Financial Reporting

Seemingly minor tweaks to the definition of materiality could be more significant than they might appear.   The International Accounting Standards Board (IASB) recently refined its definition of that fundamental concept in financial reporting – materiality. These revisions to the financial reporting standards add to the 2017 practice statement issued by the IASB and concludes their deliberations on this important topic. Given all the changes to financial reporting standards which people are currently dealing with, these seemingly minor tweaks to existing standards seem to have slipped by unnoticed. The IASB has stated that the amendments to the standards are not expected to “change existing requirements substantially”. However, this article explores whether that is actually the case and suggests that the changes are more significant than people may think. Why is materiality important in financial reporting? In my view, materiality is the most important concept in financial reporting. Its application impacts on decisions such as how an entity should recognise, measure and disclose specific transactions and information in the financial statements; whether misstatements require correction; and whether assets and liabilities or items of income or expense should be separately presented. Indeed, most definitions of the fundamental concepts of “true and fair” or “present fairly” revolve around financial information being materially correct. Where information that is required by a financial reporting standard is omitted or misstated and such information is deemed material, those financial statements cannot then be said to achieve a fair presentation or give a true and fair view. So what has changed? The refined definition of material is as follows: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The main changes are embodied in the references to “obscuring”, “could reasonably be expected to” and “primary users”. The definition is also now aligned across the various IFRS Standards and the Conceptual Framework. Furthermore, the amendments provide a definition and explanatory paragraphs in one place (IAS 1) and remove the definition of material omissions or misstatements from IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. While some have felt that the IASB is merely playing with words and the IASB itself doesn’t feel that the changes are significant, some of the altered emphasis could lead to changes in practice. Let’s explore this a little further. First, the amendment replaces the term “could influence” with “could reasonably be expected to influence”. This, in my opinion, can only be read as increasing the materiality threshold and encouraging entities not to disclose immaterial information in their financial statements. Second, the concept of “obscuring” information has been added to the requirements against “omitting” and “misstating” information. This can only be seen as an effort to alleviate stakeholder concerns that the previous definition encouraged entities to disclose immaterial information in their financial statements, which could inadvertently obscure information relevant to users. And third, the previous definition of material was also seen to be lacking in explaining why it is unhelpful to include immaterial information. To prevent this, the characteristics of users have also been expanded on, as it is now explained that they are the “primary users of general purpose financial statements”. Previously, the characteristics of users were not explained, which some people felt required an entity to consider all possible users when deciding on what information to disclose. It is worth recalling who the IASB has deemed to be the primary users of general purpose financial statements. In short, they are current and potential providers of finance to the entity (i.e. present and potential investors, lenders and other creditors who use the financial statements to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources). Up to 2010, the definition of users of financial reports was much wider than that and explicitly included suppliers, customers, government and the public. The practical result was that the materiality threshold was much lower at that time, given that information could be deemed to affect the decision-making of a wider user group. Practice statement: making materiality judgements The changes outlined above build on the 2017 practice statement, Making Materiality Judgements, issued by the IASB. As well as offering comprehensive guidance on various principles, the statement outlined a four-step process for entities to follow when making materiality judgements. Step 1 The entity identifies information that has the potential to be material. In doing so, it considers the IFRS requirements applicable to its transactions, other events and conditions, and its primary users’ common information needs. Step 2 The entity then assesses whether the information identified in step one is material. In making this assessment, the entity needs to consider quantitative (size) and qualitative (nature) factors. The