Tax

Tax

With the impending changes to property tax, it’s important to communicate some key changes to your clients. BY ANGELA KEERY Following a period of consultation, from April 2020 there will be changes to the payment of capital gains tax (CGT) on residential property by all individuals who are filing UK tax returns under self-assessment. This change will apply to both residents and non-residents. Currently, non-residents must file a return within 30 days of disposal but have the option to pay the tax on 31 January with their self-assessment tax payment, which is when UK residents are required to file their returns and pay the CGT due. From April 2020, both UK resident and non-residents will have to make a payment on account within 30 days of the completion of the disposal of UK residential property. A payment on account will also need to be calculated when a UK resident disposes of an overseas residential property unless the gain is covered by double tax relief or the remittance basis applies. T hese are significant changes for UK residents disposing of UK property and one that we need to make clients and their solicitors aware of.  Non-residents  From 6 April 2015, non-residents have been subject to capital gains tax on the disposal of UK residential property and many off-shore investors have been caught out by the strict 30-day time frame post-disposal date in which they must submit the non-resident capital gains tax (NRCGT) return, even if no gain has been made, and pay any tax that is due. At present, there is no capital gains tax charge on the disposal of commercial property by non-residents (unless the property was held on a trading account). However, draft legislation has been published to implement an extension to the charge to tax on gains. The new regime, due to come into effect in April 2019, will catch all disposals of UK investment property by non-residents. The key changes are: Most non-residents will be chargeable to UK tax on gains accruing on the disposal of UK commercial property; The existing capital gains tax charge for non-residents disposing of UK residential property will be extended to indirect disposals of properties; Annual Tax on Enveloped Dwellings (ATED) related capital gains tax, which has applied to some residential properties owned by companies since 2013, will be abolished from April 2019; and There will be a rebasing for tax purposes to April 2019 values for both commercial property and shares in “property rich” companies (see indirect disposal of properties below). Indirect disposals of properties Disposals of UK investment properties often involve a sale of the company owning the property rather than a sale of the property itself and in most cases gains are not currently taxable for non-resident investors. However, under the draft legislation, gains on share disposals of “property rich” companies will be charged UK tax where both of the following conditions are met: a)  75% or more of the gross asset value at the date of disposal is represented by UK property; and b)  The individual holds (or has held within two years prior to disposal) an interest of 25% or more in the company. Shares in such companies will be re-based to their market value in April 2019. There will be an exemption available for companies holding property for trading purposes, such as hoteliers and care home operators. In addition, some exemptions are expected to be available to widely-held entities which would not be chargeable to corporation tax if they are UK resident – pension funds, for example. The mechanism for this is subject to further consultation but one of the proposals is to introduce tax advantaged status to the offshore funds in exchange for complying with HMRC reporting obligations.  Calculating and reporting  For non-residential property brought into charge, only gains attributable to the change in value from April 2019 will be chargeable. Gains arising to individuals will be chargeable to capital gains tax and gains arising to companies will be chargeable to corporation tax. The present reporting deadlines for residential gains will be mirrored; disposals will need to be reported to HMRC on a non-resident capital gains tax return within 30 days of completion. Tax payment For corporations, a payment on account will be required with the filing of the NRCGT return by companies from 6 April 2019. Individuals, however, will have to file a return within 30 days of disposal but have the option to pay the tax on 31 January with their self-assessment tax payment. However, from April 2020, when they dispose of residential property they will have to make a payment on account within 30 days of the completion of the disposal. How can you prepare? You should advise all clients (resident and non-resident) of the forthcoming changes and request that they give you advance notice of impending disposals. The 30-day reporting deadline for residential disposals is often missed and there have been a number of appeals lodged against penalties. If you have overseas clients with UK property, it may be prudent to organise valuations for April 2019 to be one step ahead when it comes to capital gains tax reporting. Angela Keery is a Tax Director at BDO Northern Ireland.

