was entered into prior to 6^th December 2017.

The new rate will apply to contracts for sale of such shares as well as actual transfers of shares.

As the 6% rate applies to all non-residential property, this means the disposal of goodwill or the transfer of Debtors, as part of the sale of a business, could also give rise to a 6% Stamp Duty charge.

The rates of stamp duty on residential property remain at a rate of 1% up to the first €1,000,000 with 2% payable on the excess over €1,000,000.

The Stamp Duty rate on leases of commercial property will continue to be charged at a rate of 1% on the average annual rent.  However, where the landlord receives a premium from the tenant at the commencement of the lease, this will be subject to Stamp Duty at 6%.

Finance Act 2017 (Section 83D SDCA 1999) introduced a Stamp Duty Rebate Scheme in relation to land purchased for the purpose of developing residential property.  The Act provides that where Stamp Duty at the new higher rate of 6% is paid on the acquisition of land which is subsequently used to develop residential property, then the purchaser will be entitled to a rebate of 2/3 of the 6% upfront duty paid i.e. a potential refund of up to 4% can be claimed provided the following conditions are satisfied:

• The Stamp Duty Rebate Scheme is limited to the proportion of land used for residential development.
• The Scheme only applies where construction operations for residential property commence before 1^st January 2022 and construction must begin within thirty months of the date the land was acquired.
• The time required to conclude any planning appeal can be added to this thirty month period.
• The repayment cannot be claimed in advance of the commencement of construction operations.
• There is a four year time limit on claiming a repayment. The supporting documentation required to substantiate the claim include (i) a certified copy of the deed of transfer, (ii) a statutory declaration stating that building work commenced within the thirty month period immediately after the date the instrument was executed and (iii) written consent by all the accountable persons to the person making the claim.
• Where the Stamp Duty rebate claims relates to only part of the land, the Statutory Declaration must clearly state the specific part of the land to which the claim relates.
• The rebate will not carry interest.
• The refund can only be claimed via Revenue’s e-Stamping system.
• In situations where the residential development is being carried out in phases, repayments can be sought on a phased basis.
• The Rebate will be clawed back in two situations: (i) where the residential development is not completed within two years of acknowledgement, by the relevant building control authority, of the commencement notice or (ii) where at least 75% of the units or a minimum of 75% the total area of the land in question is not occupied.

Construction operations” is defined as the construction of buildings or structures including the preparatory operations of site clearance, drainage, earth-moving, excavation, laying of foundations and provision of roadways and other access works.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

Today the Minister for Finance Michael Noonan T.D. delivered Budget 2017.

Until the Brexit negotiations begin it is impossible to know the impact for Ireland however today’s Budget gave Minister Noonan the opportunity to affirm the stability of Ireland’s tax policies while at the same time introducing measures to promote economic growth.

The overall Budget package was €1.3 billion; of which just over €300 million was set aside for tax adjustments.

Unless otherwise stated, the following tax changes will take effect from 1^st January 2017

PERSONAL TAX

1)   USC Reductions

There will be a half per cent reduction to the first three USC rates of 1%, 3% and 5.5% to 0.5%, 2.5% and 5% respectively.  While this will benefit all taxpayers, it is aimed at easing the tax burden on low and middle income earners earning up to €70,044 per year.

There will also be an increase in the entry point to the 5% band from €18,668 to €18,772.

There has been no change to the 8% or 11% USC rates.

While the reduction in USC rates is a welcome reduction in the overall tax burden, the top marginal rate for employed individuals with earnings over €70,044 is still 52% and 55% for self-employed individuals with income in excess of €100,000.

2)   Home Carer Credit

The Home Carer Tax Credit is being increased by €100 to €1,100 for 2017.

The Home Carer Tax Credit may be claimed where an individual cares for one or more dependent persons.  These include children, an elderly person, an incapacitated individual, etc.

It can be claimed by a jointly-assessed couple in a marriage/civil partnership where one spouse/civil partner cares for one or more dependant individuals.

3)   Earned Income Tax Credit

The Earned Income Credit has increased from €550 to €950.

The tax credit is expected to increase to €1,650 in 2018 which will see self-employed individuals being on a par with employees who are currently entitled to a PAYE tax credit of €1,650.

An Earned Income Tax Credit of €550 was introduced in Budget 2016 for self-employed individuals, including proprietary directors, with earned income who were not otherwise entitled to the PAYE Tax Credit.

 4)   Deposit Interest Retention Tax (“DIRT”)

The rate of DIRT has been reduced from 41% to 39%.

In his Budget speech, Minister Noonan also committed to reducing the DIRT rate by a further 2% in the next three years until it reaches 33%.

 5)   Fisherman’s Income Tax Credit

A new income tax credit of up to €1,270 can be claimed by fishermen who spend at least 80 days in the tax year fishing for wild fish or shellfish.

CAT thresholds

The Group A tax-free threshold, which applies primarily to gifts and inheritances from parents to their children, is being increased from €280,000 to €310,000.

The Group B threshold, which applies primarily to gifts and inheritances to parents, brothers, sisters, nieces, nephews, grandchildren, etc., is being increased from €30,150 to €32,500.

The Group C threshold, which applies to all relationships other than Group A or B, is being increased from €15,075 to €16,250.

PROPERTY

1.    Help to Buy Scheme

Minister Noonan announced the new “Help to Buy” scheme for First Time Buyers of newly-built houses today.  This new tax incentive is aimed at assisting first time buyers in meeting the acquisition deposit limits set by the Central Bank.

Under this scheme, first-time buyers will receive a rebate of income tax of the previous four years, of up to 5% of the value of a newly constructed home, up to a maximum value of €400,000.

A full rebate (which will be calculated on a maximum of €400,000) will apply to houses valued between €400,000 and €600,000 i.e. where the new house is valued between €400,000 and €600,000 the rebate will still apply but it will be capped at €20,000.

No rebate can be claimed on house purchases in excess of €600,000.

The scheme will be back-dated to cover new houses acquired between 19^th July 2016 and December 2019.

A number of conditions must be met as follows:

• The property must be a new build or a self-build which was either purchased or built as the First Time Buyer’s main or primary residence.
• Second-hand properties will not qualify for this relief.
• The First Time Buyer must take out a mortgage of at least 80% of the purchase price.

 2.    Interest on rental properties

 For landlords of residential property, 100% relief for mortgage interest incurred on the acquisition or development of residential rental properties will be restored on a phased basis over the next five years.

The Relief will increase by 5% per annum, beginning with 80% interest relief in 2017. This change will apply to both new and existing mortgages.

Under this new measure, the relief will be increased by 5% every year over the next five years, which will ultimately bring the relief in line with that currently available to landlords of commercial property.

3.    Rent-a-Room relief

The annual tax free income limit for Rent-a-Room Relief is being increased by €2,000 from €12,000 to €14,000 per annum for 2017 and subsequent years.