practice statement notes that the presence of a qualitative factor lowers the thresholds for the quantitative assessment (i.e. the more significant the qualitative factors, the lower those quantitative thresholds will be). Step 3 The entity organises the information within the draft financial statements in a manner that supports clear and concise communication and the statement provides guidance on this. Step 4 In this, the most important step, the entity steps back to assess the information provided in the draft financial statements as a whole. It needs to consider whether the information is material, both individually and in combination with other information. This final assessment may lead to the introduction of additional information or the removal of information that is now considered immaterial; aggregating, disaggregating or reorganising information; or even beginning the process again from  step two. Evolution of the materiality concept The current iteration of the materiality concept is part of an ever-evolving process in which I have had the dubious honour of being centrally involved. As the then Head of IAASA’s Financial Reporting Supervision Unit, I was responsible for the production of a paper in 2010 entitled IAASA’s Observations on Materiality in Financial Reporting. That paper outlined IAASA’s interaction with issuers at that time as well as specific recommendations as to how companies should be dealing with, and applying, the concept of materiality in their financial reports. Resulting from this IAASA paper, I was asked to chair a group on materiality established by the European Securities and Markets Authority (ESMA). The main output from that group was the hosting of a roundtable with key European stakeholders, the issuance of an ESMA consultation paper entitled Considerations of Materiality in Financial Reporting followed by a feedback statement which provided an overview of the key messages from the responses received. I subsequently engaged with the IASB, which ultimately led to the issue of the IASB practice statement, Making Materiality Judgements, in 2017. The present revision to the standards is the conclusion of this journey and both the practice statement and revised standards will have effect in over 120 countries globally. The amendments to the standards, once endorsed by the European Union (EU), will be effective for annual reporting periods beginning on or after 1 January 2020, but earlier application is permitted. Conclusion The application of the concept of materiality is of critical importance in the context of the preparation of financial statements. It needs to be clearly understood so that preparers can apply it appropriately and users are provided with useful information in the financial statements. The revised definition and accompanying practice statement should go some way to meeting this objective. Michael Kavanagh is a Director in the Department of Professional Practice at KPMG Ireland.

Feb 11, 2019
Audit

In the UK and internationally, audit was the subject of much debate in recent times and the attention will continue over the coming year. 2018 was quite a year in the world of audit. A sector often, and unfairly, characterised as ‘grey’ and perhaps unexciting, such stereotypes certainly do not apply to the year we have just had – and it is set to continue in 2019 and beyond. Much media attention has been given to high-profile corporate scandals and failures in the UK and internationally in recent years – BHS, Carillion, Patisserie Valerie in the UK, international cases such as those involving the Gupta family businesses in South Africa and the Commonwealth Bank of Australia to name but a few. Audit regulatory investigations and findings have followed with serious implications in many cases for those involved. Studies, reviews and consultations involving the audit sector were commonplace throughout 2018. Those of particular relevance, and demanding the attention of this and other Institutes and their members, include: the UK Competition and Markets Authority (CMA) October 2018 invitation to comment on the UK statutory audit market and its December update paper; the Independent Review of the Financial Reporting Council (FRC) in the UK by Sir John Kingman (the Kingman Review) published in August and report issued in December; and the ongoing Monitoring Group (MG) consultation on reforms to the global audit standard-setting bodies. Add to that the upcoming Brydon Review of the scope and purpose of the audit, announced by the UK Department for Business, Energy and Industrial Strategy in late December and the FRC’s post-implementation review of the 2016 ethical and auditing standards. Overarching questions being addressed by these various studies, reviews and consultations include: What is the value of audit? What is the scope and purpose of a statutory audit? How do we align it better to societal needs and expectations? How do we best expand choice in the audit market? Who should police auditors and corporate reporting more generally? And what powers should the enforcers have? To which