Tax

The new rules provide an opportunity  to review your client’s overall inheritance tax position, the terms of their will, and relevant estate planning opportunities. By Fiona Hall The Residence Nil Rate Band (RNRB) was introduced on 6 April 2017, so many of us are just starting to appreciate the intricacies of the complex legislation. This article will summarise the key points regarding the RNRB, including when it does and does not apply, what property can qualify, factors affecting the amount of the allowance, and some planning points. References to spouses are to include civil partners. The RNRB is an additional inheritance tax-free allowance where a home passes on death on or after 6 April 2017 to direct descendants. The legislation is found in the Inheritance Tax Act 1984 Section 8D-8M, with HMRC’s helpful guidance contained in its Inheritance Tax Manual. The RNRB applies whether the home passes on death via the will, under the intestacy rules or by survivorship. It generally does not apply to a lifetime gift of the home (subject to the downsizing rules, highlighted later) unless the gift with reservation rules apply. Then, for the purposes of the RNRB, the home is treated as passing on death and the allowance can apply. The legislation refers to a “qualifying residential interest”, which is an interest in a dwelling house that was the person’s residence at a time when the person’s estate included that property. A person may own multiple properties on death. In this scenario, the personal representatives may nominate which is to be taken into account for the RNRB and it can be a property let out at the time of death, so long as it has been the deceased’s home at some stage during ownership (i.e. not a buy-to-let). There is no minimum period of occupation or ownership of the property and no garden/grounds limitation applies. It can be a home outside the UK so long as it is within the charge to inheritance tax. The RNRB is being phased-in over four years starting at £100,000 in the 2017/18 tax year and increasing by £25,000 each year until 2020/21 when it will be £175,000. The RNRB is not aimed at the very wealthy and it is tapered where the net value of an estate exceeds £2 million. The “net value” is the market value of the assets less liabilities at death, but before any reliefs or exemptions are deducted. It does not include the value of any gifts made in the seven years prior to death. Where taper does apply, the RNRB is reduced by £1 for every £2 above the threshold. For clients whose estates are above the taper threshold, lifetime gifts may be considered. Married couples should consider alternative options if leaving their entire estate to the survivor on first death will lead to tapering. The allowance due on a particular estate is the lower of the RNRB and the property value (after deduction of any secured liabilities and any reliefs, such as agricultural property relief). As with the nil rate band, the legislation provides that should one spouse not utilise their RNRB, on making the appropriate claim, the surviving spouse’s RNRB is increased by the unused amount (using rates on the second death). A transfer of unused RNRB is available regardless of: When the first death took place, including deaths before 6 April 2017; How much the first estate was worth (however, this may result in tapering where the first estate exceeds the taper threshold); and Whether or not the first estate included a residence. A point of practical importance when calculating the inheritance tax liability is that the RNRB applies in priority to the nil rate band. This is relevant in determining whether there is a claim for a transferable nil rate band and/or transferable RNRB by the surviving spouse. To qualify for the RNRB, the home must be “closely inherited” (i.e. generally that the property passes to direct descendants such as a child/grandchild of the deceased, including step-children and foster children). However, the legislation also extends to spouses of direct descendants, including their widows/widowers, provided remarriage is not a factor. The RNRB does not apply if the home passes to others, including parents, siblings, nephews and so on. Should the home pass into a trust for direct descendants, eligibility to the RNRB will depend on the trust terms. Trusts under which a direct descendant has a qualifying interest in possession will qualify, as will a bereaved minor or 18–25 trust. However, a discretionary trust will not. The home does not have to be a specific legacy in the will; it can pass through the residue. However, where residue passes to qualifying and non-qualifying beneficiaries, HMRC treats each as inheriting a proportion of the home and this may lead to a restriction to the available allowance. A deed of variation could be considered in such circumstances. If the maximum RNRB is not being utilised, you should consider whether the downsizing provisions apply. These complex provisions are designed to replace the RNRB lost due to a disposal of the original home. To qualify for a “downsizing addition”, the deceased must have disposed of a home on or after 8 July 2015 and either moved to a less valuable property or ceased to own a home, and some of the estate must be closely inherited. In conclusion, these relatively new rules provide an opportunity to review a client’s overall inheritance tax position, the terms of their will, and any relevant estate planning opportunities.   Fiona Hall is Principal, Private Client Tax Team, at BDO Northern Ireland.

