Kimberley Rowan outlines some of the new measures contained in Finance Bill 2015, with a focus on measures that were not announced on Budget Day.
Budget 2016 is the second budget to unwind some of the austerity measures introduced to combat the effects of the recession, while also including measures to support recovery in the domestic economy. The Minister for Finance, Michael Noonan TD, announced anticipated reductions to the Universal Social Charge (USC) for a second year in a row, much to taxpayers’ delight. The reductions promised on Budget Day are brought into effect through Finance Bill 2015 (the Bill). From 1st January 2016, therefore, workers and pensioners will see an increase in their take-home pay or pensions.
The Bill also includes other measures announced on Budget Day in addition to a number of changes that were not announced by the Minister during his Budget speech on 13th October, many of which are of a technical or administrative nature.
Personal tax
The Bill gives effect to the personal tax measures announced on Budget Day such as the reductions to USC rates, the increase in the home carer credit and the extension of the home renovation incentive. Details on the earned income credit for self-employed people, which was announced on Budget Day, are also included. New measures in the Bill include an income tax exemption for vouchers and an exemption for expenses reimbursed to non-resident directors.
Tax-free vouchers
Employers may give a voucher worth up to €500 to their employee free of income tax, PRSI and USC. The Bill provides that this measure will commence on 1st January 2016. During Second Stage debate on the Bill, however, the Minister for Finance noted that an amendment will be made at Committee Stage thereby enacting the measure from the date of publication of the Bill (22nd October). Terms and conditions also apply, so it is important to read the details.
Non-resident and non-executive directors
Vouched expenses for travel and subsistence incurred by a non-resident non-executive director will not be subject to Irish income tax from 1st January 2016. The expenses must be incurred solely for the attendance at meetings relating to the affairs of the company in the capacity as director.
Revenue’s previously published position on expenses for travel by non-executive directors attending board meetings (eBrief No. 61/14 and Part 5 of the Revenue Tax and Duty Manual) continues to apply to cases up to 1st January 2016. eBrief No. 61/14 (which applies until 1st January 2016) sets out the following:
- The position in relation to the tax treatment of expenses for travel and subsistence incurred by non-executive directors in attending board meetings;
- Confirms that, generally speaking, no deduction is due to a non-executive director in respect of such expenses; and
- Confirms that, where such expenses are met by a company on a director’s behalf or are reimbursed to him, PAYE/USC must be deducted.
The position, as provided for in Finance Bill 2015, will apply from 1st January 2016.
Corporation Tax
Much-anticipated details on the workings of the Knowledge Development Box (KDB) are covered in the Bill. Other corporation tax measures in the Bill deal with Country by Country Reporting (CbCR) and the extension of corporation tax relief for
start-ups.
Knowledge Development Box
This initiative was first mooted in the Minister for Finance’s budget speech last year. Since then, the Department of Finance conducted a consultation on the KDB and related legislation. The Minister announced in the Budget that the Irish KDB will be the OECD’s first fully-compliant preferential regime. The Bill also confirms that the
regime is following the OECD “modified nexus” approach.
The KDB will provide for an effective 6.25 per cent corporate tax rate on profits from patented inventions and copyrighted software earned by an Irish company to the extent that such income relates to research and development undertaken by that company. The relief is available to companies for accounting periods beginning on or after 1st January 2016 and before 1st January 2021.
Technical amendments to the proposed regime are expected at Committee Stage. The Minister also signalled additional legislation from the Department for Jobs, Enterprise and Innovation to deal with implementation of the KDB regime while guidance from Revenue is anticipated later in the year.
Country by Country Reporting
CbCR is a product of the OECD’s initiative on Base Erosion and Profit Shifting (BEPS), and Ireland is one of the first states to introduce this measure. The Bill allows Revenue to create regulations that give effect to the manner and form in which CbCR is to be provided. New regulations are expected by the end of this year, and will be based on OECD guidelines.
The regulations will require Ireland-resident parents of large multinational groups to provide annual reports to the Revenue Commissioner detailing a range of information including employee numbers, stated capital, retained earnings, tangible assets, the group’s profit before income tax, and income tax paid and accrued. These reports will likely be shared with other tax jurisdictions to confirm whether the multinational in question is engaged in base erosion and profit shifting or not.
Employment and Investment Incentive
Finance Act 2014 included amendments to the Employment and Investment Incentive (EII), the introduction of which was subject to a Ministerial Order. Further changes were also announced on Budget Day and provided for in the Bill. The amendments came into effect on Budget night (13th October) by Financial Resolution.
Some of the amendments to the terms of the EII aim to ensure that the incentive complies with the European Commission’s general block exemption regulations from a state aid perspective. A qualifying company must now meet the requirements of Paragraphs 5 and 6 of Article 21 of Commission Regulation (EU) 651/2014 of 17th June 2014.
Revenue published eBrief No. 107/15, which deals with the administrative aspects of the changes. In the eBrief, Revenue advises any company that received EII outline approval prior to 13th October 2015 but had not raised EII funding by that date must now consider – before issuing shares – whether it is a qualifying company under the amended scheme or not.
Revenue also published a summary of the changes to the EII. We can expect to receive frequently asked questions from Revenue on the revised incentive while an updated Form EII Outline is due to be published shortly.
