A Harvest Barrel of Tax Developments
Author:
Gerald Murphy
Autumn starts the tax ball rolling again. Practitioners are involved with returns and payments while long term issues get an airing ahead of the December budget. The Tax Administration Liaison Committee (TALC) recommences after the summer break; it is as if we were never away. So while we may be loaded and perhaps blessed with the burden of the fruit of tax legislation, this is just a dip into the harvest barrel
TAX BRIEFING 60
Revenue published Tax Briefing 60, putting it into a new setting as well as presenting readers with an opportunity to comment on the content though with no guarantee of access to the actual writer of any one article.
The following points were of immediate interest and were put to Revenue by the Institute of Chartered Accountants in Ireland (ICAI) though, at the time of writing, further clarification was awaited.
Funds in Life Assurance products
1. Notices of intention to disclose
During the voluntary disclosure phase, 10,000 notices of intention to disclose were received by Revenue. Clearly this included cases where there was no actual liability. In cases where there had been no follow up disclosure, Revenue asked the taxpayer/agent to send a follow up letter of clarification ‘to avoid unnecessary contact from Revenue’.
Was this a guarantee that Revenue would accept a simple statement that there was no liability to tax? That seems unlikely so the Revenue might usefully have given some guidance for the content of the follow up so as to avoid that unnecessary contact?
2. Acknowledgement letters.
It was of course important that such letters issued as soon as possible so as to reassure agents and their clients that matters were being dealt with. However, a major issue was when and whether the Revenue would make further enquiries after that date. Indeed, would there be any kind of clearance at some stage so that clients and agents would know that a case was settled. What we needed was some kind of default time limit for the Revenue to raise enquiries. These were issues from previous investigations so it was disappointing to revisit them.
Other matters
3 Tax treatment of legal fees (page 4)
Tax Briefing set out conditions applying whereby payment of legal costs by an employer in the case of breaches of employment would escape Schedule E liability. These are slightly different to those pertaining in the case of loss of office [Tax Briefing 51]]. But the Briefing did not clarify whether the later conditions applied both to ‘loss of office cases’ and ‘breach of employments case’.
4. Industrial and commercial buildings - qualifying expenditure own construction.
Revenue stated that allowable expenditure for capital allowances does not include any costs attributable to own labour. This seems to imply that Revenue believe one may deduct capitalised labour costs within the Case 1 computation otherwise there is no tax relief / deduction for capitalised labour costs either in Case 1 or within capital allowances.
Confusingly, the Briefing dealt with VAT treatment in certain cases and provided that "where a person who is not registered for VAT carries out the work themselves … the allowable construction costs will include VAT."
While own labour costs should not attract VAT, it does seem strange that some self incurred costs are available for capital allowances while others
are not.
5. Rent pooling.
Briefing registered a concern of Revenue that certain residential developments were being marketed on a rent pooling basis.
This provided for the pooling of all income and expenses in a development and the allocation of the net rents to the investors in the proportion in which they owned the development. While Revenue have accepted a limited form of rent pooling in relation to the Student Accommodation Scheme, section 97 specifically overruled its application for tax purposes. The difficulty seem to relate to expenses which are specific to a particular house though why this should be so is not clear.
What is just as interesting is the position of section 101 where relief is given for amounts not received where the item is to be taken into account in computing the profits. Is a net amount out of the pool, which has not been received by an investor, an amount which is to be taken into account in the computation or is section 101 concerned with failure to receive gross figures.
6 Examiners
While Tax Briefing 60 does give a genuflection to the principle that the facts of a particular case should prevail, it is difficult, given the nature of the services provided by examiners to see the justification for Revenue's view that Schedule E rather than Schedule D is the default basis.
Briefing refers to exam setters, correctors invigilators, and unidentified et ceteras engaged by the State sector, private colleges or associations. But we should perhaps not be surprised that Revenue should automatically plump for what is for them the easier option. The surprise is that a number of enquiries were made to Revenue. What other answer was Revenue likely to give?
BENEFITS TO DIRECTORS AND SHAREHOLDERS
An interesting UK Special Commissioner has been reported. Special Commissioner decisions are not precedents of course either in the UK or here but may be indicative of trends. Hopefully, this one will soon be overturned at High Court level.