standards should auditors be subject, and who should set those standards? Are the current standards fit for purpose, both now and into the future? These overarching questions give rise to more detailed questions, such as: which, if any, non-audit services should audit firms be permitted to provide, and to whom? Is there a role for other bodies, such as the regulator, in the appointment of auditors or in the governance of the process? Should standard-setting for auditors of public interest entities be separated from standard-setting for the audits of other entities? Should all accountants, irrespective of the sectors in which they work, be subject to the same general ethical principles? One only has to consider the two CMA consultations to appreciate the level of detail and complexity involved – the October consultation contained 27 different questions on 19 potential measures while the December consultation also contained 27 questions, this time focused on a small number of specific proposals. In Ireland, you can add into the mix the uncertainty that has arisen about the recognition of UK-based auditors in Ireland in the event of a no-deal Brexit and the IAASA consultation on its publication and grading policies relating to quality assurance reviews of public interest entity audits and audit firms. Reporting by IAASA is currently envisaged to commence in early 2020 with respect to 2019 audits. So, at the time of writing, where are we with all this activity? Competition and Markets Authority study of the UK statutory audit market The original October 2018 CMA invitation to comment contained a wide range of potential measures aimed at increasing competition, enhancing incentives to better align audit services to shareholder interests, improving market choice and opportunities for switching auditors and bolstering the resilience of the UK audit market, particularly against the failure of one of the Big Four audit firms. Following that consultation, the CMA published an update paper on 18 December containing a proposed package of measures, including a number of core proposals: Regulatory scrutiny of auditor appointment and management with a view to securing audit committees’ accountability and independence; Mandatory joint audit with a view to breaking down barriers to non-Big Four firms; An operational split between the audit and advisory businesses of audit firms, aiming to address conflicts between the provision of audit and non-audit services while mitigating against some of the key negative consequences of alternatively introducing full ‘audit-only’ firms; and Peer review of audits prior to the opinion being signed. Presented as preferred alternatives to other measures originally proposed in October, the update paper suggests that the CMA may still take future steps in relation to those other measures, should sufficient progress not be made through the current package of measures. The CMA is currently consulting on these revised proposals with final recommendations scheduled for April 2019. Potential measures in the October consultation not carried forward by the CMA at this point include the break-up of the Big Four firms and the creation of a national audit office-style auditor for private sector audits.  Kingman Review of the UK Financial Reporting Council The Kingman Review, also published on 18 December, calls for the replacement of the FRC with a new independent regulator, with the suggested title of ‘Audit, Reporting and Governance Authority’. It recommends that this regulator should have clear statutory powers and objectives, and should be accountable to the UK parliament. In total, there are 83 different recommendations addressing the structure and purpose of the regulator, the effectiveness of its core functions, the role and powers of the regulator with respect to corporate failures, oversight and accountability, staffing and resources, and other matters. Notable recommendations include: The new regulator taking responsibility for the approval and registration of audit firms which audit UK public interest entities from the recognised supervisory bodies (including Chartered Accountants Ireland); Enforcement action against accountants in relation to apparent wrongdoing in public interest entities should be undertaken on a statutory rather than voluntary basis; That the regulator is given the powers necessary to investigate the actions of all directors, not just those who are members of accountancy bodies; The introduction of a duty of alert for auditors to report viability or other serious concerns to the regulator; That the UK Department for Business, Energy and Industrial Strategy (BEIS) give serious consideration to a strengthened framework around internal controls; and That BEIS should put in place a statutory levy and that the current voluntary funding approach should cease. In welcoming the publication of the Kingman Review, Business Secretary Greg Clarke noted that Sir John Kingman has delivered the “root and branch review of the FRC” as requested and said “the government will take forward the recommendations set out in