4.    Home Renovation Incentive

The Home Renovation Incentive which offers a tax incentive of up to approximately €4,000 for homeowners wishing to renovate a property has been extended for another two years until the end of 2018.

It was originally introduced in Finance Act 2013 and was due to expire at the end of 2016 but Minister Noonan announced today that this will now be extended to the end of 2018. This is seen as of great benefit to the Irish construction industry.

The rate of credit and the expenditure thresholds remain unchanged.

 5.    Living City Initiative

This Initiative provides tax relief on the refurbishment of properties in designated areas in Ireland’s six cities.

The conditions of the Living City Initiative are being amended as follows:

• Landlords can qualify for the relief where they let qualifying residential property.
• The current cap on the maximum floor space of a residential property has being removed.

BUSINESS TAX

There were a number of welcome changes for business owners in today’s budget:

I.          Revised Entrepreneur Relief

Minister Noonan announced a reduction in the preferential Capital Gains Tax rate, from 20% to 10%, for those qualifying for Entrepreneur Relief on the disposal of certain business assets, including shares, provided conditions are met.

There was no change to the €1m lifetime limit on chargeable gains.

II.     Foreign Earnings Deduction (“FED”)

This scheme which was due to expire in December 2017 has been extended until the end of 2020.

The minimum number of qualifying days spent abroad for Foreign Earnings Deduction Relief has been reduced from 40 days to 30 days.

The list of qualifying countries has been extended to include two additional countries: Colombia and Pakistan.

III.          Share-based remuneration regime for SMEs

The Minister signalled his intention to develop a SME focused, share based incentive scheme which would be introduced in Budget 2018.

The Minister noted that any new regime would have to satisfy EU State Aid rules.

IV.            Start Your Own Business scheme

 The Start Your Own Business relief, which was due to expire on 31^st December 2016, has been extended for a further two years.

The cap on eligible expenditure is being increased from €50 million to €70 million, subject to State Aid approval.

AGRI SECTOR

The following changes were introduced for individuals operating in the Agri sector in light of the challenges posed from Brexit:

• The flat-rate addition for VAT unregistered farmers is being increased from 5.2% to 5.4% from 1^st January 2017.
• The extension of the scheme of accelerated capital allowances for energy efficient equipment to sole traders and non-corporates.  Previously this scheme only applied to companies who could claim relief for expenditure on qualifying plant and equipment.
• A new income tax payment option for farmers was introduced whereby farmers can opt to ‘step out’ of income averaging to allow for “unexpectedly poor income” and pay tax based on their actual profits in that year. The tax deferred must be paid in subsequent years however the period over which the deferred tax must be paid is as yet unclear. Therefore this is a tax deferral scheme and not an actual tax saving.  Farmers can opt to avail of this “step out” in 2016.
• A new low cost loan fund is to be established for farmers, with an interest rate of less than 3% per annum. These loans will enable farmers to improve their cashflow management and reduce the cost of their short term borrowings.
• The CGT relief for farm restructuring was introduced to facilitate sales, purchases and swaps of land parcels and to ensure more efficient farm structures. Although the terms of the relief remain unchanged, this relief, which was due to expire on 31^st December 2016, has been extended to 31^st December 2019.
• Payments under the raised bog restoration incentive scheme will be exempt from Capital Gains Tax.

INTERNATIONAL TAX

Special Assignee Relief Programme (“SARP”)

The SARP regime, which was due to expire at the end of 2017, has been extended for a further three years until the end of 2020.

This Relief exempts 30% of the income of between €75,000 and €500,000 of employees assigned to work in Ireland for a minimum of twelve month provided certain conditions are satisfied.

No other changes were announced in relation to SARP.

Tackling offshore tax evasion

 The Irish Revenue will be carrying out a comprehensive programme of targeted compliance interventions which will be focused on offshore tax evasion.

Attention will be given to the information Revenue receives under FATCA, EU and OECD information exchange initiatives etc.

The legislative changes contain measures to deny individuals involved in illegal offshore tax planning the opportunity to make qualifying voluntary disclosures from 1^st May 2017.

Also, a new strict liability offence will also be introduced for failure to return details of offshore assets/accounts.

Consultation on modernising PAYE

Minister Noonan announced a Revenue consultation regarding the proposed modernisation of the PAYE system to take effect from 1^st January 2019.

The consultation process will begin today regarding the implementation of a real time PAYE / Tax reporting regime for employers similar to that which currently operates in the UK.

 OTHER MEASURES

• There was no change to the VAT rates with the 9% VAT rate applying to tourism related activities remaining unchanged.

• The Minister intends to extend mortgage interest relief to 2020. The details of the extension will be set out in Budget 2018.

• A tax on sugar-sweetened drinks will be introduced in 2018 which will coincide with a similar regime in the UK. A public consultation on the form and implementation of the tax was released today by the Department of Finance and will run until 3^rd January 2017.

• The excise duty on a packet of twenty cigarettes will increase by 50c (VAT inclusive) from midnight tonight.  A corresponding pro-rata increase will also apply to other categories of tobacco products including smoking tobacco, cigars, etc.

• There is no change to the excise duty on alcohol or fuel.

• The qualifying limit on excise duty for Microbreweries was extended which will reduce the standard rate of tax (alcohol products tax) by 50% on beers produced in Microbreweries where the output is 40,000 hectolitres or less per year.  Previously the limit was 30,000 hectolitres.

• VRT relief on the purchase of electric vehicles is extended by five years and hybrid vehicles is to be extended by two years.

• Relief from carbon tax is being introduced to promote the use of “green fuels” i.e. solid fuels that include a biomass element.

When setting up a Trust, it is essential to take into consideration the following tax heads.

INCOME TAX

The tax residence of the trustees is what determines the extent of their liability to Irish income tax.

If all the trustees are Irish resident then they are liable to Irish income tax on the worldwide income of the trust from all sources.

If, however, the trustees are resident in say France or the U.S. for tax purposes, then the trustees will only be liable to Irish income tax on Irish source income.

The Trustees must pay income tax at the standard rate of 20% on any income arising but they will not be entitled to claim any of tax credits, allowances or reliefs as they are not deemed to be individuals.

If the income of the trust has not been distributed within eighteen months from the end of the year of assessment in which the income has arisen, there will be a 20% surcharge on this accumulated income.

In circumstances where a beneficiary has an absolute right or entitlement to the trust income as opposed to the Trustees then Revenue will assess the beneficiary directly.  In other words if the terms of the trust state that income is to be paid directly to a particular beneficiary as opposed to the trust then the beneficiary will be liable to Income Tax on the amounts received.  That individual must file the appropriate tax return and pay the relevant taxes within the deadline dates.

CAPITAL GAINS TAX

For the purposes of CGT, the trustees will to be Irish resident and ordinarily resident if the general administration of the trust is carried out in Ireland and if all or the majority of the trustees are resident or ordinarily resident in Ireland.

