The changing tax position between the UK and Ireland

Dec 16, 2020

Regardless of the outcome of negotiations between the EU and the UK, the tax position between the UK and Ireland will change from 1 January 2021 when the transition period concludes. Irish tax law is amended in the “2020 Brexit Omnibus Bill” to address the myriad of tax issues impacted by the UK’s departure from the EU.  Stephen Ruane and Paul Wallace of PwC’s Tax Solutions Centre share their expert insights into key tax measures covered by Omnibus Bill and, even more importantly, what is not in the Bill.

Overview

Although the UK left the EU on 31 January 2020, for the duration of the “transition period”, the UK has effectively been treated as a Member State of the EU for tax purposes. The status quo for tax purposes was maintained during the transition period via Part 15 of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019 (“the 2019 Act”). This was broadly achieved under the 2019 Act by treating a reference to a Member State in other Acts as including the United Kingdom for the duration of the transition period.

However, when the transition period ends on 31 December 2020, regardless of the outcome of negotiations between the EU and the UK, the position is set to permanently change. Amendments to Irish tax law are set to be made upon the passing or commencement of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2020 (“the 2020 Bill”).

It should be noted that at time of writing (4 December 2020) the 2020 Bill had completed Seanad Third Stage. As a result, some changes may be made to the 2020 Bill before it becomes law, and those changes will not have been reflected herein.

Included below is a table which aims to summarise the expected tax position with regard to the UK under a number of tax heads from 1 January 2021. You will note therein that the 2020 Bill maintains the status quo in a lot of areas and it generally achieves this by amending existing provisions in the relevant principal Acts such that they can apply to both EU and UK residents and/or entities post-transition. For instance, some of the more important measures to highlight that remain available in relation to UK persons, residents or activities, as relevant post 31 December 2020 are:

  • R&D Credit: relief should continue to be available in relation to qualifying R&D activities carried on in the UK post 31 December 2020.
  • Definition of s616 Group: the 2020 Bill amendment to s616 TCA 1997 maintains the status quo on the operation of certain group measures and prevents clawback events automatically arising on midnight 31 December 2020.
  • Interest as a distribution: S130(2B) TCA 1997 will continue to ensure that certain interest paid to UK-resident companies is not re-characterised as a distribution.

However, the 2020 Bill does not maintain the status quo in every respect. We highlight the following reliefs in particular which will no longer be available in respect of UK-resident or incorporated companies, as appropriate:

  • 9I Additional Foreign Tax Credit (AFTC): AFTC will no longer be available to Irish companies in respect of dividends received from shares in UK tax resident companies from 1 January 2021. During the transition period dividends from UK companies can be eligible for AFTC under 9I. Therefore, consideration may need to be given to the timing of dividends from such companies pre 31 December 2020 to maximise potential foreign tax credit relief.
  • Parent-Subsidiary Directive: A number of Directives including the Parent-Subsidiary Directive will no longer be available post 31 December 2020 where a UK company is involved. Companies currently relying on the Parent-Subsidiary Directive (via S831 TCA 1997) for non-withholding on the payment of dividends may need to consider whether non-withholding is available via the Treaty or via an alternative domestic provision. It may be necessary to put declarations in place if relying on a domestic provision for non-withholding post 31 December 2020.

Background and Operation of the 2020 Bill

The 2020 Bill (the effects of which are summarised in the table below) is aimed at dealing with the permanent changes that will take place at the end of the transition period later this month. The 2020 Bill is made up of 22 Parts and is sometimes colloquially referred to as the “Brexit Omnibus Bill”. Part 8 deals with Taxation and it aims to maintain the status quo in relation to the operation of many key tax measures which require a company or individual to be a resident of the EU or the European Economic Area (EEA). A number of important existing measures currently available to taxpayers when dealing with UK residents are, however, absent from the draft Bill.

Part 8 of the 2020 Bill, which contains the provisions amending the below taxation measures, shall come into operation on such day or days as the Minister for Finance may appoint by Order or Orders. The Bill is expected to be ready for enactment and commencement by 31 December 2020.

Summary of tax effects of 2020 Bill

 

The table which follows seeks to summarise areas where the status quo will remain and where it will not from 1 January 2021. Readers will note that the area of Customs is not within the scope of this article. The table is aimed at being a summary guide to assist in identifying some of the existing tax reliefs/measures impacted or otherwise by the 2020 Bill and is not aimed at being a guide on the substantive tax reliefs/measures contained in the primary Acts.