Jonathan Ginnelly outlines the main stamp duty considerations for those acquiring commercial property in the Republic of Ireland. The stamp duty rate on non-residential property in the Republic of Ireland was increased to 6% in Finance Act 2017. Since this rate increase, stamp duty has become a real and significant cost when it comes to property acquisitions and, in some cases, it can be a deal-breaker. While stamp duty is a cost for the purchaser, the increased rate will inevitably have an impact on the purchase price paid to the vendor so as to manage the overall cost of the acquisition. Specific provision was also introduced to ensure that the increased rate also applies to certain property holding entities, such as companies, which might have been used to transfer property indirectly to avail of lower stamp duty rates. In addition to introducing the higher rate of stamp duty on non-residential property, Finance Act 2017 introduced a new provision to allow for a partial repayment (up to two thirds) of the stamp duty paid for land that is to be developed for residential purposes. This article will look at where the 6% rate can apply to property holding entities and provide a brief overview of the refund scheme for relevant residential developments. Property holding entities Where property is held through a company (including foreign companies), a partnership or an Irish Real Estate Fund (IREF), the higher rate of stamp duty (6%) can apply on the transfer of shares, interests or units of such entities. The higher rate should only apply in the following circumstances: Where the property was acquired by the entity with the sole or main objective of realising a gain on disposal; Where the property was, or is, being developed with the sole or main objective of realising a gain on disposal when developed; or Where the property was held as trading stock. Where one of the above conditions is met, the higher rate will apply on the transfer of shares, interests or units – but only where such a transfer results in a change of control, either directly or indirectly, over the immovable property. In addition, any contract or arrangement resulting in a change of ownership and control which might not ordinarily be ‘stampable’ will also be subject to the higher rate. Where minority interests are being transferred, such that control does not change, the higher rate should not apply. However, attempts to transfer several minority interests to a person or persons acting in concert will not escape the provisions. The provision should not apply to shares in companies that hold property where the property was not acquired for the purpose of realising a gain on disposal, for development purposes, or held as trading stock. For example, companies owning and operating a hotel or nursing home, or property rental companies (where the property was acquired for the purpose of generating rental income) should not be caught by the provision. Stamp duty refund scheme To encourage the development of residential property, a refund scheme was introduced in tandem with the increased rate to effectively reduce the 6% rate by two-thirds where the land acquired is to be developed for residential use. When a greenfield site or a site with existing non-residential property is purchased for development, this would not be considered “residential” property at the date of acquisition and, as such, is subject to the 6% rate. However, post-acquisition, a refund of up to two-thirds of the stamp duty paid may be available where the property is to be developed into residential units. Such developments can be carried out in either a single phase or in multiple phases. The refund (subject to a number of conditions) is available once construction operations on the residential development have been commenced pursuant to a commencement order issued by a relevant building authority. A phased development will have a number of commencement notices attaching to the various phases of construction. The key points to remember are: The first phase of construction operations must commence within 30 months of the date of execution of the instrument of transfer; The refund for a phased development can be claimed on a phased basis, or on completion of the entire residential development; On a multi-phase development, separate commencement notices will be required for each phase; There is a two-year time frame for