In general, if the trustees are resident or ordinarily resident in Ireland they will be liable to Irish capital gains tax on their worldwide gains.

If, however, the trustees are not resident or ordinarily resident in Ireland they will be liable to Irish capital gains tax in respect of any gains arising on disposal of specified assets including:

• Land and buildings in Ireland .
• Minerals in Ireland including related rights, and exploration or exploitation rights in a designated area of the continental shelf.
• Unquoted shares deriving their value, or the greater part of their value, from such assets as mentioned above.

Please keep in mind that, just as for Income Tax purposes, the trustees are not deemed to be individuals and are therefore not entitled to the annual CGT exemption of €1,270 which is only available to individuals.

Apart from selling/distributing the trust assets, the trustees will be deemed to have disposed of assets for CGT purposes in the following three situations:

1. Where the trustees cease to be Irish resident or ordinarily resident.
2. Where a life interest in the trust property has ended but the property continues to be settled property.
3. Where a beneficiary becomes absolutely entitled in possession to the settled property except in situations where it occurred as a result of the death of the individual with a life interest in that property.

Market Value rules are imposed on this event with the Trustees being deemed to have disposed of and immediately reacquired the property at open market value.  As with all CGT computations, the liability is calculated on the difference between its base cost and the deemed market value.

CAPITAL ACQUISITION TAX

Capital Acquisition Tax is only payable when the beneficiary actually receives a gift or inheritance.  Where a beneficiary receives the gift/inheritance under a deed of appointment from a trust then he/she will be taxed as if the benefit was received from the settlor/testator.

Capital Acquisition Tax at 33% is payable by the beneficiary and is charged on the value of the gift or inheritance to the extent that it exceeds the relevant tax-free threshold amount.

A charge to Irish Capital Acquisition Tax will arise in the following situations:

• If the beneficiary is Irish resident or ordinarily resident on the date he/she receives the benefit.
• If the settlor is Irish resident or ordinarily resident either (a) at the date of setting up the trust or (b) on the date the beneficiary receives the benefit.
• In circumstances where the settlor is Irish resident or ordinarily resident at the date of his/her death a liability to Irish CAT will arise on any benefit taken on the settlor’s death
• Where the property, which comprised the benefit, is situated in Ireland.

Points to keep in mind

• The creation of a discretionary trust or the transfer of funds to a discretionary trust will not give rise to a charge to capital acquisitions tax.
• Distributions from a trust, however, can potentially give rise to both an Income Tax and a Capital Acquisitions Tax liability. You’re probably asking yourself if a double charge to tax has arisen.  It has.  Regular or periodic distributions to a beneficiary will be subject to the individual’s marginal rate of Income Tax but can also, at the same time, be liable to CAT.  A Revenue concession exists where CAT is chargeable on the net benefit i.e. the benefit after Income Tax has been deducted.  Don’t forget, the small gift exemption of €3,000 per annum can also be deducted.

STAMP DUTY

Stamp Duty can arise on the transfer of assets into a trust at 1% in the event of shares, residential property valued at less than one million euros, etc. or 2% in the event of commercial property, business assets, etc.

There is no Stamp Duty on the transfer of assets into a trust that is created by a Will.

Where trust assets are appointed by the Trustees to the beneficiaries then no Stamp Duty charge will arise i.e. there is an exemption from Stamp Duty in this situation.

DISCRETIONARY TRUST TAX

Discretionary trust tax of 6% is a once off charge based on the value of assets comprised in a discretionary trust.

If the Trust is wound up and all the assets are appointed within a five year period then 50% of this initial charge will be refunded i.e. 3%

The initial charge is due and payable on the later of the following dates:

• The death of the settlor or
• Where the last of the “principal objects” (i.e. spouse, child or child of a predeceased child of the Disponer) has reached his/her 21st birthday.

A 1% annual charge on undistributed assets comprised in a discretionary trust will arise every year on 31st December.  This annual levy, however, will not arise within the same twelve month period as the initial charge of 6% has been levied.

Are you aware of how many changes to our tax system have been implemented between 1st January 2016 and today?

• eBrief No. 52/2016: Requirement for Security Bonds Section 960 S TCA 1997
• eBrief No. 51/2016: Rental Income
• eBrief No. 50/2016: Recent enhancements to VAT Return of Trading Details (RTD) in ROS
• eBrief No. 49/2016: Tax Treatment of Flight Crew Members
• eBrief No. 48/2016: Non-Filing of Returns – Prosecution and Penalty Programmes
• eBrief No. 47/2016: Revised tax treatment of royalty income, with effect from 1 January 2016, under the terms of the Ireland-Estonia Double Taxation Convention 1997
• eBrief No. 46/2016: Corporation Tax (CT1) Returns for 2015 and 2016, Forms 46G (Company)
• eBrief No. 45/2016: Mandatory eRepayments
• eBrief No. 44/2016: Tax and Duty Manual Part 17-01-03 (Profit Sharing Schemes)
• eBrief No. 43/2016: Clarification of circumstances where a CGT clearance certificate is not required
• eBrief No. 42/2016: VAT – “Cancellation of a registration number – special provisions for notification and publication” (section 108D)
• eBrief No. 41/2016: Termination of carry forward of certain unused capital allowances beyond 2014
• eBrief No. 40/2016: High Income Individuals Restriction – Specified Reliefs
• eBrief No. 39/2016: Disclosure by Revenue of taxpayer information – Finance Act 2015 changes
• eBrief No. 38/2016: Surcharge for Late Submission of Returns
• eBrief No. 37/2016: New appeals process – issuing of Revenue ‘settlement’ letters
• eBrief No. 36/2016: Payment and Receipt of Interest without Deduction of Income Tax
• eBrief No. 35/2016: Tax and Duty Appeals Manual
• eBrief No. 34/2016: Change of Responsibility for e-Tax Clearance from 1st April 2016
• eBrief No. 33/2016: Increased compliance interventions in the construction sector – application of the Reverse Charge for VAT and other matters
• eBrief No. 32/2016: Guidelines for Using the Court Process to Pursue Tax Liabilities
• eBrief No. 31/2016: ROS – Extension of Pay & File Deadline for ROS Customers for 2016
• eBrief No. 30/2016: Commencement of new tax and duty appeals process
• eBrief No. 29/2016: Sub-Postmasters and Social Welfare Branch Managers – Tax and PRSI
• eBrief No. 28/2016: Credit in respect of tax deducted from emoluments of certain directors and employees – Section 997A TCA 1997
• eBrief No. 27/2016: Health Expenses section 469 Taxes Consolidation Act 1997
• eBrief No. 26/2016: Taxation Treatment of Termination Payments on Retirement or Removal from Office or Employment
• eBrief No. 25/2016: Gross Roll-Up Life Assurance Policies
• eBrief No. 24/2016: Order of offset of income tax reliefs, allowances and deductions
• eBrief No. 23/2016: Bus, Rail, and Ferry Passes
• eBrief No. 22/2016: Return by employer of employees who availed of relief under the Special Assignee Relief Programme (SARP)
• eBrief No. 21/2016: Transition to the reformed tax and duty appeals process
• eBrief No. 20/2016: Revenue launches dedicated Tax Avoidance webpage
• eBrief No. 19/2016: Procedures to follow when Issuing S110 VAT Estimates/Amended Estimates
• eBrief No. 18/2016: Agents Guide to Collector-General
• eBrief No. 17/2016: Average Market Mid-Closing Exchange Rates v Euro
• eBrief No. 16/2016: Guidelines for Phased Payment/Instalment Arrangements
• eBrief No. 15/2016: Exemption in respect of certain payments under employment law
• eBrief No. 14/2016: Relief from tax for certain start-up companies
• eBrief No. 13/2016: Finance (Local Property Tax) (Amendment) Act 2015
• eBrief No. 12/2016: VAT on eServices Scheme (VOES) / Electronic Services Scheme (ESS)
• eBrief No. 11/2016: Guidelines on PAYE/PRSI/USC/LPT monthly and annual estimates
• eBrief No. 10/2016: Exemption in respect of water conservation grant
• eBrief No. 09/2016: Exemption in respect of certain expenses of State Examinations Commission examiners
• eBrief No. 08/2016: Exemption in respect of certain expense payments for relevant directors
• eBrief No. 07/2016: ROS Digital Certificate renewals 2016 – reminder to save your new Certificate
• eBrief No. 06/2016: Exemption in respect of fuel grant
• eBrief No. 05/2016: Home Carer Tax Credit
• eBrief No. 04/2016: Taxation of Community Midwives employed by the Health Service Executive
• eBrief No. 03/2016: Finance Act 2015 – Stamp Duty Provisions
• eBrief No. 02/2016: eRCT payments to subcontractors for 12-month period 1 January 2015 to 31 December 2015
• eBrief No. 01/2016: Tax Treatment of Married Couples

