Revenue Note for Guidance

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Revenue Note for Guidance

308 Corporation tax: manner of granting, and effect of, allowances made by means of discharge or repayment of tax

Summary

Capital allowances in relation to capital expenditure incurred by a company which are to be given by discharge or repayment of tax, or in charging income under Case V of Schedule D (that is, rental income), and which are available primarily against a specified class of income are to be treated primarily as deductions from that specified class of income. Balancing charges made otherwise than as trading receipts are treated as income of the same class as that against which corresponding allowances are given. Where an allowance due to a company cannot be fully absorbed due to insufficiency of income of the particular class, the unabsorbed amount may, subject to conditions, be set off against other income of the accounting period or, if necessary, of the immediately preceding accounting period. Any remaining amounts may be carried forward to the next accounting period and treated as an allowance for that period.

Details

Allowances given by discharge or repayment of tax or in charging income under Case V of Schedule D

(1) This provision deals with cases where capital allowances to be made to a company for an accounting period are to be given by way of discharge or repayment of tax, or in charging income such as rents under Case V of Schedule D, and are to be available primarily against a specified class of income. Examples of such a case are an industrial building (initial) allowance and writing-down allowances in respect of a leased industrial building or structure and wear and tear allowances in respect of a leased item of machinery or plant where the lessor is not a trading company. In any such case, the allowances are to be given as far as possible by deduction from income of the specified class. An example of a provision specifying a class of income is section 278(6).

Balancing charges made otherwise than in taxing a trade

(2) Balancing charges made on a company otherwise than as trading receipts are to be given effect by treating them as income of the same class as that against which the corresponding allowances are given. This rule supersedes any other provision enabling the charge to be made by way of assessment under Case IV or V of Schedule D.

(2A) This subsection allows for excess Case V capital allowances carried forward as at 31 December 2021 by non-Irish resident companies under section 305(1)(a) (being an income tax provision) to be treated as an amount of excess Case V capital allowances carried forward under section 308(3) (being the corporation tax equivalent).

(2B) This subsection ensures that any balancing allowance or charge made to or on a non-Irish resident company, in respect of a capital allowance made to the company in a chargeable period ending on or before 31 December 2021, is adjusted such that the value of the balancing charge does not exceed the value of the capital allowance given and the value of any balancing allowance in respect of such allowances is given at the 20% tax rate.

Carry forward of unutilised allowances

(3) Where capital allowances for an accounting period which are to be made by discharge or repayment of tax, or in charging income under Case V of Schedule D, exceed the income of the class to which they relate, any excess may be carried forward to the next accounting period (in so far as it is not allowed under subsection (4)) and treated as an allowance for that period, with further carry-forward if necessary.

Set-off of excess allowances against other profits

(4) If an allowance (other than allowance carried forward under subsection (3)) cannot be given for an accounting period because the income of the particular class to which it relates is insufficient, the company may claim that the excess of the allowance over that income (instead of being carried forward under subsection (3)) be set against other profits (income and chargeable gains) of the same accounting period. The company may also claim that the excess be carried back and set against profits of previous accounting periods, subject to the limits set out in subsection (5).

(5) The limits for carrying back an allowance under subsection (4) are fixed by reference to the length of the accounting period for which the allowance is originally available. The unallowed amount may be set against profits of any description of a time of equal length immediately preceding that accounting period.

Example

A company has trading income (assessable under Case I of Schedule D), and also rents (assessable under Case V of Schedule D) from an industrial building in respect of which it is entitled to industrial building writing-down allowances. The income of the accounting period of 12 months to 31 December, 2003, before deducting the writing-down allowance in respect of the let building is —

Trading income

€25,000

Rents

€20,000

€45,000

The industrial building writing-down allowance for the accounting period is €60,000. This is first set off against the rents, €20,000, and then, on due claim, against the trading income of the accounting period, €25,000. The balance of €15,000 which cannot be so allowed may then be set off against the profits (of whatever description) of immediately preceding accounting periods ending within a time equal in length to the accounting period to 31 December, 2003, that is, 12 months.

If the company has made up accounts for the 12 months to 31 March, 2002 (profits €12,000) and the 9 months to 31 December, 2002 (profits €10,000), the unallowed balance of industrial building writing-down allowance, €15,000, can be carried back and set off first against the profits for the 9 months to 31 December, 2002, €10,000. The remaining €5,000 can be carried back for a further 3 months, that is, it can be set off against 3/12ths of the 12 months to 31 March, 2002, that is, 3/12ths × €12,000 = €3,000. There is a balance of the allowance left, €2,000. This €2,000 can be carried forward for set-off against future income from rents (but not from any other source) under subsection (3).

(6) A claim for the set-off of unabsorbed capital allowances against other profits must be made within 2 years of the end of the accounting period to which the allowances relate.

Relevant Date: Finance Act 2021