Finance (No. 2) Act 2008
Author:
Mary O'Brien
This is the concluding instalment in a two-part article on the Finance (No. 2) Act 2008.The first instalment, ‘Finance Act 2009’, appeared in Accountancy Ireland, December 2008. In the intervening period, the President signed the Bill into law before Christmas which results in the Act being part of the 2008 legislation.
The purpose of this second part is to deal with additional changes introduced to the budgetary measures, together with other legislative amendments not mentioned in the Budget.
Unlike previous years, the Committee Stage amendments introduced some worthwhile reliefs, including a new remittance basis, improvements to film relief and taxing gains arising from investments in high tech startup enterprises.
ADDITIONAL ANNOUNCEMENTS TO BUDGET MEASURES
Income levy
A levy of 1% will apply on income up to €100,100, with a levy of 2% arising on the next €150,020 and a 3% levy arising on the remainder. Tax deductible Maintenance Payments will be recognised as deductible for levy purposes.
Low income earners are excluded from paying the levy where income is €18,304 or less. There is also an age related exemption for persons aged over 65 who have gross income of less than €20,000 with a provision for double that limit for a married couple.
The income levy cannot be circumvented by basing preliminary tax on 100% of the prior year as there are specific provisions to ensure that preliminary tax payments in 2009 must include the income levy. The only respite from the income levy appears to take the form of gifts of salaries to the Minister of Finance.
Car Parking Levy
The Urban areas where the levy is to apply are specific areas of Cork, Dublin, Limerick, Galway and Waterford.
The levy, which is to be collected by the employer from the employee is contingent on the employee’s entitlement to use (as distinct from actual use) of a parking space.
However, actual entitlement to and use of the space for less than ten days a year does not bring an employee into the charge. There is also provision for an employee to disclaim the space, and bring himself or herself out of the charge. The levy may be treated by the employee neither as a deduction nor as a credit against other taxes.
Fixed penalties of €3,000, or 15 times the standard levy, are to apply where the employer gets it wrong.
Preferential Loans
The rates at which loans are treated as preferential are being reduced – from 5.5% to 5% for home loans; and from 13% to 12.5% for other loans. The Budget had included a measure to actually increase the 13% to 15%.
Research & Development
The enhancements and conditions to the R&D scheme can be summarised as follows:
Tax Credit for R&D (excluding buildings)
1. The base year for the purpose of calculating incremental expenditure is to remain as 2003.
2. The rate of the tax credit is increased from 20% to 25% of qualifying expenditure.
3. Any unused credit may be offset against any corporation tax of the preceding accounting period.
4. Any excess still remaining may be paid to the company by the Revenue in 3 instalments.
Tax Credit on Expenditure on Buildings
1. The rate of the tax credit increases from 20% to 25% of specified relevant expenditure. The full amount of the credit may now be claimed in the accounting period in which the relevant expenditure is incurred.
2. It is no longer necessary that building or structure be used wholly and exclusively for the carrying on of R&D activities by the company. At least 35% of the building must be used for R&D activities carried on by the company for a four-year period.
3. Any unused portion of the tax credit may be used in the same manner as outlined above.
4. The claw-back provisions are also amended.
The new provisions also include restrictions which take the form of a cap on amounts payable by Revenue to the greater of the corporation tax liability of the company for the 10 years prior to the period in which the expenditure was incurred, or the amount of PAYE, PRSI and levies, which the company is required to remit in the period in which the expenditure was incurred.
Electronic filing
There is a general extension to existing tax return and payment deadlines made using Revenue’s online services with effect from 1 January 2009.
Where ROS is used, the measures will extend the existing deadlines for corporation tax, relevant contracts tax, VAT and PAYE/PRSI to the 23rd of a month.
However, if the taxpayer does not pay and file by the 23rd day, then interest will run from the original due date (and not the 23rd).
e-Stamping
FA08 contained provisions to allow for the introduction of electronic stamping of instruments, by way of ministerial order. The No. 2 Act amends several technical sections of the Stamp Duties Consolidation Act 1999 in relation to e-stamping.
It is expected that the e-stamping system will be introduced in the second quarter of 2009 and that the user will be able to file, pay and receive an instant stamp without Revenue requiring sight of the deed.
Based on information currently available on e-Stamping, the taxpayer can still submit a paper tax return for
stamp duty purposes and a digital stamped certificate will issue.
FURTHER MEASURES NOT ANNOUNCED IN THE BUDGET
Tax and Duty Civil Penalties
Schedule 5 of the Finance (No.2) Act 2008 legislates for many of the features of the current Code of Practice for Revenue Auditors. The stated objective is to create a system of ‘appealable’ tax penalties to maintain compliance with the European Convention on Human Rights, but in some respects the legislation goes further and may have other consequences, unintended or otherwise.
In broad outline a taxpayer will have an opportunity to have a court examine whether they are liable to a civil penalty for tax default. Unless the taxpayer agrees to the penalty determination (as is frequently the case in settlements under the existing Code of Practice) the penalty will not be imposed unless a court has determined that such penalty is due.
The court involved will be the District Court, Circuit Court or High Court, but not the Appeal Commissioners. The Law Reform Commission had recommended that the Appeal Commissioners be the first port of call in appealing penalties, but this is not the case in the legislation.