What happens in a Share Buy Back Situation?

Providing the shareholder meets the necessary statutory conditions, the company can buy back its shares from that shareholder thereby allowing him/her to get the benefit of the Capital Gains Tax treatment as opposed to the more costly Schedule F Treatment.  In other words if the CGT Treatment doesn’t apply, any payment for the shares in excess of the amount the company originally received for the subscription of those shares will be treated as a distribution under Section 130 TCA 1997 and will be liable to Income Tax at the shareholder’s marginal rate plus PRSI plus Universal Social Charge.

Generally the only occasions where funds can be extracted from a limited company without the recipient being exposed to tax at his/her marginal rate of income tax are:
(i) on a repayment of capital at par or
(ii) on the sale/disposal of the shares or
(iii) on a liquidation.

What are the typical scenarios?

1. The departure of a disgruntled Shareholder.
2. The retirement of a controlling shareholder who wishes to stand aside and make way for new management/the next generation.
3. Situations where one shareholder wants to continue carrying on the trade, the other shareholder would prefer to exit the business and the company has the necessary funds to buy back its own shares.
4. Access to company surplus funds as part of succession planning
5. An outside shareholder who initially provided equity finance but who now wants the return of that finance.
6. A marriage break-up, etc.

What are the rules as outlined in the Taxes Consolidation Act 1997?

Where an Irish resident company repurchases/redeems/acquires/buys back its own shares then any amount paid to the shareholder in excess of the original price paid at issue will be treated as a distribution under Section 130 TCA 1997.

A more beneficial Capital Gains Tax treatment can be applied under Section 176 TCA 1997 providing certain conditions are met.

S176 – 186 TCA 1997 contain the legislative provisions relating to share buybacks as follows:

• The company must be an unquoted trading company or the unquoted holding company of a trading group.
• The shareholder participating in the share buyback must be both Irish resident and ordinarily resident in the tax year in which the share buyback takes place
• The redemption, repayment or repurchase of the shares must be made wholly or mainly for the benefit of a trade carried on by the company or any of its 51% subsidiaries.  It cannot form part of any scheme or arrangement, the purpose of which is tax avoidance.  In cannot be used to enable the shareholder to extract the profits of the company, or any of its 51% subsidiaries, and avoid being treated as having received a dividend.
• The shareholder must own the shares for a period of at least five years ending on the date of the disposal.
• There must be a substantial reduction in the shareholder’s interest following the buy back. Don’t forget, you must include the shares of (a) the shareholder whose shares have been brought back and (b) any associates of that shareholder.  For completeness, the term “associate” includes husband, wife, civil partner and minor child.  The term “substantially reduced” means that there is a reduction in the nominal value of the participating shareholder’s shares of at least 25%.  Another way of saying it is that the shareholder’s remaining shareholding, following the redemption of the shares, cannot exceed 75% of its value pre Buy Back.
• The shareholder must no longer be connected with the company i.e. the shareholder and his/her associates, together, must own less than 30% of the company post buy back.

Under Section 186 TCA 1997, they cannot hold or be entitled to acquire more than 30% of [s186]:

(a) the ordinary share capital of the company

(b) the loan capital and issued share capital of the company

(c) the voting power in the company or

(d) the assets on a winding up in the company.

Let’s go back to the Trade Benefit Test

The repurchase of its shares by a limited company must be made “wholly or mainly for the purpose of benefiting a trade carried on by the company or any of its 51% subsidiaries”.

Tax Briefing 25 provides guidance on the “Trade Benefit Test:”

(i) It must be shown that the sole or main purpose of the buyback is to benefit a trade carried on by the company or of one of its 51% subsidiaries.
(ii) The Trade Benefit Test would be breached if the sole/main purpose was to benefit the shareholder by reducing his/her tax liability as a result of the more beneficial CGT treatment.
(iii) From the company’s perspective, the test would not be met if the sole/main aim was to benefit any business purpose other than a trade.

Situations where the Buy-Back will benefit the trade include:

Where there is a disagreement between the shareholders of the company over its management and that disagreement is or will negatively impact on the company’s trade if the situation were to continue.  Enabling the shareholder to cease his/her association with the company without having to sell his/her shares to a third party would benefit the company’s trade.

Revenue has listed a number of examples which involves the shareholder selling his/her entire shareholding in the company and making a complete break from the company which would benefit the trade.

Revenue also recognises that the shareholder may wish to significantly reduce his/her shareholding and retain a limited connection which the company.  For example, a shareholder with a majority shareholding  wishes to pass control to his/her children but intends to remain on as director as an immediate departure from the business would have a negative impact on the trade.  In such circumstances it may still be possible for the company to show that the main purpose is to benefit its trade.