completion. This two-year period runs separately for each phase; and If the residential development is not carried out in a phased manner, the full two-thirds refund can be claimed following commencement of construction operations – but the entire development must be completed within two years of the commencement notice. A refund claim for each phase can be made after the issuance of the relevant commencement notice and once construction operations have commenced. The refund will be for the proportionate amount of stamp duty relating to that phase. In a multi-phase development, there could be a number of phases commencing and finishing at various stages throughout the overall development. It is important to bear in mind that the 30-month time period in which the developer must commence construction runs from the date of execution of the instrument of transfer. If the development is carried out in phases, the legislation states that the construction operations in respect of the first phase must be commenced within 30 months of the date of the instrument of transfer. The last commencement notice and respective construction operations must commence before 31 December 2021 in order to fall within the scope of the relief. As such, the latest possible date for completion of qualifying construction works is 31 December 2023. Given the very specific timeframes involved, any development needs to be carefully managed to ensure all relevant dates are complied with. If any condition or timeframe is breached, a claw back of the refund can arise, leaving the taxpayer open to additional costs such as interest. Practical issues in claiming the refund Since the introduction of the refund scheme, certain practical difficulties have arisen in the refund application process. The stamp duty return may be filed by the solicitor dealing with the property conveyance, for example. However, when it comes to the refund scheme, taxpayers may opt to use the services of their tax advisor. In such cases, the advisor must liaise with Revenue to have the stamp duty records for that particular case transferred to the advisor’s ROS certificate. This can take some time to arrange, resulting in delays in the issuance of refunds. Where there are critical cash flow issues with a development and the taxpayer is relying on the stamp duty refund for financing purposes, early engagement with the tax advisors and Revenue is advisable. In conclusion, given the growth in property prices over the last number of years, the increased stamp duty cost now constitutes a significant part of the financing of acquisitions and developments. Accordingly, care should be taken to ensure that acquisitions and related development operations are structured so as to avail of the residential refund scheme where appropriate.   Jonathan Ginnelly is Tax Director at Grant Thornton Ireland.

The digital VAT quarterly deadline bites for the first time. On 7 August, the first quarterly return deadline for businesses mandated to meet the requirements of Making Tax Digital (MTD) for VAT will arrive for those businesses with a VAT return period that ended on 30 June 2019. Businesses must use MTD for submitting VAT returns if they are VAT-registered and have taxable turnover exceeding the VAT registration threshold (currently £85,000). The first return period beginning on or after 1 April 2019 must meet the requirements of MTD. Some more complex businesses have been given an extension until 1 October 2019. Not only does the business have to use functional compatible software to submit VAT returns, but the business must also now keep and preserve certain digital records. A year-long ‘soft landing’ period will apply during which HMRC will accept the use of ‘cut and paste’ as a digital link, but only if a digital link hasn’t been established between software programs. Now that the first returns are with HMRC, what will its response be? We’ve heard that HMRC will apply a light touch approach if a business “does their best to comply” with the core requirements; only in those instances will no filing or record-keeping penalties be issued. What will this light touch approach look like and for how long will it last? These questions are yet to be addressed. We would like to hear how your first MTD submission went. Contact leontia.doran@charteredaccountants.ie to tell us. Leontia Doran is UK Taxation Specialist at Chartered Accountants Ireland.