It concerned advice sought by a company in connection with a potential dispute that might involve a majority and a minority shareholder in a company, the majority shareholder also being the managing director, while the minority shareholder was an executive.
Doubtless there were several approaches that might have been recommended, but in this case, the lawyers suggested that the majority shareholder make an offer for the minority shares. The cost of this professional advice was borne by
the company.
Apart from that advice, there were also connected legal actions carrying other legal costs.
Focussing for the moment on the professional advice, UK Revenue took the view that this was a benefit to the majority shareholder and BIK was assessed under Schedule E
Whether or not it was the company that bought back the shares or the managing director who did so, there was a clear benefit to the company in losing a dissident shareholder. There was a clear benefit also to the majority shareholder from such an event since the loss of a dissident may be expected to improve the overall value of the shares held in the company.
But, if the logic of Revenue's approach is followed through, almost any advice sought by a company can benefit its commercial activities and thus potentially flow through to the shares in the company.
The benefit in kind under section 118 is not related specifically to the value of the shares of course. It basically comprises the amount of the expense incurred by the company and not made good by the director/employee
But if the majority shareholder benefited from the proposal to acquire the shares of the dissident, the dissident in turn of course may have had a benefit from proposal enabling her to dispose of shares at value and liquidate assets in a family company
If there were a BIK assessment raised on the dissident as well, whether under Schedule E or Schedule F, what would be the measure of it? Could the same benefit be taxed twice. These questions were not attended to.
It is to say the least a messy case and one crying out to be overturned.
RETROSPECTIVE LEGISLATION
More to our taste, in theory, is the ECJ decision in the Goed Wonen case. In brief this was a case in the Netherlands dealing with VAT. It centred on the frequent practice of governments, a practice we are all too familiar with, to announce that anti-avoidance legislation will be made effective from a certain date but not to publish the detail until some time after.
However, a taxpayer is entitled to a reasonable and legitimate expectation of the legal basis on which business operations may proceed; there should legal certainty.
Whether Irish so-called ‘retrospective legislation’ meets the ECJ principle remains to be seen. The taxpayer may still have difficulties in claiming the appropriate tax break.
CLIENTS FUNDS
Cahill v O' Driscoll
The case involved the rate of income tax applicable to interest earned on clients' funds deposited by the respondents in the course of their practice as solicitors.
This case was concerned with interest earned arising from a general client deposit account with significant cash flows from many clients.
The Appeal Commissioner took the view that the interest was taxable at the standard rate in accordance with the provisions of what is now s.15 of the Taxes Consolidation Act, 1997.
The Appeals Commissioner accepted the contention of the solicitors that they held their clients' monies in trust and were acting in a fiduciary capacity and so should be taxed only at standard rate
Not so, argued Mr. McBratney S.C., on behalf of Revenue. No such fiduciary relationship existed because such relationship was set at nought as a consequence of the Solicitors Professional Practice, Conduct and Discipline Regulations, 1986 (Statutory Instruments 405 of 1986). These regulations seek to control and to direct the manner in which certain client funds are handled by members of the solicitors profession
The effect of Regulation 5(2) argued Counsel is that solicitors need not account for any interest less than £50. Removing that obligation effectively destroys any notion of a fiduciary relationship. You cannot be a trustee if you do not have to account.
However, and this is the real point of the case, it does not, said the judge, disturb the client's ownership of the monies. Nor does it abrogate the solicitor's stewardship thereof. It is and remains the law that client's funds held by solicitors in the circumstances that arise here remain the property of the client.
It was found therefore that the interest should only be taxed at standard rate.
HELPFUL EXPLANATIONS
UK Revenue publishes on its web site a glossary to assist taxpayers who may not understand certain terms used by Revenue.
One of these terms consists of the initials ‘DEB’.
This is defined as Denatured Ethanol B - 999 parts by volume of spirits (of a strength not less than 85% by volume) and 1 part by volume of Tertiary Butyl Alcohol. Bitrex is added to resulting mixture in the proportion of 10 microgrammes per millilitre. Now you know.