In circumstances where a company isn’t certain as to whether the proposed “Buy Back” is deemed to be for the benefit of the trade and providing all the other legislative requirements have been meet, Revenue will issue an advance opinion on whether the Buy Back satisfies the “Trade Benefit Test” if requested.

Are there any situations where the above conditions don’t apply?

The conditions as outlined in Section 176 – 186 TCA 1997 will not apply where the shareholder uses the entire proceeds received from the redemption of the shares to:

(a) Settle his/her inheritance tax liability in respect of those shares.  This must be done on or before 31st October in the year in which the CAT is payable in relation to the inheritance of those shares or

(b) Discharge a debt which arose in order to settle this CAT liability within one week of the buy-back;

AND where the shareholder could not otherwise have discharged the tax liability without incurring undue hardship.

Administration

In the event of a company buying back its own shares or those of its parent company it must file a Return within nine months of the accounting period in which the redemption occurred or within thirty days if requested in writing by the Inspector of Taxes.

The Return must include all payments liable to the Capital Gains Tax Treatment.

If any individual connected with the company is aware of any scheme to avoid the “Connected Person’s Rule” they must notify Revenue within sixty days of becoming aware of that information.

Are there any other issues to be considered?

A liquidation instead of a share buyback might be considered for succession planning purposes.

CGT Retirement Relief and CAT Business Property relief can be used to minimise (a) the tax on the transfer of the business/company by the parent and (b) the gift tax for the child receiving it.

A company and not a sole trader is entitled to a tax credit equivalent to 25% of qualifying R&D expenditure incurred in a particular accounting period which can be offset against the corporation tax liability.

For accounting periods beginning on or after 1st January 2015, the base year restriction has been removed which means the credit is now available on a volume basis as opposed to an incremental basis.

The 25% Tax Credit is in addition to the normal Case I deductions for expenditure incurred against trading income which may result in a corporation tax refund. For a 12.5% taxpayer, this can result in a net subsidy of 37.5% (i.e. 12.5% corporation tax deduction + 25% R&D tax credit). Please be aware, however, that certain restrictions apply to limit the extent of the refund.

 What are “Qualifying R&D Activities”?

Revenue guidelines state that qualifying R&D activities must:

• Be systematic, investigative or experimental in nature,
• Be carried out within a Revenue approved field of science and technology,
• Involve basic research, applied research or experimental development,
• Seek to achieve scientific or technological advancement, and
• Involve the resolution of scientific or technological uncertainty

 What areas are considered for “qualifying” R&D Activities?

• Natural sciences including food science, software development, chemical sciences, biological sciences. „
• Engineering and technology including mechanical, material, electronic, electrical, and communication engineering, food and drink production. „
• Medical sciences including basic medicine, clinical medicine, health sciences.
• Agricultural sciences including forestry, fisheries, veterinary medicine.

Points in relation to “qualifying” expenditure:

1. Expenditure covered by grant assistance received from the State, the EU, or EEA does not qualify for the credit.

2. Eligible expenditure includes expenses such as salaries, overheads, materials consumed, etc. which are allowable trading deductions for the purposes of computing corporation tax.

3. Expenditure incurred on plant and machinery may also qualify as R&D expenditure. To do so, however, it must be eligible for wear and tear capital allowances and must be used for the purposes of R&D activities.

4. Expenditure incurred on R&D activities outsourced to a third-party or to third level institutions may also qualify as R&D expenditure for the purposes of the R&D Tax credit subject to certain conditions:

• Payment to a third party is limited to the greater of 15% of the company’s overall R&D spend or €100,000. „

• Payment to a third level institution/university is limited to the greater of 5% of the company’s overall R&D spend or €100,000. „

• The total amount claimed must not exceed the qualifying expenditure incurred by the company itself in the period. „

• The company must notify the third party provider in writing that it cannot also claim the R&D tax credit for the work it has been contracted to carry out.

5. Companies who build or refurbish buildings or structures for both R&D and other activities may claim an R&D tax credit in respect of the portion of the construction and/or refurbishment costs that relate to R&D activities.

• To qualify, the company must be entitled to claim industrial buildings capital allowances on the building. It’s important to bear in mind that the cost of the site is excluded.

• A minimum of 35% of the building must be used for conducting R&D activities for a four year period.

• The building must be used for R&D for a period of ten years.

• The relief will be clawed back if the building is sold or ceases to be used within ten years by the company for research and development activities or for the same trade as when the building is first brought into use.

• An R&D tax credit of 25% of relevant expenditure can be claimed in full in the year in which the building is first put into use for the purpose of the trade.

 The order of offset of the R&D Tax Credit is as follows: 

1. Firstly against the current period’s corporation tax liability.
2. Secondly, where the company does not have sufficient corporation tax liability in the current accounting period, that company can make a claim to carry back the unutilised portion of the tax credit against the corporation tax liability of a preceding accounting period of corresponding length.
3. Thirdly, if any portion of the credit remains after making this claim the company can make a claim under Section 766(4B) for a cash refundpayment of this excess in three instalments. Please be aware that this payment is subject to a cap (see below).
4. Finally, any remaining portion of the R&D Tax Credit will be carried forward and offset against the corporation tax liability of the future accounting periods

The amount of cash refund that a company can claim under (Section 7664B) is limited to the greater of:

1. The corporation tax paid by the company during the period of ten years prior to the previous accounting period i.e. prior to the period in which Section 766(4A) TCA 1997 relief is claimed. It’s important to bear in mind that these payments are reduced by any claims already made under Section 766(4B)TCA 1997 in those earlier periods or
2. The sum of the payroll tax liabilities for the period in which the expenditure on R&D was incurred as well as the prior period’s payroll, subject to restrictions if the company has previously made a claim based on its preceding payroll.

Points to keep in mind

• The amount of any payment made by the Revenue Commissioners following a Section 766(4B) claim by a company will not to be treated as income of the company and therefore not included in the CT computation.
• Instead it will be deemed to be a refund of corporation tax.
• By doing this, Revenue Commissioners can offset the payment against any outstanding tax liabilities of the company.
• The company must make a claim for the R&D Tax Credit within twelve months of the end of the accounting period in which the expenditure was incurred.
• If possible the claim should be made when filing the corporation tax return of the relevant accounting period.
• Relief can be claimed for expenditure incurred prior to the commencement of the company’s trading activity.

As Tax Advisers, we’re frequently asked to advise business owners stepping down from running their businesses; individuals passing the farm or business to one or more family members or providing for the next generation with assets other than business assets.  To provide the most accurate, relevant and comprehensive advice possible, it is essential that we understand not just the basic conditions of the main Reliefs and Exemptions but that we have an in-depth knowledge of these rules including exceptions, anti-avoidance provisions, etc.

Agricultural Relief is one of the most significant Reliefs from Capital Acquisitions Tax i.e. the tax that affects recipients of gifts and inheritances.