  

Summary of Tax Position Post Enactment/Commencement of 2020 Bill

Corporation Tax

Tax measures where Status Quo is NOT maintained post 31 December 2020

Double tax relief under Schedule 24 TCA 97

Para 9I of Schedule 24 TCA

Schedule 24 Paragraph 9I provides for an additional foreign tax credit (“AFTC”) to Irish companies in respect of dividends received from shares in EU tax resident companies. From 1 January 2021 AFTC will no longer be available in respect of dividends from UK-resident companies. Consideration may need to be given to the timing of dividends from such companies pre 31 December 2020 to maximise potential foreign tax credit relief.

Double Tax Relief under Schedule 24 TCA 97

Paras 9A, 9B, 9C and 9DA of Schedule 24 TCA

The following Double Tax Relief measures will be restricted post 31 December 2020 where the claimant company is resident in the UK.

  • Para 9A Unilateral Relief.
  • Para 9B Dividends between related companies: Relief for Irish and Third Country Taxes.
  • Para 9C Non-resident companies carrying on a trade in Ireland via a branch or agency.
  • Para 9DA Unilateral Relief (branch profits).

Section 110 Companies with specified property businesses

 

 

 

 

 

 

S110(5A) TCA

 

 

 

 

 

 

 

 

 

 

Section 110 companies which hold financial assets that are secured over Irish property may avail of a tax deduction for interest accrued on their profit participating debt finance, in certain limited circumstances only. One such circumstance is where the recipient is a company carrying on genuine economic activities which is formed, authorised or resident under the laws of a "Member State", being an EU or EEA jurisdiction. Irish securitisation vehicles for which this exception is relevant may not be able to continue to avail of a tax deduction in the same way as they currently can for interest on debt financing to UK-resident recipients post 31 December 2020.

Exit Tax

 

 

 

 

S627, S629 TCA

 

 

To the extent that a company has transferred to the UK and already availed of the election to defer the payment of Exit Tax under S627(2), the tax so deferred may become due from 1 January 2021. Therefore, any such company will need to consider their position if paying Exit Tax by instalments.

EU Directives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

S630/Part 21, S267G & S831 TCA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mergers Directive: The definition of a company in S630 TCA does not include UK companies. This impacts all sections in Ch 1 of Part 21 dealing with mergers and asset transfers concerning companies of different EU States. Sections 633 and 633D are likely the most used of these provisions. CGT relief will not be available in respect of transfers of Irish development land via S633 in the course of a reconstruction or amalgamation. Similarly, relief will not be available under S633D where a company is dissolved without going into liquidation and that event involves a UK incorporated company.

Interest and Royalties Directive: S267G transposes the Interest and Royalties Directive into Irish law. Companies currently relying on S267G for non-withholding may need to consider whether non-withholding is available under the Treaty or via an alternative domestic provision, as S267G will not be available when paying to UK incorporated companies post 31 December 2020. If relying on domestic provisions, it may be necessary to put declarations in place.

Parent-Subsidiary Directive: S831 transposes the Parent-Subsidiary Directive into Irish law. Companies currently relying on S831 for non-withholding on the payment of dividends may need to consider whether non-withholding is available under the Treaty or via an alternative domestic provision as S831 will not be available when paying to UK-incorporated companies post 31 December 2020. If relying on domestic provisions, it may be necessary to put declarations in place.

Tax Measures where Status Quo is maintained in following areas post 31 December 2020

Distributions

 

 

 

S130(2B), S130(3) TCA

 

Interest as a Distribution and Asset Transfers: The exclusion from distribution treatment for certain interest payments and certain asset transfers under S130(2B) and S130(3) to UK-resident companies can continue to apply post 31 Dec 2020.

Charges on income

S243 TCA

Relief will remain available on non-yearly interest paid to UK banks, stock exchange members and discount houses post 31 Dec 2020.

Group Payments & Group Relief

S410, S411 TCA

Definition of ‘relevant Member State’ for s410 and s411 purposes is extended to include the UK post 31 December 2020.

Loans to Participators

 

S486 TCA

 

For S438(6) purposes companies resident in the UK will be treated the same as EU-resident companies post 31 Dec 2020.

Start-up company exemption

S486C TCA

 

Status quo will remain post 31 December 2020 for companies incorporated in the UK.