This has two consequences. Appeal Commissioners’ hearings are private – held in camera. The manner of hearings as proposed is not. Secondly, the whole disclosure structure has become more tightly defined to facilitate the new appeals process. This is not of itself a bad thing, but tighter definitions should not imply broader definitions. For example, if a penalty is to be appealable, the circumstances in which the disclosure is made must also be appealable and defined in law.
The definition of ‘Qualifying Disclosure’ was amended at Committee Stage, with a result now closer to what is generally understood as covered in a Qualifying Disclosure under the Audit Code of Practice, i.e. all deliberate default, plus other tax default not being deliberate default for the taxable period under review. Qualifying Disclosures cannot be made where the Revenue are already on the case. The legislative wording would seem to suggest a definite action is required on Revenue’s part against a specific taxpayer, rather than perhaps a mere request for supporting documentation etc.
As a whole, the nature and scope of the Committee Stage changes illustrated how disruptive the new appealable penalties regime is to the established approaches under the existing Code of Practice.
It is clear that the existing Code of Practice for Revenue Auditors will have to be substantially revised to coexist with the new legislation. ICAI, through CCAB-I will be involved in that process, and we will keep members briefed on it.
Remittance Basis
The Remittance Basis has been reintroduced. The provisions have a familiar ring, in that they codify the pre 2006 remittance basis approach, but there are significant terms and conditions. Notably also, the relief will be given by way of refund.
The individual must be Irish resident for a period of at least 3 years, though the refund can apparently be claimed annually from the commencement of the residency period. Revenue can claim back tax repaid if this 3 year rule is subsequently breached.
The individual must be resident but not domiciled in Ireland. Prior to arriving in Ireland (and this is a significant difference) he or she must have been resident outside the European Economic Area (EEA), but in a Double Tax Agreement (DTA) country. They must be employed by a company established outside the EEA, but in a DTA country and paid from abroad.
At the end of every tax year the individual can opt to be taxed on the greater of their remittances and €100k plus 50% of any further emoluments. An executive earning €150,000 but who remitted €100,000 would therefore be taxed on €125,000, rather than on €150,000. The Minister has confirmed that the repayment will not include the income levy.
Residence Rule
The ‘present in the State’ test within TCA97 s819 is amended. Before this change, an individual was deemed to be present in the State for a day if the individual was present in the State at the end of the day, namely at midnight.
Now an individual will be deemed to be present in the State for a day if the individual is present in the State at any time during that day. The change takes effect from 1 January 2009. A technical amendment clarifies that the new rule governing what constitutes a day for the residence test will only take effect for years of assessment after 2008.
Film Relief
Important changes increase the allowable percentage of a film investment from 80% to 100% and the allowable amount from €31,750 to €50,000.
New Incentive to invest in High Tech ventures
This amendment introduced a new relief whereby specific profits from certain investments are treated as chargeable gains and taxable at the reduced rate of 15% (for partnerships) or 12.5% (for companies).
The purpose of the relief is to encourage investment in research, development or innovation. R&D activities take the meaning from the R&D credit provisions. Innovation means development of new technological, telecommunication, scientific or business processes.
Restricted and Forfeitable Shares
The income tax charged on restricted shares is on the market value of the shares (without taking account of the restriction on the shares) as reduced by a certain percentage which depends on the period of restriction – 10% for 1 year; 20% for 2 years, … up to 60% for more than 5 years. If the restriction is removed, then there will be a clawback in the income tax reduction in proportion to the restricted time period remaining. Restricted shares, as the name suggests, refer to shares where there is some sort of restriction on the freedom of the shareholder to dispose of the shares for at least one year.
In the case of forfeitable shares, the full charge to income tax must be paid, i.e. taking into account the market value of the shares, at the time of acquisition. Where the shares are subsequently forfeited, there is provision for the repayment of the income tax paid. The director / employee has 4 years from the end of the year of assessment in which the forfeiture took place to make a claim.
Know-How
This section replaces TCA97 s768(3) which had been introduced by the first Finance Act of 2008. That Act had introduced anti-avoidance provisions, including Subsection 3 which had provided for the nondeductibility of expenditure on knowhow where a trade had been acquired, but the know-how in that trade had been acquired by a person connected with the person who acquired the trade.
The new Subsection 3 further tightens the availability of know-how in a variety of connected party transactions.
VAT on Company Cars
The Committee Stage Amendments introduced a partial input credit for VAT on company cars. The amount of input credit available is 20% of the VAT charged. The credit is in respect of purchase, hiring, intra-Community acquisition or importation of a qualifying vehicle. The car must have been first registered after 1 January 2009 and meet specific emissions standards. The car must be used primarily for business purposes, i.e. at least 60% of the use.
There will be a clawback of the VAT claimed if the car is disposed within 2 years or if it ceases to meet the 60% test.
Resting in Contract
The old SDCA99 s110 has been repealed and replaced with something almost identical, with some exceptions for Public Private Partnerships and certain specified incentive schemes. The Minister for Finance has stated that :
The section is subject to a Commencement order being made and it is my intention to commence the provisions early next year.
Mary O’Brien, ACA is Senior Manager at the Taxation Department of the Institute of Chartered Accountants in Ireland.