the Review to replace the FRC with a new independent statutory regulator with stronger powers”. The Chairman of the FRC, Sir Win Bischoff, also welcomed the recommendations, saying that they have “addressed the gaps in our powers... [and] have the potential to bring about significant improvements in the work we do in protecting the interests of investors and the wider public”. Independent review of the quality of UK audit standards (Brydon Review)/FRC post-implementation review On the same day as the publication of the Kingman Review and CMA update paper, BEIS announced the appointment of Donald Brydon to chair another review in the UK. The Brydon Review, which is intended to build on the work of the Kingman and CMA reviews, will consider how the audit and auditing standards may be evolved to better address the expectations gap between what the audit can and should deliver compared to the public expectations from audit. The terms of reference are expected shortly. Separately, the FRC issued a consultation in November as part of its post-implementation review of the current UK auditing framework. These standards were revised primarily to support the implementation of the EU Audit Regulation and Directive and to reflect changes made by the IAASB to the suite of international standards on auditor reporting. The FRC notes that having applied to two cycles of audits, it is seeking to learn the lessons from its enforcement work and, at the same time, gather feedback on whether the changes made to the standards have had the desired impact on auditor independence and audit quality. The Monitoring Group consultation on the future of international auditing standard-setting The Monitoring Group (MG) is a group of regulatory and international organisations committed to advancing the public interest in areas related to international audit standard-setting and audit quality – members include the International Organisation of Securities Commissions (IOSCO), the World Bank, the European Commission and the Financial Stability Board. The MG issued its initial consultation entitled Strengthening the Governance and Oversight of the International Audit-Related Standard-Setting Boards in the Public Interest in November 2017. A May 2018 feedback statement highlighted concerns raised by respondents under the primary objectives of serving the public interest; independence from the profession; and timeliness of standard-setting. We await the MG white paper setting out its more detailed proposals, which are expected to include the core principles of a ‘public interest framework’ and proposals relating to a sustainable funding model that is consistent with, and indeed enhances, the desired levels of independence of the standard-setting processes. International audit-related standard-setting is currently undertaken by independent boards (the IAASB and the IESBA) within the International Federation of Accountants (IFAC) in New York. IFAC’s standard-setting activities are funded primarily by IFAC member bodies, including our Institute, and international audit networks (which also provide significant people resources to the standard-setting boards). The underlying position of the MG and the regulatory community in general is that in order to ensure that standard-setting is undertaken in the public interest, and to enhance public confidence in audit, the governance processes involved need to become more independent of the audit profession and multi-stakeholder in nature. To achieve this, the MG envisages a separation of the standard-setting processes away from IFAC. The MG aims to implement the new standard-setting arrangements by the second half of 2020 or the beginning of 2021. Implications of a ‘no-deal’ Brexit on the registrations in Ireland of UK-based audit firms The UK parliament recently voted by an overwhelming majority to reject the withdrawal deal negotiated between the UK Government and the European Union (EU), leading some commentators to state that a no-deal Brexit is more likely than ever. The Institute has been actively engaging with IAASA on the position of UK-based audit firms as regards registration to undertake Irish company audits post-withdrawal in the event of a deal not being agreed and information on that engagement has been published on our website. Space constraints do not allow for a summary here of the many clarifications sought or various scenarios presented, but suffice to say that in the event of a no-deal Brexit, the indications are that our registered audit firms (and those of the other recognised accountancy bodies) based in Northern Ireland and the rest of the UK will not be recognised under Irish law post the withdrawal date to undertake statutory audits of companies in Ireland, unless they are recognised as a ‘third country auditor’ by IAASA. Such recognition can only be granted post-withdrawal and, except with regard to a small number of UK firms auditing non-EU entities with Irish listings, will require a reciprocal arrangement to be put in place by Ireland and the UK, which is likely to take some time. This is not likely to be