Oct 01, 2018
Tax

With the publication of the Corporation Tax Roadmap, Ireland has a clear route towards BEPS implementation. BY PETER VALE Last month saw the publication of Ireland’s Corporation Tax Roadmap document by Minister Donohoe. This document outlines how Ireland intends to implement mandatory EU tax directives and other non-binding recommendations under the OECD’s BEPS tax anti-avoidance project. International tax Corporation tax receipts have doubled since 2013 and now make up 16% of our total tax take. So far this year, it is the more than €400 million increase in corporate receipts over the prior year that is cushioning deficits elsewhere. The point is: robust corporation tax receipts are critical to the Exchequer’s health. Much of the focus of the Roadmap document is on international tax issues. This is relevant for Ireland as 80% of our corporate receipts are made by foreign multi-national corporations and 39% of that is made by the top 10 companies. So what imminent changes are addressed in the Roadmap document? A tightening of our existing laws on the deductibility of interest is an important aspect. At the moment, Ireland has relatively light rules in terms of disallowing ‘excessive’ interest payments. Under the EU’s Anti Tax Avoidance Directive (ATAD), interest deductions will be capped at 30% of EBITA. Originally, it appeared Ireland would have until 2024 before this restriction would be introduced, but an earlier implementation date now looks likely. The restriction on interest deductibility is not just in respect of intra-group interest charges, it also applies to third-party interest. For groups with significant financing costs, this restriction will increase after-tax costs and is already being factored into financing models, with an implementation date of somewhere between 2020 and 2022 seen as prudent. It is planned to hold a public consultation shortly on the proposed new interest rules, in tandem with certain other ATAD changes. Exit tax Ireland currently has rules that provide for an ‘exit tax’, where an Irish tax-resident company moves its tax residence away from Ireland. Broadly, that exit event triggers a deemed disposal of assets at market value for Capital Gains Tax (CGT) purposes, resulting in a potential 33% CGT charge. There are a number of exemptions to the exit tax rules and, in practice, it is currently not a significant issue for most Irish tax-resident companies. Under the EU’s ATAD rules, the existing rules will be tightened significantly, making it much more difficult to escape an Irish tax charge on migration of tax residence. You could assess this as making it more difficult to move valuable assets, such as intellectual property, out of Ireland, but will possibly encourage existing groups to stay, which could be seen as a positive move, but in reality, anything that reduces flexibility for either existing groups or potential new investors is not a good thing. However, all EU countries will be obliged to introduce similar rules by 1 January 2020 at the latest. It is also worth noting that the current CGT rate of 33% applies to exit tax charges. One suggestion, which seems reasonable, is that a 12.5% rate is more appropriate.  We can expect to see legislation on the exit tax changes next year, although there is no formal public consultation phase planned. A final point to note is that the grandfathering of the old “Double Irish” rules ends on 31 December 2020, at which point many groups will have made a decision to “onshore” their intellectual property from an existing low/nil tax jurisdiction. A change in the exit tax rules could potentially influence this decision. Controlled Foreign Company regime The Roadmap document also covers the most imminent change to our corporation tax rules: the introduction of a Controlled Foreign Company (CFC) regime to Ireland. Many countries already have a CFC regime under ATAD. We are obliged to introduce similar rules by 1 January 2019, with the legislation to be presented in the 2018 Finance Bill later this month. Broadly, under CFC rules, low-tax subsidiaries are taxed in the parent company’s jurisdiction where there are ‘non-genuine’ arrangements in place for the purposes of obtaining a tax advantage. Where the tax rate in the subsidiary is less than half of the tax rate in the parent company, then the CFC rules can take effect. The CFC rules can impact on Irish groups with low-tax operations overseas but also on Irish companies with a foreign parent which itself might be impacted by the new CFC rules by virtue of Ireland’s relatively low rate. Transfer pricing There have been major transfer pricing (TP) developments in recent years, with a broad move towards aligning taxable profits with real substance. Ireland has yet to adopt the latest OECD TP guidelines, something that is expected to happen in the near future. This will be a significant development for many groups, with a welcome consultation phase in early 2019. Legislation is expected to be introduced later that year, effective 1 January 2020. How Ireland and other countries implement TP rules could have a significant impact on future corporation tax receipts, with the taxation of valuable IP one of the most sensitive areas of the OECD’s BEPS project. Probably the most welcome feature of the Roadmap is the willingness of the Minster to engage via public consultation on issues that are critical to the future sustainability of our corporate tax receipts. As ever, many things remain outside of our control, but we’re at a critical juncture given the requirement to introduce further anti-avoidance provisions while simultaneously maintaining the attractiveness and sustainability of our regime. Peter Vale FCA is a Tax Partner at Grant Thornton.