As you’re probably aware, Agricultural Relief takes the form of a 90% reduction in the market value of the agricultural property which means that only 10% of the market value is liable to Capital Acquisitions Tax.

The relevant piece of legislation is Section 89 CATCA 2003 which provides tax Relief as follows:

1. To recipients who meet the “Farmer Test”
2. In respect of gifts and/or inheritances of “Agricultural Property”
3. On the “Valuation Date”

 Who is a “Farmer”?

To qualify for Agricultural Relief, the individual receiving the gift or inheritance must be deemed to be a “Farmer” on the Valuation Date.

For the purposes of Agricultural Relief, a “Farmer” is defined as an individual in respect of whom at least 80% of the market value of his or her assets, after taking the gift or inheritance, consists of agricultural property on the valuation date of the gift or the inheritance.  This is calculated as follows:

                         Agricultural Property                         x 100% = 80% at least

Agricultural Property + Non-Agricultural Property

Finance Act 2014 Changes

The following conditions were introduced for gifts or inheritances taken on/after 1st January 2015 where the “Valuation Date” is also on/after 1st January 2015:

The beneficiary must:

1. Farm the agricultural property for a period of at least 6 years starting on the valuation date or lease the agricultural property for a period of at least 6 years beginning on the valuation date.
2. Have an agricultural qualification i.e. a qualification as listed in Schedule 2, 2A or 2B of the Stamp Duties Consolidation Act 1999 or farm the agricultural property for not less than 50% of his or her normal working time.
3. Farm the agricultural property on a commercial basis with a view to making a profit although the timeframe isn’t specified.

The individual may lease the agricultural property to a number of lessees as long as each lease and lessee satisfies the conditions of the relief.

If the beneficiary farms the agricultural property but then decides to lease it within the six year period, then NO clawback of Agricultural Relief will arise providing the lessee and the lease meet the relevant conditions for the remainder of the six year period.

If, following the gift or inheritance the beneficiary leases the agricultural property and within the six year period decides to farm it him/herself, NO clawback of Agricultural Relief will arise.

There is one exception to the “Farmer Test” requirement. To qualify for Agricultural Relief, the beneficiary doesn’t need to meet the conditions of the “farmer test” where the agricultural property consists of trees or underwood.

This concession does not apply to the lands on which the trees or underwood grow.  To be eligible for Agricultural Relief on the lands, the beneficiary must meet the “farmer” criteria.

What’s included in the Farmer Test?

When carrying out the Farmer Test, the following must be included:

1. The gross value of any assets taken under the gift or inheritance and
2. The gross value of any existing assets held by the beneficiary prior to the gift or inheritance including cars, bank accounts, property, agricultural property, etc.

As you have seen, the liabilities of the beneficiary are not taken into account when carrying out the Farmer Test.  There is, however, one exception and that is any mortgage on the main or principal private residence of the individual, providing it is not deemed to be agricultural property.  Therefore, if the beneficiary’s dwelling house is not a farmhouse then he/she can deduct the amount of the mortgage from its value thereby reducing the value of this non-agricultural asset in the Farmer Test calculation. It is important to remember that the mortgage can only relate to borrowings used for the purchase, repair or improvement of that property.

This is known as the Farmer Test and only by meeting this test will the done or successor be eligible for the 90% Agricultural Relief.

The Farmer Test isn’t quite as straight forward as it seems.  If the individual is taking a life interest in agricultural property or some other limited interest, the gross market value of that interest should be included in the Farmer Test i.e. the value before the age/gender factor is applied.  This point can often be overlooked when carrying out the all too important calculations.

Another point to be aware of is where a benefit is taken subject to a condition in a Will or Deed of Gift that the benefit must be invested in agricultural property. If that condition is fulfilled within two years from the date of the benefit, then Agricultural Relief will apply providing the beneficiary passes the Farmer’s Test because the benefit is considered to be agricultural property both at the date of the benefit and at the valuation date.

The beneficiary cannot claim Agricultural Relief in respect of this benefit unless it was subject to the condition to invest in agricultural property. It is also important to remember that if the benefit is not invested in agricultural property then it will fail.  However, if the client inserts a “gift over” clause in the Will or Deed of Gift then even if the beneficiary doesn’t invest in agricultural property within two years as per the condition, he/she can still receive the benefit.

Anti-Avoidance Provisions 

If the individual is beneficially entitled in possession to (a) an interest in expectancy (e.g. a future interest) and/or (b) property contained in a discretionary trust which was set up by and for the benefit of the done/successor then these amounts should be included in the 80% Farmer Test Calculation.

This is to prevent the donee/successor from using artificial means to reduce his/her non-agricultural property in an attempt to meet the 80% Farmers Test and qualify for the 90% Agricultural Relief.

A future interest is taken into account whether it is vested or contingent i.e. it’s taken into account even where there is only a possibility that the beneficiary may actually receive the benefit.

In the event of a remainder interest, its value is arrived at by deducting the value of the life interest from the market value.

Shares in a company carrying on a farming trade

“Agricultural property” does not include shares in a company carrying on a farming trade.

Agricultural property and other assets used in a farming business carried on by a company may, if conditions are met, qualify for Business Relief.

Where both business relief and agricultural relief can be claimed by a beneficiary, Agricultural Relief must be claimed.

 Agricultural Relief and Dwelling House Exemption

In circumstances where the agricultural property includes a farmhouse on which Agricultural Relief is available, you should also check to see if the Dwelling House Relief also applies.

Where both Reliefs apply you should:

1. Include the value of the farmhouse in the Farmer Test Calculation
2. Then Claim Dwelling House Exemption
3. Apportion the costs and expenses between the farmhouse and the agricultural property in your computation.

Clawback

A clawback of Agricultural Relief arises if the agricultural property, contained in the gift or inheritance, is disposed of within a six year period commencing on the date of the gift or inheritance and is not replaced by other agricultural property.

For benefits received on or after 1st January 2015, a clawback of agricultural relief will also arise where the farmer or lessee ceases to farm all or part of the agricultural property, except for crops, trees or underwood, for at least 50% of that person’s working week within a six year period beginning on the valuation date of the gift/inheritance.

This clawback applies in all cases except where the farmer dies prior to the cessation of the farming activity.

In circumstances where there a clawback of agricultural relief arises, the CAT on the gift/inheritance is recalculated as if Agricultural Relief never applied in the first place.

There will be a clawback of Agricultural Relief if the agricultural property is sold, otherwise disposed of or compulsorily acquired within six years beginning on the date of the gift/inheritance and the full proceeds are not reinvested in replacement agricultural property within one year of the sale/disposal or six years of the compulsory acquisition.

If the disposal or compulsory acquisition takes place after the beneficiary dies the Agricultural Relief will not be clawed back.  Equally the Relief will not be withdrawn on the death of a life tenant within six years of taking the benefit or where the beneficiary receives an interest in agricultural property for a period certain which is less than six years.