an issue in the event that a withdrawal deal between the UK and EU is agreed and there is a transition period. It should be noted that the UK Government issued a technical notice in October, which stated that the UK will unilaterally provide a transitional period as regards audit until the end of December 2020. During this transition period, EU auditor registrations will continue to be recognised in the UK. As such, audit opinions issued by Irish-based audit firms on the financial statements of entities in Northern Ireland and the rest of the UK will continue to be valid under UK law. It is an evolving situation and the Institute continues to engage with the relevant authorities. Audit firms likely to be affected should make reference to a regulatory bulletin issued in recent days by the Professional Standards department. The Institute’s ‘Value and Future of Audit’ event Many of the topics mentioned above were debated during an excellent event on the value and future of audit hosted in October 2018 by the Institute’s Deputy President, Conall O’Halloran, and organised by Aidan Lambe, Director Professional Standards. Conall and Aidan assembled a top quality panel of contributors, drawn from the profession, business and the media. Given the significance and topical nature of the issue, the event naturally drew a very large and engaged audience, resulting in a lively debate. Some interesting perspectives from contributors to the debate included: The much-discussed ‘expectations gap’ between what the audit can deliver and what the public expects from the audit does not necessarily apply across all stakeholder types. Speakers argued that consumers of audit services, practitioners, regulators, audit committees, boards and analysts all understand the limitations of a statutory audit; That being said, there was general agreement that audit may need to better address the needs and expectations of society in order to survive and thrive into the future. To do so, the scope and purpose of the audit may need to change, though debates in this regard need to begin from informed positions; That the application of ever-increasing regulatory requirements intended to enhance the quality of audit may actually have the contrary effect of diminishing the importance of professional judgement in the process; That the audit profession, operating, as it is perceived by many stakeholders, from a privileged position in society given the legal requirements pertaining to the purchase of audit services, is validly challenged by politicians and the media in the event of corporate scandals and failures, and the onus is on the profession to meet those challenges; and The need for the profession to better communicate the value proposition of the audit, and indeed the output, in a manner that doesn’t disenfranchise stakeholders. The irony was noted of the audit opinion relating to listed entities and certain other public interest entities having in recent years moved clearly away from boilerplate language to provide very interesting and useful information, while the focus on the opinion at the annual general meeting has simultaneously diminished. As the Deputy President acknowledged in closing the event, the debates created some great content which the Institute will consider when formulating its own contributions to consultations going forward and we will return to some of the topics discussed in future issues of this magazine. Concluding remarks It is fair to say that the underlying theme of the various studies, reviews and consultations, the level of regulation of the audit sector globally, and the extent of media and political interest and scrutiny the sector continues to receive all clearly highlight the continuing importance of audit today. Audit faces significant challenges to bridge the expectations gap and to evolve to embrace technological developments and artificial intelligence, but the significance of its oversight role has not diminished. The profession needs to present a strong voice to ensure new measures achieve the goals of providing more assurance to stakeholders and higher quality audit. Collectively, we need to commit our talents to develop solutions to ensure the continued relevance and importance of audit to the market into the future. These studies, reviews and consultations are inextricably linked and responses from this Institute, and the profession in general, have voiced the need for proposed measures to be coordinated and coherent, and to encompass developments and changes in corporate reporting. Other key messages include serious concerns about the implications of UK-only approaches, given the international nature of audit and the need for solutions that work globally. There is a general recognition that public trust in the audit needs to be restored. While we may not agree with all the proposals on the table, we welcome the debates and will continue to actively contribute to the debates both locally and internationally. Never a dull moment, it seems! Mark Kenny is Director, Representation & Technical Policy, at Chartered Accountants Ireland.