Oct 01, 2018
Tax

With Budget 2019 just weeks away and limited fiscal space for manoeuvre, what are the key themes under consideration? With two months to go, what can we expect to see in Budget 2019 and what is being sought in the pre-Budget submissions made to date? At this stage, it is safe to predict that low and middle income earners will do relatively better from Budget 2019 than higher income earners. Any cut to the top marginal tax rates of 52% and 55% for the employed and self-employed respectively would be a big surprise. Likely measures in Budget 2019 include a widening of the tax bands, pushing more income outside the 40% top income tax rate, and an increase in tax credits. Both measures are of relatively more benefit to lower and middle income earners. Small reductions in the USC rates and tweaks to the bands can also be expected, again of relatively more benefit to lower and middle income earners. The above changes will likely make up the bulk of the tax breaks we can expect in October. The cost of last year’s equivalent changes amounted to €400 million and didn’t leave much room for further tax cuts. Pre-Budget submissions Pre-Budget submissions made to date have focused on a few key areas, with entrepreneurship a recurring theme that features in both the CCABI and ITI submissions. Despite previous Government commitments to bring our tax regime for entrepreneurs more in line with the UK equivalent, the €1 million cap on gains liable to the reduced 10% capital gains tax (CGT) rate remains. Other anomalies in the legislation have also been central to submissions to the Minister. While it is difficult to fathom why more hasn’t been done for Irish entrepreneurs, particularly given our exposure to any dip in foreign direct investment, I wouldn’t hold out for any significant improvements in the regime this year. We may therefore be left with the €1 million cap for another year, although I hope that this won’t be the case. On a similar theme, a more attractive tax regime for share options (the KEEP scheme) was introduced last year, broadly providing CGT treatment rather than income tax on share option gains. While welcome, there are a number of practical difficulties under the existing legislation which make it difficult to access in many cases. Improving the accessibility of the KEEP scheme, in line with promoting entrepreneurship, has been identified in pre-Budget submissions made. Private pension provision Over the past number of years, successive Finance Bills have reduced the attractiveness of making pension contributions, with recent media reports raising the spectre of even more significant adverse changes. This seems to run against concerns as to how well-provided we are for the post-retirement years. At a minimum, tax relief at marginal income tax rates for pension contributions should be maintained. Many pension pots still bear the scars of the recession. Property supply Other matters identified in pre-Budget submissions, and likely to feature in future submissions, include considering the position of landlords in an effort to improve supply and pricing in the rental sector and an increase in the capital acquisitions tax (CAT) thresholds, which remain significantly behind 2008/09 levels. In respect of landlords, the restriction on the deductibility of interest costs has been removed, albeit on a phased basis over five years. It is difficult to understand why a full deduction for interest incurred isn’t reinstated immediately – at present, an unprofitable letting can still result in a tax charge. Tax issues On the corporate tax front, there will be significant changes announced on Budget day with most of the detail in the subsequent Finance Bill/Act. From 1 January 2019, Ireland will be obliged to introduce Controlled Foreign Company (CFC) legislation, broadly aimed at ensuring that the profits of low-taxed subsidiaries can be subject to tax in the Irish parent company if there is insufficient substance in the foreign subsidiary. The legislation implementing CFC rules will be included in the Finance Bill and has been the subject of much discussion in recent months. While our legislation must fit within the parameters of the relevant EU Directive, it is critical that it protects both Irish and foreign parented groups to the greatest extent possible. In tandem with the CFC changes, we can also expect a change to the taxation of foreign dividends and branches. While foreign dividends generally suffer no additional Irish tax due to the availability of foreign tax credits, the rules are complex and in some cases unclear. Going forward, we may have a much more straightforward regime that broadly exempts foreign dividends completely, thus providing more simplicity and certainty – although, we may have to wait until next year’s Finance Bill. Last year, we saw a change to the intangible asset regime, re-introducing the 80% cap on allowances. I suspect we won’t see any further significant change this year, although pre-Budget submissions have included the research and development (R&D) tax credit and enabling loss-making companies to claim the full tax credit in year one as opposed to over a three-year period. In summary, for most taxpayers, Budget 2019 might look similar to Budget 2018. A key focus of pre-Budget submissions has been on entrepreneurship and ensuring that the right tax incentives are in place to encourage innovation in Ireland. Peter Vale FCA is Tax Partner at Grant Thornton.