If only a portion of the proceeds is re-invested in agricultural property, then only a portion of the relief can be clawed back. For example, if a Farmer disposes of 100% of the land he inherited but only reinvests 75% of the proceeds back into agricultural property then CAT will be calculated as if 25% of the value of that farm had not ever qualified as agricultural property.

If the beneficiary disposes of agricultural property that qualified for Agricultural Relief, he/she cannot use the proceeds from that sale to buy “replacement” agricultural property from his/her spouse/civil partner.

We referred above to a situation where an individual didn’t need to qualify as a Farmer to be eligible for Retirement Relief.  Where that beneficiary, in relation to trees or underwood, disposes of these assets within six years of the date of the gift or inheritance there will be no clawback of the relief.

For Development Land, the Clawback period is extended from six to ten years in the following circumstances where:

1. a gift or inheritance of agricultural property is taken on or after 2nd February 2006 and Agricultural Relief was claimed and
2. the agricultural property is “development land” which is disposed of in the period beginning on the sixth anniversary of the date of the gift or inheritance and ending four years after that date.

“Development land” is defined as land in Ireland where the market value at the date of a gift or inheritance exceeds the current use value of that land on that same date.  It also includes shares which derive their value, wholly or mainly, from such land.

As you are aware, when calculating agricultural relief, the relief is based on the market value. Where the market value is comprised of both development value and current use value and Section 102A CATCA 2003 applies, then only the relief relating to the development land will be clawed back.  This relief will be clawed back even if the sales proceeds were used to purchase replacement agricultural property.

In Summary

Therefore to fulfill the criteria of being a “Farmer” means:

• At least 80% of the individual’s assets must be agricultural as the date of transfer and he/she must farm or lease the land for a minimum of six years
• He/she must have an Agricultural qualification including the Green Cert or an Agricultural Science Degree or must secure that qualification within four years from the date on which the farm was transferred.
• He/she must farm that land on a commercial basis with a view to making a profit.
• If he/she doesn’t hold an agricultural qualification that individual must spend at least 50% of his/her normal working time farming (i.e. at least twenty hours a week farming)
• Even if the individual doesn’t meet these criteria, he/she may still be eligible for Agricultural Relief if he/she leases out the agricultural property transferred to him/her to a Farmer for six years, providing that individual meets the “Farmer” criteria as listed above.

For all those individuals currently preparing his/her own 2015 Tax Return, please be aware of the significant changes in Finance Act 2014, especially in the areas of:

1. Research & Development Tax Credits
2. Capital Allowances for the Provision of Specified Intangible Assets
3. Three Year Relief for Start-up Companies
4. Employment and Investment Incentive (EII)
5. Company Residence

R&D Tax Credit

Up to 1st January 2015, Section 766 TCA 1997 provided that the 25% tax credit applied to the amount of qualifying R&D expenditure incurred by a company in a given year that was in excess of the amount spent in 2003 (i.e. the base year).

For accounting periods beginning on or after 1st January 2015, the base year restriction has been removed which means the credit is now available on a volume basis as opposed to an incremental basis.

Capital Allowances for the Provision of Specified Intangible Assets

 This provides capital allowances for expenditure incurred by a company on the provision of certain intangible assets for use in a trade.

Up to 1st January 2015 the use of such allowances in any accounting period was restricted to a maximum of 80% of the trading income from the “relevant trade” in which the assets were used.  Another way of wording this is, for accounting periods ending on or before 31st December 2014 only 80% of the income from the “relevant trade” could be sheltered by the capital allowances and interest.

Finance Act 2014 introduced an amendment to this rule stating that for accounting periods beginning on or after 1st January 2015 the restriction has been removed meaning all the “relevant trade” income can now be sheltered.

Finance Act 2014 also introduced the following:

1. a flat five year period for all disposals on or after 23rd October 2014.
2. an amendment to the “connected party” rules stating that from 23rd October 2014 the purchaser can claim capital allowances on the lower of (a) the purchase price paid or (b) the tax written down value.

Three Year Relief for Start-up Companies

 This relief from corporation tax on trading income (and certain capital gains) of new start-up companies in the first three years of trading has been extended to new business start ups in 2015.

Employment and Investment Incentive

The EII is being amended as follows:

1. The amount a company can raise in a lifetime has been increased from €10 million to €15 million (s. 491(2) TCA 1997).
2. The amount a company can raise in EII funds in any one year had been increased from €2.5 million to €5 million (s. 491(4) TCA 1997).
3. The scheme has been expanded to include medium sized enterprises in certain non-assisted areas, the management of nursing homes and IFSC services, subject to certain conditions.
4. The period for which shares in an EII company must be held by an investor to avoid a clawback of the relief has been extended to four years (s. 496(1) and s.488(1) TCA 1997).
5. any claim for EII relief will not be allowed unless, at the time the claim is made, the company in which the investment is made qualifies for a tax clearance certificate

Previously income tax relief was given for 30/41 of the investment made. The remaining tax relief of 11/41 was given in the year after the holding period ended. Finance Act 2014 amended the income tax relief which will now be 30/40 and 10/40 respectively.

Company Residence

Finance Act 2014 introduced amendments to the corporate tax residence rules to address concerns about the “double Irish” structure.

The new rules state that an Irish-incorporated company will be regarded as Irish tax resident here unless it is deemed to resident in another country under the terms of a Double Taxation Agreement.  Therefore if, under the provisions of that treaty, an Irish-incorporated company is considered to be tax resident in another jurisdiction then the company will not be regarded as Irish tax resident.

These changes are in addition to the existing “central management and control test” which means that the new legislation does not prevent  a non-Irish incorporated company that is managed and controlled in Ireland from being considered resident for tax purposes in Ireland.

The new provisions take effect from 1st January 2015 for companies incorporated on or after 1st January 2015.

For companies incorporated before 1st January 2015, the new provisions will come into effect from 1st January 2021.

As an anti-avoidance measure, however, the new legislation take effect for companies incorporated before 1st January 2015 where there is (a) a change in the ownership of the company as well as (b) a major change in the nature or conduct of the business of the company within the time-frame that begins one year before the date of the change of ownership and ending five years after that date i.e. occurring within a period of up to six years.

The aim of this anti-avoidance provision was to restrict the incorporation of companies between 23rd October 2014 and 31st December 2014 to 1st January 2015 where the primary intention was to avail of the extension.

It is always essential to keep up to date with changes to the Finance Act especially if you are preparing your own tax returns.

The due dates for the payment of your Capital Gains Tax liability arising in the tax year 2015 are as follows:

1. 15^th December 2015 if you made any disposals or transfer of assets in the period 1^st January 2015 to 30th November 2015 inclusive.
2. 31^st January 2016 for all asset disposals and transfers made between 1^st and 31^st December 2015 inclusive.