R&D Tax Credit Relief

S766 TCA

R&D tax credit relief will continue to be available in respect of R&D carried on in the UK post 31 December 2020.

Income Tax

Tax measures where Status Quo is NOT maintained post 31 December 2020

Deposit Interest Retention Tax (DIRT)

S267 TCA

 

EU-sourced interest will remain taxed at DIRT rates. DIRT rates will no longer automatically apply in the case of UK-sourced interest of individuals.

Tax measures where Status Quo is maintained via 2020 Bill in following areas post 31 December 2020

UK Government Securities

S42 TCA

 

Exemption from income tax for UK government securities will continue to remain available.

Shares held in trust

S128D TCA

Abatement of charge to income for shares held in trust will continue to apply to entities incorporated in the UK.

KEEP

S128F TCA

UK-incorporated and/or UK-resident companies will continue to be considered qualifying companies.

Hepatitis C compensation

S191 TCA

Exemption for payments from UK compensation schemes will remain.

Foster Care Payments

S192B TCA

Exemption for UK payments corresponding to equivalent Irish payments will remain.

Student Grants

S192F TCA

Exemption for UK student support payments will remain.

Artist Exemption

S195 TCA

UK residents to remain eligible.

Overseas charities

S208A/S208B TCA

UK charities will remain eligible to seek to qualify for exemptions. Donations to UK charities remain potentially eligible for relief.

Mortgage interest relief & TRS

S244/S244A TCA

Qualifying properties situated in the UK will continue to be eligible for the relief.

Certain Health Insurance

S470 TCA

Certain Health Insurance Relief policies granted by UK-established insurers will continue to qualify for relief.

Seafarer Allowance & Fisher Tax Credit

S472B/S472BA TCA

Seafarer allowance and Fisher Tax Credit will continue to be available for seafarers on UK registered ships.

Relief for 3rd Level Fees

S473A TCA

Relief will continue to be available on fees for UK-based institutions.

Relief on retirement of certain sportspersons

S480A TCA

 

 

Relief will continue to be available in respect of UK residents.

EIIS

S489/S490 TCA

Relief continues to be available in respect of investments in companies incorporated in the UK.

Pensions and Annuities

S770/S772/S772A/S784/S784A/S785 TCA

UK occupational pension schemes and UK providers of certain annuity products will continue to be able to obtain the requisite status for contributions/payments made and will remain capable of qualifying for tax relief.

Overseas Pension Plans

S787M TCA

UK employees or self-employed individuals will continue to be able to obtain tax relief for contributions to pension plans with UK and EU (other than Ireland) pension providers.

Allowances & Reliefs

S1032 TCA

British citizens will continue to be entitled to certain personal allowances, deductions and reliefs.

 

 

 

Capital Gains Tax

Tax Measures where the Status Quo is maintained via 2020 Bill in following areas post 31 December 2020

Venture Fund Managers

S541C TCA

Investments made in the UK can continue to be taken into account in calculating the relief available under this provision.

4­–7-year CGT Exemption

S604A TCA

The relief will continue to be available in respect of UK situate land.

Reconstruction or Amalgamation: Transfer of assets

S615 TCA

 

 

 

Relief under s615 will continue to be available to companies resident in the UK post 31 December 2020.

Group definition

 

 

 

 

 

 

S616 TCA

 

 

 

 

 

Companies which are resident in the UK will generally continue to be regarded as being within a group of companies following the end of the transition period. Therefore, the provisions of S618 and S620 of TCA 1997 will continue to apply in the case of such companies. In addition, the amendment will ensure that an immediate tax charge under S625 of the Act will not arise solely as a result of the UK ceasing to be an EU Member State.

 

 

 

Value Added Tax (VAT)

Note: As the UK will no longer be a Member State, VAT on imports of goods to Ireland will generally apply. However certain changes are made in relation to Northern Ireland and other aspects of the VATCA (see below).

Goods and Northern Ireland

 

 

 

 

 

 

S2 amended, New S4A and New Sch 9 VATCA

 

 

S2 is amended and a new S4A and Schedule 9 is introduced. The changes are aimed at ensuring that VATCA 2010 is consistent with the Northern Ireland Protocol by including Northern Ireland in the definition of Member States and the European Union where those references relate to transactions in goods but not with regard to transactions in services. This means the definition of "Member State" and "Community" in a VAT context will differ depending on the nature of the transaction under consideration.