Paul Smith breaks down the three most significant changes in the latest edition of Revenue’s R&D tax credit scheme guidelines. In a recent Oireachtas debate, Deputy Mary Butler asked the Minister for Business, Enterprise and Innovation: “What is being done to ensure we reach the EU average spend? Will Ireland meet the 2020 target to spend 2.5% of GNP on research and development annually?” To which the Minister replied: “It is unlikely that many European countries will reach the target of 2.5%. Where Ireland stands and how well we are doing, we can only go on the European and global statistics we get. Under the heading, Excellent Science, a report from Science Foundation Ireland (SFI) noted that Ireland is tenth in the global scientific ranking. A few examples of our global rankings in different areas are: second in animal and dairy, immunology, and nanotechnology; third in material science; fourth in agricultural science; fifth in chemistry; and sixth in basic medical research… I have been all over the world and our 18 research centres are recognised as being par excellence throughout Europe and the world. We are doing exceptionally well.” A key part of Ireland’s national development strategy is to develop “a strong economy supported by Enterprise, Innovation and Skills”. The research and development (R&D) tax credit scheme forms part of the overall corporation tax offering aimed at fulfilling this strategy. The primary policy objective behind the tax credit is to increase business in Ireland, as R&D is considered an important factor for increased innovation and productivity. Reflecting these considerations, the Government’s Innovation 2020 Strategy aims to achieve the EU 2020 target of increasing overall (i.e. public and private) R&D expenditure in Ireland to 2.5% of GNP by 2020. The R&D tax credit scheme is administered by the Office of the Revenue Commissioners, which issued its latest guidelines on 6 March 2019. It is almost four years since the previous guidelines were published (April 2015) and in the interim, a number of significant events relating to the wider research, development and innovation (RD&I) landscape have happened: The Knowledge Development Box was introduced in 2015; The updated OECD Frascati Manual was issued in 2015; The Department of Finance reviewed the R&D tax credit scheme in 2016; An R&D Discussion Group was formed in 2017; and The Department of Business Enterprise and Innovation’s Disruptive Technologies Innovation Fund was introduced in 2018. It was expected that the latest guidelines would provide additional clarity on issues set out in previous ones, insight from the increased number of audits, and recommendations for continued best practice. There are 14 changes in all, most of which are relatively minor, and are therefore not discussed in this article. I will instead evaluate the more significant changes and briefly comment on the upcoming Department of Finance review of the R&D tax credit scheme. Change 1: Suggested file layout for supporting documentation An important consideration is that in defending a claim, the burden of proof is on the claimant to evidence their entitlement to tax credits. It should therefore come as little surprise that the principal focus of many audits is on supporting documentation. Although the legislation is silent on the nature of the documentation required to support an R&D tax credit claim, Revenue conducts audits using its own guidelines and provides a copy to the experts appointed to assist Revenue. The guidelines give indications of records that should be maintained to satisfy the science and accounting tests. The latest guidelines have, for the first time, introduced a “suggested” file layout for supporting documentation. This should be of benefit to existing claimants who have inadequate record-keeping and who are considering upgrading their systems and processes to be audit-ready. It may also be of benefit to potential claimants who are assessing what must be done to prepare a robust claim and, in time, defend it – the adage being that “your first step to claiming is also your first step to audit”. Revenue also benefits by potentially standardising the audit process and its inherent costs. At a recent audit this author attended, the Revenue inspector commented: “If we knew then what we know now, there may have been less need for the audit”. With Revenue’s increased adoption of e-auditing, a standardised R&D file structure could reduce the time and cost of on-site audits for both Revenue and claimants. Although the suggested file layout has advantages, it could be costly and administratively difficult for claimants to adopt. Furthermore, although the words “suggested” and “non-obligatory” are used, we can but assume that in time it could become a de facto requirement. This raises the question as to whether claimants would be disadvantaged in not using it or in having an incomplete file. In addition, claimants frequently receive an Aspect Query (Revenue’s R&D questionnaire, comprising 23–25 questions) into their claim in advance of a full audit. In answering the Aspect Query, a report setting out one’s entitlement to claim is typically furnished. That report is often laid out in the same format as the Aspect Query and although additional questions may be raised, the reports are not generally rejected by Revenue. Therefore, if reports in the Aspect Query format are broadly acceptable to Revenue, a suggestion is for Revenue to consider amending its Aspect Query rather than asking