Feb 11, 2019
News

As the evolution of the Institute’s syllabus continues, the FAE syllabus will soon undergo a range of significant enhancements.   The December 2018 issue of Accountancy Ireland outlined the marking developments at FAE level. In this issue, we will continue that discussion with an overview of the evolutionary plans for the FAE and assessments in particular. In rolling out the new ACA syllabus at all levels (including two new FAE electives) in 2018/9, we are mindful that the syllabus will need continuous enhancement and development. The periodical review of syllabus content is no longer appropriate. The only constant for accountants today is the constancy of change and indeed, the increasing pace of change. Future skills and syllabus trends The key areas requiring further enhancement at FAE level encompass the skillsets of accountants and the impact of technology on the work of accountants. In framing our thinking, we are mindful that the profession globally is facing a tsunami of change. Our thinking is being informed by: Current work being undertaken by the Global Accounting Alliance Directors of Education, which seeks to redefine the future skills and areas of competence for accountants; Enhancements to IFAC Education Standards, which reflect ICT developments and the need for enhanced skills in areas such as professional scepticism and soft skills; The changing nature of trainee and firm work profiles and how this is likely to continue to evolve over the coming years. We continue to consult with firms on anticipated changes and will reflect this in the syllabus. Our three practice-focused electives (audit, tax and advisory) seek to better align with how practice is evolving, while exam cases seek to ensure that we better reflect the operational realities of today’s trainees; Rapid change in a wide range of technologies, which require syllabus updates to cover such items as data analytics, artificial intelligence and emerging technologies (including blockchain and cryptocurrencies). We expect these topics to feature in the evolving FAE Core case exam, for example; The challenge of sustainability (including the opportunities presented by millennial development goals and integrated reporting) and how these and related topics are creating opportunities for firms and members; and Risk topics also require enhancement to reflect best practice in areas such as internal audit. Naturally, we cannot simply add additional topics to the syllabus without seeking opportunities to de-emphasise some technical topics that have already been assessed at CAP2 level and will continue to be assessed in elective modules. Assessment trends Internationally, professional bodies are moving away from paper-based assessment in favour of digital platforms. Such a change will allow us to take advantage of significant technological enhancements while maintaining the examination’s integrity. The work of today’s student is completed virtually exclusively on computers and digital assessment therefore better reflects the skills and day-to-day experience of trainees. Technology also offers the potential for increased flexibility and innovative assessment methodologies. In framing our thinking in this area, we consulted with leading technological providers, other professional bodies and regulators to learn from their experiences and challenges. Conclusion We are entering a very exciting time for the Institute’s education and examinations operations. The new topics and processes available will allow us to ensure that the future Chartered Accountant is fully equipped to take advantage of the significant change underway. We will approach this opportunity and change with a view to minimising risk as far as possible. We anticipate a future update to reflect our evolving thinking. Ronan O'Loughlin is Director of Education at Chartered Accountants Ireland. Ian Browne is Head of Assessment & Syllabus at Chartered Accountants Ireland.

Feb 11, 2019
Tax

2019 will be a critical year in shaping the tax landscape for multinational corporations. 2018 was a busy year on the international tax front, with developments across the globe having an impact on Ireland, directly and indirectly. So, what can we expect in 2019 in terms of tax developments which could impact Ireland, directly or indirectly? Interest deductibility changes The Department of Finance has just completed a consultation phase around the EU ATAD (Directive) in respect of both hybrid instruments and interest deductibility rules. The interest deductibility rules are probably of most interest. Broadly, under a binding EU Directive, we are obliged to amend our interest deductibility rules so that allowable net interest will be restricted to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA). As Ireland currently has very limited rules restricting the deductibility of interest, this is a significant change. It initially appeared that Ireland would have until 2024 before the new interest restrictions would be implemented. However, it now looks likely that the new rules could be in place by the end of this year. Companies may need to adjust existing tax cash flow models to factor in potential disallowable interest in the future. Grandfathering of existing loans will be limited, with loans taken out post-June 2016 within the ambit of the new provisions. The consultation phase is focusing on a number of issues, including carve-outs for certain activities and sectors, as well as how any de minimis limit (expected to be circa €3 million) will be legislated (for example, how group situations will be impacted). At the moment, there is uncertainty as to how the new rules will be implemented. How will a fully geared company with only rental income be impacted? Will there be a carve-out