Postponed accounting for VAT

 

 

 

 

 

 

S53 amended, New S53A VATCA

 

 

 

 

Postponed accounting for VAT for all importers registered for VAT in Ireland is being introduced. As a result, the status quo for VAT registered businesses trading with the UK can potentially effectively be maintained. Therefore, import VAT need not necessarily become payable at the point of import of goods into Ireland from the UK (and other non-EU countries). The practicalities concerning the actual import declarations and the consequential reporting obligations on VAT returns are being considered at the moment.

Section 56 VAT Authorisations

S56 VATCA

Amendment to S56 makes participation in the scheme subject to a number of new conditions.

Retail Export Scheme

 

 

 

S58 VATCA

 

 

 

VAT Retail Export Scheme is to be restricted in two ways. The value of qualifying goods must exceed €75 for third-country residents in order to qualify for the Scheme. UK citizens must show proof that VAT and customs and excise duties have been paid on importation of the goods into the UK.

 

 

 

Stamp Duty

Tax measures where the Status Quo is maintained via 2020 Bill in following areas post 31 December 2020

Relief for Brokers

 

 

S75 SDCA

 

Relief will continue to be available for purchases made by UK-based intermediaries on behalf of their clients post 31 December 2020.

Counterparty Relief

 

S75A SDCA

 

Purchases in a chain of transactions by UK-based counterparties will continue to be capable of being eligible for this relief post 31 December 2020.

Reconstruction Relief

 

 

S80 SDCA

 

 

Reconstruction relief will continue to be capable of applying post 31 December 2020 where the reconstruction or amalgamation includes UK-incorporated companies merging with or acquiring Irish-incorporated companies.

Demutualisation of assurance companies

S80A SDCA

 

Instruments issued by acquiring companies incorporated in the UK will continue to be capable of being covered by this exemption post 31 December 2020.

Certain life assurance premiums

S124B SDCA

 

UK and Gibraltar-based assurers will be liable to the current 1% levy on life assurance premiums on their Irish business post 31 December 2020.

Certain non-life insurance premiums

S125 SDCA

 

UK and Gibraltar-based insurers will be liable to the current 3% levy on certain non-life insurance premiums on their Irish business post 31 December 2020.

 

 

 

Capital Acquisitions Tax

Tax measures where the Status Quo is maintained via 2020 Bill in following areas post 31 December 2020

Agricultural Property Relief

 

 

S89 CATCA

 

 

Agricultural property situated in the UK will continue to be taken into account in calculating the value of agricultural property owned by a farmer for the purposes of establishing entitlement to this relief.

 

 

 

Anti-Avoidance

Tax measures where the Status Quo is maintained via 2020 Bill in following areas post 31 December 2020

Transfer of assets abroad/Non-resident trusts/Gains of non-resident companies

S806/S579/S579A/S590 TCA

 

 

The “genuine economic activities” carve-out can continue to apply to these provisions.

 

 

 

 

 

 

 

 

Miscellaneous

Tax measures where Status Quo is maintained via 2020 Bill in following areas post 31 December 2020

Cross-Border Pension Schemes

S790B TCA

 

Irish pension schemes can continue to obtain tax exemption in respect of scheme income from contributions by a UK undertaking.

Tax measures where Status Quo is NOT maintained post 31 December 2020

Shipping Tonnage Tax

S697H, S697A TCA

Post 31 December 2020 UK-resident companies will no longer be considered a company resident in a Member State for the purposes of these provisions.

Life Assurance

S730D TCA

 

 

 

 

Currently, Irish life assurance companies selling directly into the UK market and with UKresident policyholders are permitted to avail of the tax documentation exemption under S730D(2A) for Irish exit tax purposes. Post 31 December 2020, Irish exit tax may be required to be operated. As a result, it may be necessary for exit tax refund claims to be made under the UK-Ireland Double Tax Agreement.

IREFs

 

Part 27 TCA

“Specified person” definition in S739K is not extended to include UK pension funds.

Payments to non-resident artistes

S529B TCA

 

Currently, S529B facilitates payments to UK resident artistes (as EU residents) free of withholding tax. Post 31 December 2020 S529B will not apply to UK resident artistes.

Relief for investment in films

S481 TCA

 

The definition of “producer company” will not include UK- resident companies post 31 December 2020.