claimants to amend their processes. The R&D tax credit was introduced to defray the cost for claimants in the carrying on of R&D activities. There is no tax credit for the costs of record-keeping or file management. Change 2: Eligibility to claim for sub-contracted R&D activity The guidelines have reversed Revenue’s position that “outsourced activity must constitute qualifying R&D activity in its own right”. In the past, outsourced activities needed to be the R&D of the company carrying on the activities. With this change, they now must be the R&D of the claimant. This is constructive as it considers entitlement to tax credits from the claimant’s standpoint and reflects the reality of sub-contracting where the claimant lacks specific expertise and requires outside assistance to support its in-house R&D activity. The positive impact of this change will be the confidence it gives claimants to include sub-contracted activities that may previously have been omitted from claims, as the claimant could not determine whether the outsourced activities constituted R&D when performed by the contracted party. Change 3: Materials used in R&D activities, which may be subsequently sold R&D tax credit/relief schemes in other jurisdictions (such as Canada, Australia and the UK) have a legislative requirement to deduct from claims saleable products resulting from R&D activities. In Ireland, there is no such legislation, but the 2015 guidelines introduced this requirement without worked examples. The latest guidelines have updated the wording to read “where it is reasonable to consider that there will be a saleable product” and have provided three examples. Revenue is effectively placing the onus on the claimant to assess, based on a “reasonable to foresee” test, whether the materials were utilised “wholly and exclusively in the carrying on by the company of R&D activities”. This assessment seems to be at odds with the legislation, wherein other than a requirement to make a deduction for expenditure met by grant assistance, there is no reference to eligible expenditure having to be reduced for income from the sale of materials or saleable product derived from R&D. In the author’s opinion, whether materials have a post-R&D resale value should not detract from the fundamental and legislative reason for which their cost was incurred – namely, to carry on R&D activities. Guidelines do not make the law, and are but an aid to its interpretation. Department of Finance Review The Department of Finance has a duty of care over public expenditure and this year, in co-operation with the Office of the Revenue Commissioners, it will conduct its triennial review of whether R&D tax expenditure remains fit for purpose. The R&D tax scheme benefits not only claimants, but wider society also through development, employment, education and so on. However, the R&D headline cost figures do not reflect the full cost of the scheme to the Exchequer. It will be a full review (unlike 2016, which was economic only) and will cover four pillars – relevance, cost, impact and efficiency – to determine if the scheme remains valid. It will be conducted along two strands: A cost-benefit analysis (statistical in nature); and A tax policy unit analysis, involving a public consultation. It is encouraging that since the last review:  There has been no change in the R&D legislation; The OECD-compliant Knowledge Development Box scheme has come into operation; Ireland is ranked tenth in the 2018 Global Innovation Index; Ireland is ranked ninth in the 2018 European Innovation Scorecard; and Ireland is ranked fourth in the OECD Tax Database in terms of R&D tax incentives (tax and grants). Conclusion The expectations of the latest guidelines have largely been met, and hopefully the R&D Discussion Group will function as a collaborative forum to influence future updates.Yes, there is increased focus on supporting documentation, but broadly, the status quo remains. For now, you could say of the RD&I landscape in Ireland and the R&D tax credit guidelines respectively: “You rock. You rule!” The big three The three significant changes to Revenue’s R&D tax credit guidelines of which claimants should be aware are as follows: Change 1:  Suggested file layout for supporting documentation. The layout will benefit existing claimants who have inadequate record-keeping and who are considering upgrading their systems and processes to be audit-ready. A standardised R&D file structure could also reduce the time and costs of on-site audits for both Revenue and claimants. Change 2:  Eligibility to claim for sub-contracted R&D activity. The guidelines have reversed Revenue’s previous position that “outsourced activity must constitute qualifying R&D activity in its own right”. This is constructive as it considers entitlement to tax credits from the claimant’s standpoint and reflects the reality of sub-contracting, in that the claimant lacks specific expertise and requires outside assistance to support its in-house R&D activity. Change 3:  Requirement to deduct the cost of materials used in R&D and having resale value. The guidelines update the wording and provide three examples regarding saleable materials used in R&D activities. Revenue is effectively placing the onus on the claimant to assess, based on a “reasonable to foresee” test, whether the materials were utilised “wholly and exclusively in the carrying on by the company of R&D activities”. Paul Smith is Senior Tax Manager, Global Investment & Innovation Incentives (Gi3), at Deloitte.