Nothing but the expected?

Dec 05, 2019
Kimberley Rowan highlights the key elements of Finance Bill 2019. 

Most of the measures contained in Finance Bill 2019 (the Bill) were expected. It consisted mainly of legislative provisions for the tax changes announced by the Minister for Finance as part of Budget 2020. But some measures were not expected. The change to the general rule on tax deduction for any taxes on income, for example, was not expected by most tax practitioners. A handful of other measures contained in the Bill were also surprising.

In this article, I will explore the unexpected measures and provide an overview of the key anticipated measures, focusing on those that affect the domestic taxpayer. Peter Vales write about the key Finance Bill measures for international businesses in his article on page 68.

Tax-deductible expenditure

The Finance Bill includes two changes to the general rules applying to tax-deductible expenditure. First, a tax deduction is not available for “any taxes on income”. This matter has been before the Tax Appeals Commission in a number of cases and now puts Revenue’s view on a legislative footing. This will be relevant in the context of Irish companies that suffer foreign withholding tax on their business profits.
The second amendment aligns the tax deduction for doubtful debts with impairment losses under the relevant accounting standards.

KEEP

The Bill confirms the welcome enhancements to the Key Employee Engagement Programme, as announced on Budget Day. However, new complex conditions seem likely to limit the practical application of the enhancements. For example, the definition of a qualifying group includes only a qualifying holding company, its qualifying subsidiary/subsidiaries and its relevant subsidiary/subsidiaries. The qualifying group (excluding the holding company) must be wholly or mainly carrying on a qualifying trade, must have at least one qualifying subsidiary and all the companies in the group must be unquoted. It seems that the definition does not extend to scenarios where the parent company in a group is a trading company with multiple subsidiaries or where a holding company holds cash or undertakes certain activities.

Income tax payments

The Bill introduces exemptions for certain income tax payments. The exemptions introduced cover:
  • The reimbursement of expenses by the HSE to an individual for the donation of a kidney for transplantation (under conditions defined by the Minister for Health);
  • Certain foster care-related payments made by TUSLA;
  • Certain training allowances paid by, or on behalf of, the Minister for Education and Skills; and
  • Certain student support payments awarded by SUSI, education and training boards, or local authorities.
The Bill also introduces an amendment to clarify the availability of the income tax exemption on a range of payments made by the Minister for Employment and Social Protection, including payments made under the Magdalen Laundry ex-gratia scheme. The amendment is to clarify that a qualifying person for the relief must, in all circumstances, have received a payment under the Magdalen Restorative Justice Ex-Gratia Scheme.

Food supplements 

The change in the VAT treatment of food supplements was widely expected. The Bill introduces a provision that, with effect from 1 January 2020, food supplements will be subject to VAT at 13.5%. A concessionary zero rating had applied to these products. The change from zero to 13.5% VAT rate follows a comprehensive review by Revenue of the VAT treatment of food supplements, engagement with the Department of Finance in 2018 concerning policy options, the publication of Revenue guidance in December 2018 and a public consultation in May of this year. Revenue will not, as previously announced, apply a 23% VAT rate to these products.

There was no change to the rate in last year’s Finance Bill, but Revenue did issue guidance in December 2018 which removed the concessionary zero-rating of various food supplement products with effect from 1 March 2019. However, the withdrawal of Revenue’s concessionary zero-rating of food supplement products was delayed until 1 November 2019 to allow time for the Department of Finance’s public consultation on the taxation of food supplement products in summer 2019. The zero rate continues until 31 December 2019. From 1 January 2020, the 13.5% rate will apply.

The change introduced in Finance Bill 2019 will not impact certain products. These are:
  • Well-established and defined categories of food that are essential for vulnerable groups of the population such as infant formula, baby food, food for special medical purposes and total diet replacement for weight control;
  • Human oral medicines that are licensed or authorised by the HPRA are zero-rated for VAT purposes under a different provision. This includes certain folic acid and other vitamin and mineral products for oral use. Once such products are licensed/authorised by the HPRA as medicines, they are zero-rated for VAT purposes; and
  • Fortified foods (i.e. foods enriched with vitamins and/or minerals).