Aug 01, 2018
Tax

Executors must consider a range of issues if they are to fully discharge their relevant tax obligations. An executor has many responsibilities, one of which is to deal with the tax affairs of the deceased. In addition to quantifying any inheritance tax liability and ensuring that all income tax and capital gains tax liabilities up to the date of death are settled, executors are also responsible for taxation during the period of administration, which lasts from the day after death until the estate is settled. Income tax During the administration period, executors are subject to income tax at a rate of 7.5% on dividend income and 20% on any other income. Unlike individuals, executors do not benefit from the personal allowance, personal savings allowance or the dividend allowance. Furthermore, there is no liability to higher rate tax. Prior to 6 April 2016, executors were liable for income tax on dividend income at a rate of 10% and this was covered by the dividend notional tax credit. The abolition of the dividend tax credit, coupled with banks’ decision to cease the deduction of tax at source on interest income, has resulted in increased tax reporting requirements and additional income tax liabilities for executors in the administration period post-6 April 2016. While the income arising in the period of administration is taxed on executors in the first instance, the residuary beneficiaries are ultimately personally liable for income tax on their share of the estate’s income. For simple estates that are administered within one year, executors should provide the beneficiary with details of the estate income taxable on them via Form R185 Estate Income. In calculating the taxable amounts, general estate management expenses (for example, the costs associated with the preparation of tax returns) can be deducted. The beneficiary will use the R185 figures to complete his or her own tax return, as appropriate. The beneficiary then receives credit for the tax already paid by the executor. If they are basic rate taxpayers, there will be no further income tax to pay. If they are higher rate taxpayers, on the other hand, they will be subject to an additional inheritance tax (IT) liability. Alternatively, they may be due a tax refund if they are not a taxpayer. Where dividends were received by the executor prior to 6 April 2016 but only taxed on the beneficiaries after 6 April 2016, such income must be separately identified to ensure that the tax credit is not treated as repayable to the beneficiary. For more lengthy administrations, which may extend over a number of tax years, a record of the estate income arising and tax paid by the executor in each year must be maintained. The income will be taxed on the beneficiary when sums are paid to them (this includes a transfer of assets). If no distributions are made until the end of the administration period, the beneficiary’s share of the total estate income will be taxed in the final tax year of administration. Executors should therefore consider, and discuss with beneficiaries, whether it is appropriate to make interim payments as the administration progresses to avoid, for example, needlessly pushing the beneficiary into a higher tax band or increasing income to a point that triggers a child benefit clawback. Capital Gains Tax Death represents a capital gains tax-free uplift to probate value for executors, who are treated as acquiring the assets at the date of death. During the administration period, executors pay capital gains tax at a rate of 20% or 28% on UK residential property. For the tax year of death and the two subsequent tax years only, the executors have a full capital gains tax annual exemption, which currently stands at £11,700.  In calculating the gain, executors may make a deduction to represent the costs of establishing title. This is a scale rate dependent upon the value of the deceased’s estate. If assets are to be sold during the administration period, consideration should be given to whether the sale ought to be carried out by the executors or by the beneficiaries. It may minimise capital gains tax to transfer assets to the beneficiaries prior to a sale as the beneficiaries may have a larger available capital gains tax annual exemption; they may pay capital gains tax at the lower rates of 10% or 18%; or they may have personal capital losses to use. If certain estate assets (including land and quoted shares) realise a loss on sale within prescribed time periods, the executors may claim inheritance tax loss on sale relief. This effectively substitutes the sale proceeds for the probate value for inheritance tax purposes, resulting in an inheritance tax refund. If no inheritance tax was paid, inheritance tax loss on sale relief is not applicable. Therefore, for assets standing at a loss, consideration should be given as to how best to utilise the loss. For example, should the asset be transferred to the beneficiary to sell, or can the executors sell other assets at a gain to fully utilise their capital losses before the end of the administration period? As always, appropriate tax advice should be taken to ensure that the executors are meeting all relevant tax obligations. Fiona Hall is Tax Principal at BDO Northern Ireland.