Corporation tax relief for start-ups
The three-year corporation tax relief for start-ups was due to expire at the end of 2015 but will be extended for a further three years, benefiting trades which commence before 31st December 2018.
Capital taxes
The Bill provides details on the new Capital Gains Tax (CGT) Entrepreneur Relief, which was announced on Budget Day, and a new CGT clearance (CG50) threshold of €1 million in the case of disposals of apartments and houses. The increase to the Group A threshold for Capital Acquisitions Tax (CAT) purposes, as announced in the Budget, is confirmed.
Entrepreneur Relief
The previous version of Entrepreneur Relief, introduced in Finance (No. 2) Act 2012, is to cease from the end of the year. The relief was dogged by restrictions, which in practice made it very difficult to access.
The new version of Entrepreneur Relief provides for a reduced rate of CGT of 20 per cent on chargeable gains on the disposal of chargeable business assets made by an individual on or after 1st January 2016 up to a lifetime limit of €1 million. The individual must have owned the chargeable business assets for a minimum of three years prior to the disposal. Other conditions also apply.
The relief, as drafted in the Bill, is not as generous as expected and falls short compared to similar reliefs available in other jurisdictions such as the UK. The many conditions of the relief will limit its application to certain entrepreneurs.
Revenue has indicated that there will be a number of amendments to the relief at Committee Stage. It is expected that some prescriptive conditions will be relaxed.
Capital Gains Tax clearance
CG50 clearance on the disposal of a house or apartment will only be necessary when the proceeds of sale exceed €1 million. The €500,000 threshold remains in place for disposals of other assets falling within the scope of tax clearance. It is likely that the €1 million threshold applies only to houses and apartments due to the volume of clearance applications received by Revenue.
The €1 million threshold will be introduced on 1st January 2016. Revenue published eBrief No. 106/15 to clarify that the existing threshold of €500,000 will continue to apply to disposals of houses or apartments made on or before 31st December 2015.
Value Added Tax
VAT did not feature much in the Budget speech. The Minister for Finance referenced the benefit of the nine per cent rate and the abolition of the air travel tax for the tourism sector in Ireland, but no VAT changes were announced.
While the Bill did not signal any major policy changes, a number of technical changes are proposed – mainly to deal with VAT fraud and anomalies in the legislation, and to clarify existing provisions. The proposed VAT changes include the following:
- Revenue can cancel VAT registration numbers and publicise situations where a cancellation has taken place in the protection of VAT revenue; and
- A reframing of what constitutes educational activities for VAT purposes following recent appeal decisions at both European and domestic level, so that the exemption applies only where specified recognised bodies carry out the activity. Revenue can also determine that a specified activity is subject to VAT where its exemption creates a “distortion of competition”.
Administration
The Bill contains a number of proposed changes regarding the administration of the tax system, but three proposals stand out as having most general application.
Requirement to file a return
The Bill proposes changes to the definition of a chargeable person (an individual who is required to file a self-assessment income tax return). The level of non-PAYE income that can be coded against tax credits will increase from €3,174 to €5,000. This in turn
changes one of the tests to determine if an individual is a chargeable person for self-assessment purposes.
Guidance from the Department of Finance also proposes to reduce the current gross limit for non-PAYE income from €50,000 to €30,000, which is also a test to determine self-assessment. This measure does not require legislative change, according to the Department of Finance’s publication. Therefore, the overall effect of these measures will most likely result in little change to the number of individuals subject to self-assessment.
Record retention
In the case of a cessation of trade, records must now be retained for five years from the date of cessation. This change is proposed in an effort to comply with the Global Forum on Tax Transparency and information exchange. There is no proposed change to the current requirement to retain linking documents and records for six years. Revenue clarified that the retention period in the case of a cessation of trade is not increased to 11 years. It seems that the five-year period may run within the six years.
Penalties
Proposed changes to the penalty system should also allow Revenue to impose penalties for incorrect returns where no tax was at issue. It seems that this amendment was triggered by an incorrect claim for a refund of Relevant Contracts Tax (RCT), but no penalty was applicable as no tax was owed by the taxpayer.
Reporting issues
While introducing another Finance Bill, Finance (Miscellaneous Provisions) Bill 2015, to the Dáil, the Minister for Finance announced a proposed amendment to the Taxes Consolidation Act 1997. A new Part in the Taxes Consolidation Act 1997 is proposed to deal with Revenue’s treatment of confidential taxpayer information and disclosing such information to the Law Society of Ireland. This amendment allows Revenue to disclose confidential taxpayer information to the Law Society of Ireland in such circumstances where the tax advisor or agent is a solicitor, ensuring equal treatment across the range of “tax advisors”.
Currently, personal and commercial information revealed to Revenue for tax purposes is protected against unauthorised disclosure. However, Revenue can use taxpayer information to report a tax practitioner to a professional body where Revenue is satisfied that the work of that practitioner does not meet the standards of the professional body. The provisions do not currently cover practitioners who are not members of a professional body or who are members of the Law Society of Ireland.
Finance Bill timeline
At the time of writing, the Committee Stage of Finance Bill 2015 is scheduled for 17th to 19th November and will be followed by the Report Stage on 24th and 25th November. The Bill is expected to be signed into law in December. Amendments made before the Bill is enacted into law are not reflected in this article.
Kimberley Rowan ACA, AITI Chartered Tax Advisor is Tax Manager at Chartered Accountants Ireland.