Revenue Note for Guidance

644AA Treatment of losses from dealing in residential development land

Summary

This section sets out special rules for the treatment of certain trading losses arising from a trade of dealing in residential development land where, if profits had been earned, the profits would have qualified for the 20% incentive rate of income tax under section 644A.

Under normal income tax rules, a loss sustained in a trade may be set sideways against the person’s other income in the year in which the loss arises, or may be carried forward for set-off against the income from the trade in subsequent tax years. In the case of losses sustained in a trade of dealing in residential development land, this could lead to a mismatch, in that such losses (sustained in a trade in which if profits had been made they would have been taxed at 20%) could be set against the person’s other income taxable at the higher rate of tax. This section provides that such losses must first be converted into a tax credit, valued at 20% of the loss, and then allows the tax credit to be set sideways in the year the loss is sustained against tax payable on the person’s other income. Any unused part of the tax credit may be carried forward and set-off against tax payable on the income from the trade in subsequent years. Where dealing in residential development land is part of a larger trade, any carried forward tax credit may be set against tax on the income from the larger trade.

As respects a claim for the sideways set-off of losses arising in a trade of dealing in residential development land against a property developer’s other income, the special rules apply where such a claim has not been made to and received by Revenue before 7 April 2009. As respects the carry forward of such losses within the trade, the special rules apply unless the carry forward claim by the property developer is made to and received by Revenue before that date. For the purposes of these rules, where a trade comprises partly of dealing in residential development land and partly of other activities the new section requires each part to be treated as a separate trade.

Finally, where a claim for terminal loss relief (i.e. on the permanent cessation of a trade) has not been made to and received by Revenue before 7 April 2009, the special rules restrict the relief so that any part of the terminal loss that relates to a loss sustained, before 1 January 2009, in a trade of dealing in residential development land is “ring-fenced” and can only be set against income arising in that trade, or in that part of a trade, in prior years.

Details

Definitions

(1) Certain terms used in the section are defined. While these are largely self-explanatory, the definition of the term “specified trade” should be noted. Specified trade is defined as a trade in its own right, or part of a combined trade, the income (if any) of which was taxable at the 20% incentive rate in the tax years before 2009. In essence, this means a trade, or part of a trade, consisting of dealing in residential development land. The definition specifically excludes, however, situations where a taxpayer elected to be taxed under the normal income tax rules (which he could do by making an election under section 644A(5)) and not under the special 20% incentive rate provided for by section 644A(3). The purpose of the definition is to allow the identification of losses arising in a trade of dealing in residential development land so that they can be treated in the fashion set out in the section.

Other definitions to note are “adjusted income” and “adjusted profits or gains”. These terms are used in the formula for attributing part of the tax payable on a person’s total income from all sources to the profits or gains from a trade carried out by that person (see material on subsection (7)(a) following).

(2) Where there is a combined trade, the part of the trade that involves dealing in residential development land (i.e. the specified trade) and the part of the trade involving other activities (i.e. the non-specified trade) are each to be treated as separate trades. Where such is the case, an apportionment must be made of sales, expenses etc between the two parts of the trade, on a just and reasonable basis.

Relief to be granted by converting loss into tax credit

(3) & (4) Where a claim is made by a person under section 381 in respect of a loss which is, or includes, a relevant loss (defined as a loss, or part of a loss, arising in a specified trade) then if the claim is not made to and received by Revenue before 7 April 2009, the normal rules of section 381(1) – which allows the loss to be set-off sideways against the person’s other income in the tax year in which the loss is sustained – do not apply. Instead, relief is to be granted by converting the loss into a tax credit and setting the tax credit sideways in the year the loss is sustained against tax payable on the person’s other income.

(4)(a) Essentially the relief is to be granted by reducing the amount of tax that would otherwise be payable by the person by the tax credit equivalent of the relevant loss, or, where appropriate, by making a repayment of tax, sufficient to ensure that the final tax borne by the person is no greater than it would have been if the tax which would otherwise have been borne by that person (i.e. “the interim amount of tax payable”), had been reduced by the tax credit equivalent of the loss.

(4)(b) The “interim amount of tax payable” means the tax that would otherwise have been borne by that person following any reduction in the person’s income as a result of the sideways set-off of other losses to which the person is entitled in accordance with section 381 – this could be the part of any loss arising on the non-specified part of a combined trade or losses from another trade of that person, in respect of which the old rules will continue to apply.

(5) The tax credit equivalent of the relevant loss is determined by way of a formula. Basically the tax credit is the amount of the relevant loss multiplied by the incentive rate of tax (20%) which would have applied to the profits or gains of the specified trade had such profits or gains been made. So if the relevant loss was €100, the equivalent tax credit is €100 x 20% = €20.