Aug 01, 2018
Tax

With April 2019 inching closer, it’s time businesses prepared for the challenges Making Tax Digital will bring. Twenty years ago, I qualified as a Chartered Accountant. 1998 also saw the first self-assessment deadline in the UK. We were just beginning to use computers in work, but it wasn’t a daily occurrence and most work was still done on paper and filed on paper files. Later that year, we got our first work laptops. Fast-forward 20 years and technology is embedded in everyday life. The world of tax is heading in a digital direction. HMRC’s Making Tax Digital (MTD) project is just one part of its Digital Transformation project. A glance at other tax jurisdictions around the world tells a similar story. The traditional role of the accountant focused on functions relating to the financial operations of a business and tax compliance. Today’s accountant is a business adviser dealing with an extremely rapid pace of change, particularly in the world of tax. The modern accountant needs to be ready to meet the challenge of change on an almost daily basis. Are you ready for the move to Making Tax Digital? The project timeline MTD was first announced by former Chancellor, George Osborne, in Budget 2015 with a bold declaration: “We will abolish the annual tax return altogether… tax really doesn’t have to be taxing, and this spells the death of the annual tax return.” That was followed in December of the same year with the launch of the project’s roadmap, followed by the start of a consultation process in 2016. The project is based on the following cornerstones: Tax simplified; Making Tax Digital for business (MTDfB); Making Tax Digital for individuals (MTDfI); and Tax in one place. However, the scope and pace of the original reforms resulted in the government announcement in July 2017 that businesses would not be mandated to use MTD until April 2019, and then only for VAT. Isn’t there something even more seismic happening in March 2019? While it is laudable that the government showed its willingness to listen to stakeholders’ concerns, the beginning of MTDfB in April 2019 coincides with Brexit. The Institute’s Northern Ireland Tax Committee, which engages regularly with HM Treasury and HMRC on behalf of members, has highlighted this to government on a number of occasions. At the time of writing, the start date of MTDfB for VAT remains fixed at 1 April 2019. Currently, the government is committed to not widening the scope of MTDfB beyond VAT – in its own words: “before the system has been shown to work” and not before April 2020 at the earliest. The MTDfB for VAT trial is currently by invitation only and is not expected to be more widely available until later in 2018. More worryingly, at present, there is only scant software with MTDfB for VAT functionality given the importance of software to the project’s success.  Why make tax digital? According to HMRC, MTD will reduce tax errors in real-time meaning a higher tax take. The most recent tax gap stats show that small businesses account for 41% of the UK tax gap. The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC and what is actually paid. In 2016/17, errors and failure to take reasonable care was calculated at £9.1 billion (almost 28%) of the £33 billion gap. The idea is that businesses will be more likely to get their tax right “first time” with MTD. This means HMRC will, in theory, benefit from a resource saving as a result of less compliance interventions. But will this really be the case and what’s in it for business? What is clear is that the mandation of digital record keeping and quarterly digital reporting will be of almost universal impact. Many are yet to be convinced that this will reduce both the level of administrative burden on businesses (particularly the smallest businesses) and the level of error cited by HMRC as being one of the major drivers in the mandation of MTD. Whenever a new digital tax solution is introduced, it should attract willing users among businesses and agents alike. In short, it should be voluntary to begin with. If a voluntary approach is adopted, those creating the new system face the challenge of making it attractive and easy for its users. To achieve this, the software developers are likely to set more realistic goals, aiming initially at those most likely to become enthusiastic early adopters. An iterative approach can then be used. By developing the system in this way, the developers can work to create a natural following among others eager to experience the advantages they might otherwise miss. Such an approach would also help focus attention on addressing HMRC service standards for taxpayers and businesses alike. What is clear is that the digital transformation of the UK tax system should be a longer term objective developed in tandem with overall simplification of tax policy in the UK, and should not be seen as a substitute for legislative simplification. However, the MTD project continues – despite its obvious challenges. Making Tax Digital for business – VAT The regulations introducing MTDfB for VAT come into effect on 1 April 2019 and apply to any VAT-registered business with a turnover exceeding the current VAT registration threshold of £85,000. MTD applies to