for infrastructure projects? There is some flexibility as to how countries implement the Directive; the hope is that Ireland chooses a sensible course. We will likely see the outcome of the consultation phase, and the resultant legislation, later this year. Transfer pricing There is a separate public consultation phase due to commence shortly in relation to transfer pricing (TP). This will cover various matters such as how Ireland will implement the updated OECD guidelines and whether TP should be extended to non-trading transactions. Irish TP legislation currently refers to 2010 OECD guidelines. One of the key changes in the 2017 guidelines is around value creation and the consideration that needs to be given to where value is created in allocating taxable profits. A greater focus on value creation activities could impact companies that carry out significant research and development (R&D) activities outside Ireland, amongst other things. How Ireland implements the new OECD guidelines could impact significantly on a company’s effective tax rate. One potential outcome of the new guidelines is that countries may compete for taxing rights over the same pool of profits. In the authors’ view, we are likely to face an environment of increased cross-border tax disputes, likely to last for several years. Later this year, in Finance Bill 2019, we will see the output of the consultation phase and the Department’s view on how best to implement the updated OECD guidelines. Regardless of the outcome of the consultation phase, there will be an increasing onus on companies to have appropriate and robust transfer pricing documentation in place to support their intra-group pricing policies. A unique feature of Ireland’s current TP regime is that TP does not extend to “non-trading” transactions, which would cover companies that, for example, might provide a limited number of (interest-free) intra-group loans. The expectation is that Ireland will move to change this, with TP in the future covering both trading and non-trading transactions. While it is expected that there will be an appropriate time-frame to unwind existing structures, or suitable grandfathering provisions, the changes may have a significant impact on Irish and international groups with interest-free loan structures in place. Digital tax The position in respect of digital tax is a moveable feast. At the time of writing, the potential for a consensus at European Union (EU) level looks low, which in some respects is a positive for Ireland, which stood to lose tax revenues from an EU-wide digital tax. However, we are already seeing individual countries, such as the UK, introduce unilateral digital tax equivalent measures. Such measures can reduce the attractiveness of our 12.5% tax regime. 2019 may see further developments at EU level on the digital tax front, or more likely an increase in the number of countries looking to implement their own digital tax regimes. The OCED has recently rowed heavily into this debate, which is likely to give significantly more impetus to proposed future changes. Unanimity over tax matters There has been talk at EU level of removing the current requirement for unanimity at EU level for the passing of tax changes. If, instead of unanimity, a qualified majority only was required to introduce tax changes, it would increase the likelihood of other EU changes being introduced. For example, the threat of a common consolidated corporate tax base (CCCTB) regime would increase, which would also erode the benefits of our low corporate tax rate. A change to the current unanimity rules would itself require unanimity, which at the moment seems most unlikely. However, it provides a good sense as to the direction in which the EU wishes to travel. In summary, we can expect significant further activity in 2019 on the international tax front that will be critical in shaping the landscape both for multinational corporations operating in Ireland and for indigenous Irish groups with overseas operations. Peter Vale is a Tax Partner at Grant Thornton Ireland. Paschal Comerford is a Tax Director at Grant Thornton Ireland.

Feb 11, 2019
Tax

By Cróna Clohisey The first pay cheques of the New Year will see the average Irish worker about €3 better off per week. However, these new gains could be wiped out with the increase in the rate of tourism VAT with consumers facing heftier bills in restaurants, hotels and hairdressers. The 9% rate introduced in 2011 was reinstated to its original rate of 13.5% from 1 January 2019. Ireland’s return to the rate of 13.5% means it is one of the highest rates of tourism VAT in the EU. Sixteen out of 19 eurozone countries have a rate of 10% or less while Northern Ireland has just undergone a consultation on whether it should reduce its rate from 20%. Brexit and associated Sterling fluctuations have also been mentioned as a reason for keeping the VAT rate at 9% in Ireland. Yet, visitors from the UK remain strong. The initial VAT rate drop was a temporary measure and at the time, businesses were warned that they must pass the savings on to customers. Now, tourism is booming and our value for money rating has improved. Tourism accounts for an estimated one in 10 jobs and has created employment opportunities all over the country. Despite good growth in Dublin and other cities, there are reports that rural areas are struggling despite seven years of the reduced VAT rate. A targeted support system to promote Ireland’s Hidden Heartlands and the Wild Atlantic Way, as well as funding to develop our greenways, was announced in Budget 2019.  Using a reduced VAT rate on an entire sector of the economy to encourage growth now seems to have been a blunt tool. Perhaps the targeted support approach is the right way forward. Time will tell.