Carry forward of unused tax credit

(6)(a) If relief cannot be fully given for the relevant loss via the tax credit in the year in which the loss is sustained, due to the fact that the tax that would otherwise have been payable by the person is less than the amount of the tax credit, the unused tax credit (the “excess tax credit”) may be carried forward and used against tax payable on the profits or gains of the overall combined trade in any subsequent tax year.

(6)(b) Relief for any carried forward tax credit is to be given, as far as possible, from the tax payable on income from the combined trade in the first subsequent tax year and so on.

Tax attributable to income from the trade

(7)(a) As tax is charged on a person’s total taxable income and not separately on individual sources of income, some mechanism is required to attribute part of the overall tax payable by the person in a subsequent year to the income from the trade of dealing in residential development land for that year. The section provides a formula for determining this. The intention of the formula is to attribute to the income from the trade a portion of the overall tax payable by the person which is in the same proportion as the income from the trade bears to the person’s total income, but only where the trading income actually contributed to the overall amount of tax payable by the person on his or her total income in the first place.

The numerator in the fraction in the formula is the “adjusted profits or gains” from the trade – that is, the amount, if any, of the profits or gains after taking into account any allowance, charge, deduction or loss (for example, capital allowances) specific to the trade. Similarly, the denominator is the person’s “adjusted income” – that is, the person’s income from all sources, after taking into account any allowance, charge, deduction or loss specific to each income source. The definition of “adjusted income” makes clear, however, that it does not take into account any general allowances, charges or deductions available against all of the person’s income sources. To do so, could give rise to an over attribution of tax payable to income from the trade.

(7)(b) Where the carry forward of the excess tax credit is to a tax year before the tax year 2009 (i.e. to a tax year when the special incentive rate of 20% applied to profits or gains from a trade of dealing in residential development land) any excess tax credit is to be offset-

firstly, against any tax actually paid at the 20% rate on profits or gains of the specified trade in that tax year, and
only then against the tax payable on the non-specified trade as calculated by the formula in subsection (7)(a) except for altering the definition of “C” in the formula to allow for the apportionment of tax to be between the profits or gains on the non-specified trade and other income (as opposed to the profits or gains on the trade as a whole and other income).

Treatment of loss carried forward

(8)(a) Where a claim is made to carry forward a relevant trading loss or part of such a loss sustained in a tax year prior to 2009 (other than a loss where the claim for the sideways set off of the loss is not made to and received by Revenue before 7 April 2009 which is already dealt with in the earlier part of the section) then, unless the claim for the carry forward is made to and received by Revenue before 7 April 2009, new rules apply which require the carried forward loss to be converted to a tax credit. The purpose is to bring within the new rules, claims for the carry forward of unused losses, notwithstanding, for example, that any associated sideways set-off claim was made to and received by Revenue before 7 April 2009, once the carry forward claim itself is made after that date.

(8)(b) The tax credit equivalent of the carried forward relevant loss is to be determined by way of a formula. Basically the tax credit is the amount of the relevant loss, or the part of the relevant loss, carried forward multiplied by the incentive rate of tax which would have applied to the profits or gains of the specified trade had such profits or gains been made. So if the carried forward relevant loss was €100, then the equivalent tax credit is €100 x 20% = €20.

(8)(c) The amount of the tax credit in these circumstances is to be treated as if it was an excess tax credit under subsection (6)(a) – this ensures that the provisions of subsections (6) and (7)(b) will apply to such an excess tax credit.

Terminal loss relief

(9)(a) Where a claim for relief in respect of a terminal loss (i.e. where a trade ceases permanently) under section 385 is made in respect of a combined trade and the claim is not made to and received by Revenue before 7 April 2009, subsection (1) of that section (which allows the terminal loss to be set against the profits or gains from the trade in the three tax years preceding the tax year in which the permanent cessation of the trade takes place) will apply to so much of the terminal loss as is attributable to the period before 1 January 2009 as if the specified and non-specified parts of the combined trades were two separate trades. In essence, this means that any part of the terminal loss that relates to a loss sustained, before 1 January 2009, in a trade of dealing in residential development land is “ring-fenced” and can only be set against income arising in that trade, or in that part of a trade, in prior years. The companion provisions to section 385 (i.e. sections 386 to 389) will apply accordingly. These provisions deal, inter alia, with how to calculate the terminal loss and how to calculate the amount of profits and gains from a trade in prior years against which the terminal loss relief may be claimed.

(9)(b) Where in order to give effect to subsection (9)(a) an apportionment of sales, expenses etc is required, it shall be done on a just and reasonable basis.

Relevant Date: Finance Act 2021