the first VAT return period commencing on or after commencement. At the heart of the regulations are two core requirements: Digital record keeping: businesses will be required to keep and preserve digital records; and Electronic filing of VAT returns: to submit a VAT return, businesses must use information stored in their digital records combined with “functional compatible software” to submit VAT returns directly to (and receive responses from) HMRC. “Functional compatible software” is defined as software that maintains the mandatory digital records, calculates the return and submits it to HMRC via an Application Programme Interface (API). An API is essentially a software intermediary that allows two applications to talk to each other. There are a number of options to meet this software requirement, including bridging software and API-enabled spreadsheets. Making Tax Digital for business – other taxes According to HMRC, MTD for other taxes will commence in April 2020 at the earliest, starting with income tax with effect from the first accounting period beginning after 5 April of the relevant tax year that it is introduced. While there will be some limited exemptions available from MTDfB for income tax and corporation tax, the detail of what these exemptions might look like is scant. Those with an annual turnover below a set amount and anyone unable to engage digitally are, at least, likely to be considered for exemption. Once again, MTD requires digital record-keeping coupled with quarterly update submissions to HMRC followed by a final “end of year” submission. Businesses can choose their periods of account and update periods, with a basic requirement that four quarterly updates must be submitted for each 12-month period. The deadline for making quarterly submissions is the end of the following month after the quarter-end date. The final submission for an accounting period (which thereby finalises the taxable position for the relevant accounting period) is the earliest of either 10 months after the last day of the period of account or 31 January thereafter. According to HMRC, free software will be available to businesses with “the most straightforward affairs”. However, there will be no free software provided for agents. This means that, in future, all agents will need to have commercial software. HMRC tells us that it is working closely with software developers who will be providing software packages to support MTDfB. The questions remain: what software will be free? What functionality will it include? And who will it be available to? The requirement to keep digital records does not mean that businesses will need to make and store invoices and receipts digitally. Businesses will still be able to keep documents in paper form, however transactions will need to be stored and compiled digitally at each quarterly interval. Businesses will also still be able to continue to use spreadsheets for record-keeping but again, these must be MTDfB-compliant. The information submitted will be either three-line account information or the level of detail currently required as part of the annual self-assessment return. In April 2018, HMRC launched a limited MTDfB pilot for income tax. Businesses can now send quarterly updates to HMRC and agents can now set up an agent services account and sign up to use software to send income tax updates on behalf of their clients. In time, HMRC will make the pilot available to all self-employed businesses. For smaller businesses, the idea of a single software package that interfaces with HMRC’s systems to provide tax information in real-time may seem a realistic challenge once the initial hurdle of dealing with this change is overcome. However, when this approach is considered in the context of larger and more complex businesses and corporates, the challenges become clear. What does my business need to do? Agents and businesses should now seek advice on the best software fit and process for their particular business model. The first recommended action is to review the current software package (if any) and assess if it is (or, in many cases, will be) MTDfB for VAT-compliant by 1 April 2019. Speak to your software provider as a first step. Businesses should conduct an end-to-end review of the journey currently taken when submitting VAT returns, irrespective of whether or not this journey ends with an agent completing the online submission. The key is to ensure that the core MTDfB requirements of digital record-keeping and submission can be satisfied from April 2019. If a business has an accounting period spanning their first MTD VAT quarter after 1 April 2019, that business may want to ensure that they have MTD-compatible software in place at the beginning of that period. This is likely to be in advance of 1 April 2019 to avoid changing their accounting software mid-year. Having to change software part-way through a period would be very problematic with tax and business information spread over two different systems. This could also present practical difficulties in assessing important matters such as in-year results and profitability, and providing the requested information for the annual tax compliance cycle. At the time of writing, this affords affected