Professional Services Withholding Tax

Interpretation

This article gives an overview of Professional Services Withholding Tax (PSWT) and outlines the changes in relation to the changeover to the calendar year of assessment.

Schedule 2, paragraph 28 FA 2001 amends section 520 TCA 1997 which is the interpretation section for PSWT.

PSWT deducted in a basis period for a tax year is available for set-off against the income tax chargeable for that tax year. The term “basis period” is defined in section 520 TCA 1997 as being, in general, the period on the profits or gains of which income tax for a tax year is finally computed. In the case of the commencement or cessation years of a business, or in cases where a business changes its accounting period, the basis periods for income tax purposes for two tax years can overlap or coincide or, indeed, a period may not form part of a basis period for any tax year. The definition of “basis period” provides rules to deal with such situations, the purpose of which is to ensure that each day in the life of a business on which a payment subject to PSWT is received is to be included in one, but only one, basis period for PSWT purposes.

In general, self-employed persons will be assessed for the short tax “year” 2001 on the basis of 74% of their profits for the 12 month period of account ending in the short “year”.

Those taxpayers who customarily make up annual accounts to a date in the period from 1 January to 5 April will not have a 12 month period of account ending in the short tax “year” 2001 as their normal 12 month period of account will end in the period from 1 January to 5 April 2002. Notwithstanding this, such taxpayers are to be assessed for the short tax “year” 2001 on the basis of 74% of the profits of the 12 month period of account ending in the period from 1 January to 5 April 2002. The same 12 month period of account will also be the basis period for the tax year 2002, albeit that for that year the taxpayer will be assessed on the basis of 100% of the profits of that 12 month period of account.

Under the definition of “basis period” in section 520 TCA 1997, where there is an overlap between, or a coincidence of, basis periods, the period common to both is regarded for the purposes of PSWT as being referable to the later tax year. On this basis taxpayers who prepare annual accounts to dates in the period from 1 January to 5 April 2002 would not get any credit for PSWT deducted in the period of account against income tax payable for the short tax “year” 2001, since all of the PSWT would be treated as being referable to the basis period for the tax year 2002.

Paragraph 28 amends section 520 TCA 1997 so as to provide a special rule to deal with such cases. In essence, where a 12 month period ending in the period from 1 January to 5 April 2002 is the basis period for both the short tax “year” 2001 and the tax year 2002, the 12 month period in question will be treated for PSWT purposes as the basis period for the short tax “year” 2001 only. This will ensure that the taxpayers concerned will get credit for PSWT deducted in that 12 month period against income tax payable for the short tax “year” 2001. The credit will not be deferred to the tax year 2002.

Paragraph 28 also rewrites the definition of “income tax month” in section 520 TCA 1997 - from 1 January 2002, an income tax month will be a calendar month.

Returns and collection

Schedule 2, Paragraph 29 FA 2001 fixes the return and payment deadline for PSWT as the 14th day of the month - this change will apply from 1 January 2002.

Interim refunds

Paragraph 30 amends section 527 TCA 1997 which deals with interim refunds of PSWT. A person carrying on an ongoing business may make a claim for an interim refund of PSWT referable to a basis period for a tax year if the profits of the immediately preceding basis period have been finalised and the tax for the tax year referable to that immediately preceding basis period has been paid. The amount of the interim refund is the excess of the total amount of PSWT deducted and vouched over the amount of the income tax liability for the tax year referable to the immediately preceding basis period, less any value-added tax, PAYE tax, and PRSI contributions due but unpaid.

The move to a calendar tax year involves a mismatch between the length of the short transition tax “year” 2001 (270 days from 6 April to 31 December 2001) and the length of previous and subsequent tax years (12 months).

In the case of claims for interim refunds of PSWT referable to a basis period for the short tax “year” 2001, paragraph 30 provides that the comparison for refund purposes will be with 74%, and not 100%, of the income tax liability for the tax year 2000/2001.

In the case of claims for interim refunds of PSWT referable to the basis period for the tax year 2002, for which year 100% of the profits of the basis period will be charged to income tax paragraph 30 provides that the comparison for refund purposes will be with 135% of the income tax liability for the short tax “year” 2001.