Feb 11, 2019
Tax

Although entrepreneurs’ relief wasn’t abolished or capped in the 2018 budget, it is subject to additional conditions.   Entrepreneurs’ Relief (ER) is the fundamental capital gains tax (CGT) relief in the United Kingdom (UK). It replaced business asset taper relief in April 2008 and provides the opportunity to obtain a 10% CGT rate on gains from qualifying business disposals if certain conditions are met. The relief has gradually been extended to cover £10 million of lifetime gains. Prior to the autumn 2018 budget, there was concern that ER could be significantly capped or even abolished. The good news is that there were no changes to the overall value of ER, but the bad news is that there are now additional conditions which must be satisfied for ER to apply. Change effective from 6 April 2019 This change involves an increase from one year to two years in the qualifying period over which the necessary qualifying conditions must be met. Individuals who acquired a qualifying holding of shares between 6 April 2017 and 5 April 2018 will therefore be subject to the minimum holding period of one year provided the sale takes place on or before 5 April 2019. From 6 April 2019, however, those shares may then cease to meet the minimum holding period until the new two-year period is reached. This will require careful consideration regarding the timing of a sale. It is important to remember that entering into an unconditional contract represents the disposal date for CGT and not the completion date. Hence, could there be agreements entered into on 5 April 2019 with completion thereafter? Alternatively, there may be situations where the sales process is delayed until the two-year period is met and the use of option agreements may also be considered. Change effective from 29 October 2019 Changes have been made to the definition of a “personal company”. Two additional tests have also been introduced to ensure that the shareholder has a genuine economic interest in the shares being disposed. Previously, a personal company was one in which the individual held at least 5% of the ordinary share capital of the company and at least 5% of the voting rights. From 29 October 2018, the individual is also required to be: Beneficially entitled to at least 5% of the profits available for distribution to the equity holders of the company; and Beneficially entitled, on a winding up of the company, to at least 5% of the assets of the company available for distribution to equity holders. The proposed ER legislation broadly imports the definition of equity holders and assets available for distribution from the existing group relief provisions in chapter six of part five of Corporation Tax Act (CTA) 2010. This is a complex area and consideration will be required on a case-by-case basis. Where a company has issued convertible loan notes, debt securities with “equity-like” features or where the interest on the debt exceeds a commercial rate of return, for example, this will cause significant issues and a potential dilution of an individual shareholder in the “equity holders” pool, potentially bringing them below the 5% threshold. In determining assets available for distribution, the definition within Section 166 of CTA 2010 provides that assets available are the assets amount minus the liabilities amount. The problem with this definition is that internally generated goodwill or intellectual property is unlikely to be included in the assets amount. Companies with no net assets are assumed to have a sum of £100 to distribute. It is also likely to cause problems for shareholders with entitlement to growth or freezer shares and may also cause problems where there are “alphabet” shares in the company, depending upon the rights attaching to them in the articles. These changes do not impact enterprise management inventive (EMI) shares. Further change from 21 December 2018 Given the complexity of the new rules introduced on budget day, a late proposed amendment to the legislation has been made inserting an alternative test to the two new 5% economic tests. This new test requires that, on the date of disposal, the selling shareholder would have been entitled to 5% of the proceeds in the event of a hypothetical sale of all of the company’s ordinary share capital on that day. This test is good news, especially for companies with alphabet shares, and it is likely that when individuals look to consider if ER is available, they will first consider if this test is met in priority to the other alternative economic tests. Conclusion Following these changes, the assessment of whether ER is available will be significantly more complex. It will be important to consider the interaction of these changes from budget day, 21 December 2018 and 6 April 2019 and establish what possible planning can ensure the future availability of ER. The above represents a short overview of the proposed new rules and may be subject to further changes as the Finance Bill proceeds through Parliament. Specific advice should be sought in advance of any proposed transaction. Kate Hamilton is a Senior Tax Manager at BDO Northern Ireland.

Feb 11, 2019