businesses little time to select, integrate and train staff on a new package if one is required. Those businesses first affected by MTDfB will be under enormous pressure to choose a suitable system within a very short timeframe. As a result, many will be left to consider making a change mid-way through their accounting period. According to recent research from Intuit Quickbooks, 41% of small businesses are still unaware of MTD. What is clear is that Chartered Accountants can play a key educational and preparation role as the deadline for MTD moves nearer. But will the enhanced agent services HMRC have been promising for years be available in tandem with the introduction of MTDfB? If you’re an agent, begin the conversation now with clients about what this change will mean for them and what you can do to help.  Institute activity From the beginning of this project, the Institute has engaged with members and HMRC as the proposals were developed, and it continues to do so. Submissions were made to all key MTD consultations. Members are also regularly updated on MTD developments via various Institute publications. The Institute also recently launched its MTD Hub, which is aimed at helping members and businesses get MTD-ready. An MTD event is also currently planned for Autumn 2018. Opportunities, and some threats MTD will bring challenges and opportunities. The change-over will mean a complex mix of “old” and “new” filing dates, at least initially. Some businesses and practices may leave it too late to get their practice and staff prepared and trained, and make the necessary software decisions – if indeed the software is even ready in time. Lack of client awareness and unwillingness to change might prove problematic, and many practices may be unable to recoup additional costs from clients through fees. The speed of implementation, coupled with other recent and imminent changes, may mean that MTD is last on the list for consideration. MTD will be all about change management. So what is the benefit for businesses? MTD will force businesses and agents to carry out a review of their systems and processes. There will usually be room for improvement with any system, and changes could lead to efficiency savings. Advisers will have the opportunity to engage with their clients on a more regular and real-time basis by moving away from being focused on the annual compliance cycle to embracing the role of business adviser. The adviser will be able to be more proactive in providing advice. Arguably, there may be scope for better spacing of fees and work throughout the year. There will be a cost in updating and purchasing software, but the business may be able to avail of additional functionality and should be able to harness the benefits of cloud accounting. Will Making Tax Digital make tax even more difficult? Watch this space. Leontia Doran FCA is Taxation Specialist at Chartered Accountants Ireland.

Aug 01, 2018
Tax

David Duffy highlights the latest VAT cases and discusses recent VAT developments. IRISH VAT UPDATES Services in connection with immovable property Revenue eBrief No. 142/18 contains a Tax and Duty Manual on the VAT treatment of services connected with immovable property (e.g. land and buildings). The manual contains useful guidance and examples in relation to the VAT treatment of various services including estate agency services, holiday and similar accommodation, construction and similar services, and legal services in connection with immovable property. By way of background, services connected with immovable property are subject to VAT in the jurisdiction where the relevant property is located. This is a departure from the normal VAT “place of supply” rules, which deem a service to be subject to VAT in either the supplier’s or the customer’s country of establishment depending on whether it is a supply to another business or to a consumer. However, in order for a service to fall within the specific rule for immovable property, the service must have a direct connection with a specific property as opposed to an indirect connection. The criteria for a direct connection between the service and a specific property include that the service must be derived from immovable property and the property makes up a constituent element of the service and is central to, and essential for, the services supplied; or where the services are provided to, or directed towards, an immovable property, they have as their object the legal or physical alteration of that property. The manual provides a number of examples of services that would be considered to be directly connected with immovable property as well as examples of other services that would not. The manual also contains guidance on the Irish VAT rate that is applicable to various types of services in connection with the property, as well as further information on which party is liable to account for the VAT. VAT treatment of cryptocurrencies In eBrief No. 88/18, Revenue issued a Tax and Duty Manual addressing the taxation of cryptocurrencies, such as Bitcoin. This includes guidance in relation to the VAT treatment of transactions involving cryptocurrencies. The Court of Justice of the European Union (CJEU) ruling in the Hedqvist case (C264-/14) had established that Bitcoin should be considered a currency for VAT purposes, and therefore trading in Bitcoin is VAT exempt. Supplies of goods or services that are paid for using cryptocurrency are subject to normal VAT rules, with any Irish VAT due being calculated based on the euro value of the cryptocurrency at the relevant point in time when the VAT charge arises. The manual also states that income received from cryptocurrency mining activities will generally be outside the scope of VAT. EU VAT UPDATES VAT recovery on share acquisition costs The CJEU issued a judgment on the VAT recovery position of a holding company on costs relating to the acquisition of shares in Marle Participations SARL (C-320/17). This judgment is the latest in a line of case law on the complex question of a holding company’s entitlement to VAT recovery on costs relating to acquiring shares of its subsidiaries. The case law up to this point has established that a holding company whose only activity is to acquire and hold shares is not engaged in economic activities (i.e. activities within the scope of VAT) and is not entitled to VAT recovery on its costs. However, a holding company is engaged in economic activities and is generally entitled to VAT recovery on its costs relating to its acquisition of subsidiaries where it becomes involved directly or indirectly in the management of its subsidiaries and charges its subsidiaries for those management services.   In this case, the holding company let out a building to its subsidiaries. The French referring court asked the CJEU whether the letting of the building by the holding company to its subsidiary can constitute the direct or indirect involvement in the management of that subsidiary such that the holding company has a right to VAT recovery on the costs of acquiring the shares in that subsidiary. The CJEU concluded that the letting of a property comes within the meaning of management of the subsidiary providing the letting is on a continuing basis and is for consideration. Therefore, where the holding company has elected to charge VAT on the rent of the property to its subsidiary, this should give the holding company a right to recover VAT on costs relating to the acquisition of shares in that subsidiary. If, however, the holding company also acquires shares in other subsidiaries to which it does not grant VATable lettings and is not otherwise engaged in their management, there is no right to VAT recovery on costs relating to those acquisitions. Therefore, an apportionment of costs for VAT recovery purposes would be required in cases where both managed and unmanaged subsidiaries are acquired. The judgment does not specify the exact mechanism for carrying out this apportionment but states that it must objectively reflect how the input costs are attributed between the holding company’s economic activity (i.e. the provision of management/letting of the property to certain subsidiaries) and the non-economic activity of passively holding shares in other subsidiaries. The Irish Revenue Commissioners has not yet published guidance following this or other recent cases on the topic. It wll be interesting to see the approach that is taken in light of the recent case law developments. Import VAT  In Enteco Baltic (C-108/17), the CJEU had to determine the criteria under which a company could apply 0% VAT to the import of goods from outside the EU into an EU member state, which were subsequently dispatched to other EU member states. While VAT is normally payable on an import of goods into an EU member state, the 0% VAT rate applies where the importer provides to the relevant tax authorities at the time of importation details of its customer’s VAT number in the other member state to whom the goods will be sold as well as evidence that the goods are intended to be dispatched to that other member state. Enteco Baltic had applied 0% VAT to its imports into Lithuania and had provided the Lithuanian customs authorities with the VAT number of its customers in other member states to whom the goods would be dispatched. However, while the goods were in fact dispatched from Lithuania, in some cases they were sold to different customers than those indicated to the custom authorities at the time of import. Enteco Baltic did provide their actual customers’ VAT numbers to the Lithuanian tax authorities at the time of onward sale, but the customs authorities contested the application of the 0% rate on import on the basis that the VAT numbers subsequently provided did not correspond to those provided at the time of import. The CJEU ruled that the taxpayer could apply 0% VAT on imported goods in these circumstances as the taxpayer had satisfied the substantive conditions that the goods were dispatched to VAT-registered customers in another EU member state (albeit not those originally identified at the time of import). However, the Court made clear that the formal conditions (e.g. recording the customer’s VAT numbers) cannot be completely disregarded and that it is only where a taxpayer has made every effort at the time of the import to fulfil the requirements that the 0% rate can apply. David Duffy ACA, AITI Chartered Tax Advisor, is a VAT Director at KPMG.

Aug 01, 2018