Dwelling house exemption 

An exemption from Capital Acquisitions Tax may be available in respect of inheritances of certain dwelling houses. One of the conditions to avail of the dwelling house exemption is that the person receiving the inheritance doesn’t have a beneficial interest in any other residential property at the date of the inheritance. Any dwelling house that is subject to a discretionary trust where the taxpayer is the settlor and a potential beneficiary must also be considered.

The Bill amends the exemption following the High Court decision in the Deane case in 2018. The conditions of the relief are amended such that all properties inherited from the same estate are to be considered. A clawback is provided for where a beneficiary subsequently inherits an interest in any other dwelling house from the same disponer.

R&D tax credit

The Bill details the measures announced as part of Budget 2020 while also introducing several new measures. A summary of the key legislative amendments is as follows:
  • Grants funded by any state and/or by the European Union must be deducted when calculating the amount of qualifying research and development (R&D) expenditure;
  • A company that outsources to third parties must now notify in advance of, or on the day of, payment if that company intends to claim the R&D tax credit. Revenue has said that the purpose of this amendment is to ensure that the sub-contractors do not receive such notifications after their R&D claims have been filed. How this notification by the company will work in practice needs further consideration and guidance from Revenue;
  • The application of a penalty for an over-claim of the R&D tax credit has been aligned with the procedure for over-claims of other credits;
  • Where a payable amount or amount surrendered to a key employee is later withdrawn, any offset of losses or credits cannot be used to shelter the clawback on this amount; and
  • Amendment to capital expenditure on scientific research to ensure that relief for capital expenditure on buildings or structures cannot be claimed in respect of the same expenditure.

Pension deduction

The Bill provides for tax relief for pension contributions made by a company to occupational pension schemes set up for employees of another company in certain defined circumstances. This amendment is to accommodate cases of a merger, division, joint venture, reconstruction or amalgamation where an issue could arise as to whether contributions are being made in respect of an employer’s employees. Specific conditions apply.

A few words on the expected

The Bill confirms the Minister’s announcement as part of Budget 2020 that there will be no significant income tax cuts for 2020. The Bill provides the legislation for the tax measures announced in Budget 2020 and the ones worth noting are:
  • Extension of both the Special Assignee Relief Programme and Foreign Earnings Deduction to 31 December 2022;
  • Enhancement of the operation of the Employment and Investment Incentive (EII), although a few technical points were not expected;
  • Minor increases in the Home Carers Credit and the Earned Income Credit (up €100 and €150 respectively);
  • The reduced Universal Social Charge (USC) rate for medical cardholders is extended;
  • Extension of the 0% benefit-in-kind (BIK) rate on electric vehicles;
  • Changes to the overall BIK treatment of employer-provided cars (not vans) from 2023;
  • Capital Acquisitions Tax threshold increase from €320,000 to €335,000. The Bill confirms that the increase applies to gifts or inheritances taken from 9 October 2019;
  • Increase in the rate of Dividend Withholding Tax from 20% to 25% with effect from 1 January 2020. Additional information gathering requirements are proposed at Committee Stage on the ultimate payer of a dividend before the payment of a dividend;
  • Increase in the rate of stamp duty on non-residential property from 6% to 7.5% with effect from 9 October 2019;
  • The ‘Help to Buy’ scheme and the living city centre initiative are extended for a further two years; and
  • The R&D tax credit rate for small and micro companies has been increased from 25% to 30%.

What’s next?

The Bill is scheduled to move to Report Stage at the end of November and after that, as is the customary legislative process, to the Seanad. Under the requirements of the European Union’s two-pack budgetary schedule, a common budgetary timeline applies to all EU member states. As a result, the Bill will complete passage through the Oireachtas and be enacted as Finance Act 2019 by 31 December.

More unexpected measures are unlikely at this stage of the Finance Act process. As this is likely to be the last Finance Act before Brexit, and the last before a general election in the Republic of Ireland, any legislative changes to the tax legislation will have to wait until the new government is formed and the next Finance Act.
 
Kimberley Rowan ACA AITI Chartered Tax Advisor, is a Tax Manager at Chartered Accountants Ireland.