In Summary

If an asset was disposed of or transferred between 1^st January to 30^th November 2015 giving rise to a chargeable gain then any liability to CGT is due and payable by 15^th December 2015. If, on the other hand, it was disposed of or transferred in the month of December 2015 then any liability arising will be due for payment on or before 31^st January 2016.

Other Points

1. If you have made a disposal under an unconditional contract, the date of disposal is deemed to be the date the contract is signed.
2. If the contract is subject to a condition, then the date of disposal is deemed to be the date the condition is satisfied.

What about CGT Refunds?

Please be aware that there is a 4 year time limit or Statute of Limitations for claiming tax refunds. If, for example, you are entitled to a refund from the tax year 2011, then you must ensure that you complete and send your refund claim to the Revenue Commissioners before 31st December 2015 otherwise you will forfeit this refund.

The Minister for Finance Michael Noonan T.D. presented his 2016 Budget yesterday which outlined a wide range of changes to the tax system with particular emphasis on personal taxation, initiatives to begin equalising the tax treatment of the self-employed and employees as well as steps to support businesses in Ireland.

The key features of yesterday’s Budget are outlined below.

PERSONAL TAX

Universal Social Charge

Comprehensive changes were introduced to the Universal Social Charge for 2016 which are aimed at reducing the tax burden on low and middle income earners.

The entry threshold for Universal Social Charge (“USC”) will be increased from €12,012 to €13,000.

Otherwise, rates of USC will be reduced as follows:

• Income up to €12,012 – Rates reduced from 1.5% to 1%.

• Income from €12,013 to €18,668 – Rates reduced from 3.5% rate to 3%.

• Income between €18,669 – 70,044 – Rates reduced from 7% to 5.5%

• Income between €70,045 – €100,000 – 8% (no change)

• PAYE Income in excess of €100,000 – 8% (no change)

• Self-employed income in excess of €100,000 – 11% (no change)

The top rate USC exemption will be retained for all medical card holders and individuals aged seventy years and older providing their total income does not exceed €60,000.

 Income Tax

There have been no changes to the income tax rates and bands.

 PRSI (Pay Related Social Insurance) 

Budget 2016 introduced a tapered PRSI tax credit for employees up to €624 per annum.

The entry point to the higher rate of employers’ PRSI of 10.75% will be increased to €376 per week which will be a welcome introduction by all employers.

The reason for this tapered PRSI credit being introduced is to ensure low income earners benefit from the increase to the minimum wage which will take effect in January 2016.

The credit applies to individuals earning between €18,304 and €22,048 per annum and is be subject to a maximum of €12 per week.

Earned Income Tax Credit

In an attempt to equalise the tax treatment of the self employed with employees paid through the PAYE system, the government will be introducing an Earned Income Tax Credit of €550 per annum in 2016.

This new tax credit will be available to individuals who are not eligible for the PAYE Tax Credit including those earning self employed trading or professional income (subject to Income Tax under Cases I and II Schedule D), those in receipt of Case III Schedule D income as well as to business owners who, up to now, didn’t qualify for a PAYE credit on their salary.

 Pensions

There was no reference made to tax relief on pensions in this Budget.

The “additional” pension levy of 0.15% will expire at the end of 2015.

The original 0.6% pension levy ended in 2014.

 Home Carer’s Tax Credit

The Home Carer’s Tax credit increased by €190 to €1,000 per annum.

1. An income tax credit worth up to €5,000 per annum for five years was introduced for family farming partnerships to facilitate the transfer of family farms to the next generation.
2. There was an extension of general and young farmers’ stock relief for a further three years.
3. Profits or gains from the occupation of woodlands are being removed from the High Earners’ Restriction.

Apart from the Earned Income Tax Credit, Budget 2016 announced a number of new tax measures aimed at encouraging and supporting entrepreneurs and small business owners including:

• The introduction of a Knowledge Development Box to provide for a 6.25% corporation tax rate on profits arising to certain IP assets which are the result of qualifying R&D activity that is carried out in Ireland. The Minister stated today that the KDB would add “a further dimension to our ‘best in class’ competitive corporation tax offering, which includes the 12.5% headline rate; the R&D tax credit; and the intangible asset regime.”
• The Start-up Relief from corporation tax is being extended for new start-ups commencing to trade over the next three years.  This relief applies where the total corporation tax payable for a period does not exceed €40,000 and the amount of relief available is linked to employer’s PRSI.
• The amendments to the Enterprise and Investment Incentive Scheme (EII) announced in Budget 2015 took effect from midnight. They have been pending EU State Aid approval for the past year.  These included an increase in the annual limit companies can raise to €5 million and an increase in the lifetime cap to €15 million. Investments in the extension, management and operation of nursing homes will also qualify for the EII.
• The cap on eligible expenditure for Film Relief is being increased from €50 million to €70 million subject to State Aid approval.
• The entry point to the top rate of employer’s PRSI increases by €20 per week to €376 per month.
• Commercial Road Tax is to be simplified and reduced. The current 20 rates are being replaced with 5 rates, which will range from €92 to €900. The new rates will take effect from 1st January 2016.
• The Bank Levy has been extended to 2021 and is expected to yield circa €750 million over the period of extension.
• The scheme of capital allowances for the construction of facilities used in the maintenance, repair, and overhaul and dismantling of aircraft is being amended to comply with State Aid rules. The scheme is also being commenced with effect from Budget night.

 CAPITAL TAXES

• A 20% Capital Gains Tax rate will to apply to the disposal in whole or in part of a business up to an overall limit of €1million in chargeable gains.
• Other than the reduced rate of CGT which applies to the disposal of a business, there has been no change to the Capital Gains Tax rate of 33%.
• The Group A threshold for capital acquisition tax will be increased from €225,000 to €280,000 with effect from 14th October 2015. The Group A threshold typically applies to transfers between parents and their children. The current Class B and Class C thresholds remain unchanged and there has been no change to the CAT rate of 33%.

 Local Property Tax (LPT)

The Local Property Tax revaluation date for the Local Property Tax has been extended from 2016 to 2019. This follows recommendations in the “Review of the Local Property Tax” report which has also recommended exemptions for properties significantly affected by pyrite.

NAMA is to deliver 20,000 houses between now and 2020. 90% of these in the Dublin area and 75% of the overall total will be starter homes.

OTHER CHANGES 

1. The Home Renovation Incentive is being extended until 31 December 2016.
2. The existing €5 Stamp Duty on Debit/ATM cards is to be replaced with a 12 cent charge for ATM transactions.  This is subject to a cap of €2.50 or €5 depending on the card type.
3. The reduced 9% rate for the tourism and hospitality sector will be retained.
4. There will be no changes to the reduced VAT rate of 13.5% or the standard VAT rate of 23% in 2016.

 FINALLY

This is the first time since the Budget in April 2009 that the marginal rate for middle income earners has fallen below the 50% rate.