A new Vacant Homes Tax (VHT) was introduced in Budget 2023. The primary objective of this is to increase the availability of housing, but landlords need to be aware of the restrictions on allowable pre-letting expenses when calculating their rental profits.
Vacant Homes Tax (VHT)
VHT applies to residential properties which have been occupied for less than 30 days in a chargeable period.
VHT is calculated at three times the residential property’s local property tax (LPT) liability.
The following will be exempt from the VHT:
Properties recently sold or listed for sale or rent.
Properties vacant due to illness or long-term care of the occupier.
Properties which were the principal residence of a deceased chargeable person in either the chargeable period or in the 12-month period prior to the commencement of the chargeable period.
Properties which were the principal residence of a deceased chargeable person where a grant to administer the estate issues in the chargeable period and for any chargeable period following such a grant, where the administration of the estate has not yet completed.
Properties which are vacant due to significant refurbishment work.
The first chargeable period runs from 1 November 2022 to 31 October 2023.
A VHT return will be due by 7 November 2023, with the tax payable by 1 January 2024.
Pre-Letting Expenses
In determining the taxable rental profits from the letting of residential property, a landlord may claim a deduction for the following expenses:
Costs not repaid by tenant – e.g., light & heat costs.
Capital allowances on qualifying capital items – e.g., furniture, white goods.
However, with the exception of property-related fees such as letting or legal fees incurred on the first letting, a deduction is not permitted for expenses incurred prior to the first letting of the property.
The Finance Act 2017 sought to address the above and introduced an allowable deduction of up to €5,000 for certain pre-letting expenses incurred on vacant residential properties. From 1 January 2023, this cap on the authorised deduction has been increased to €10,000 and the specified period for which the property was vacant has been reduced from twelve to six months. The landlord must incur the expenditure during the twelve months prior to first letting the property.
If the landlord ceases to let the property within four years, the deduction for the pre-letting expenses will be clawed back in the year in which the property ceases to be let as a residential property. Importantly, a clawback will be triggered if there is a change of use from residential or if the property is sold.
If you need any assistance with VHT or Pre-Letting Expenses, please contact Niall Grant, Partner in our Tax Services’ Department.
Budget 2023 saw the introduction of a new Rent Tax Credit which is available from 2022 to 2025.
The credit is 20% of the rent paid in a year, up to a maximum credit of either €500 for an individual or €1,000 for a couple, for:
A person’s principal private residence (i.e. sole place of residence).
A person’s ‘second home’ which they use to facilitate their attendance at their employment, office holding, trade, profession or a Revenue approved college course.
A property used by a child to facilitate their attendance at a Revenue approved college course.
Qualifying rents are any amounts paid in return for the use, enjoyment and special possession of the property but does not include payments made for security deposits, repairs or maintenance or any other services such as board, laundry, etc.
The main conditions of the relief are as follows:
The property must be a residential property located in Ireland.
The payment must have been made under a tenancy. Tenancy for rent tax credit purposes must fall under one of the following categories:
An agreement or lease which is required to be registered with the Residential Tenancy Board (RTB).
A licence for use of a room(s) in another person’s principal private residence. These arrangements are commonly known as “rent-a-room” or “digs”. (No RTB registration is required under these licences).
A tenancy for 50 years or more.
Tenancies under “rent to buy” arrangements.
The landlord and the individual making the claim cannot be parent and child. If they are otherwise related the credit may be available as long as the RTB registrations have been complied by. Therefore, the credit is NOT available where the tenancy is under different arrangements such as “digs” or “rent-a-room”.
The individual must not be a supported tenant (in receipt of any State housing supports such as HAP or RAS).
The landlord must not be a Housing Association or Approved Housing Body.
You can claim the Rent Tax Credit for rent paid during 2022 by submitting a 2022 Income Tax Return to Revenue. For 2023 and subsequent years the claim can also be made in-year using Revenue’s Real-Time Credit Facility.
If you are not registered for self-assessment, you can submit your Income Tax Return via Revenues’ MyAccount. By selecting “Review your Tax 2022” and requesting a “Statement of Liability”, you can input the information under the “Tax Credits & Reliefs” page.
The Real Time Credit Facility for 2023 and subsequent years enables you to claim the Rent tax credits in during the year. To claim the credit you must select “Manage your Tax 2023” and “Add new credits”, there it will give you the option to add the “Rent tax credit” and input the relevant information. Once the claim has been processed by Revenue, an amended Tax Credit Certificate is issued, and an amended Revenue Payroll Notification will be made to your employer.
For further information about the Rent Tax Credit, please contact us.
As remote working becomes more popular, employees are no longer obliged to work at their employer’s premises or indeed in the same country as the employer’s premises. This presents a number of opportunities and challenges for employers.
In the second of this global mobility series, we focus on the payroll tax compliance obligations for foreign employers with employees working in Ireland under a foreign contract of employment (inbound workers).
This can occur where:
an employee relocates to Ireland, or
an employer sends an employee to Ireland for a short period to fulfil part of a contract e.g. as part of a construction or installation project.
The basic rule is that all foreign employers must register as an employer in Ireland and operate Irish payroll taxes on any salary attributable to employment duties carried out in Ireland by their employee. This applies even if the employer has no business premises in Ireland or the employee is working from home in Ireland. It applies irrespective of the tax residence status of the employee.
There are a number of exceptions to this rule, which come as a welcome release for foreign employers:
Business visits of up to 30 workdays in a year
A foreign employer need not operate Irish payroll taxes on the salary of an employee who is employed under a foreign contract of employment and carries out the duties of that employment in Ireland for no more than 30 workdays in aggregate in any year.If the employee exceeds the 30 workday threshold and an obligation to operate Irish payroll taxes exists, the employer must operate Irish payroll taxes from the employee’s first workday in Ireland.
Business visits greater than 30 workdays and not more than 60 workdays per year
A foreign employer can rely on this exception where an employee who is employed under a foreign contract of employment visits Ireland and is a resident of a country with which Ireland has a Double Taxation Agreement. In addition, the Double Taxation Agreement between Ireland and the employee’s country of residence must relieve the employment income from the charge to Irish tax. Not all Double Taxation Agreements are the same and foreign employers wishing to rely on this exception should examine the wording of the relevant Agreement carefully to establish if their employee’s employment income is relieved from the charge to Irish tax.Where the employment income of the employee is not relieved from the charge to Irish tax under the Double Taxation Agreement or where the workdays in Ireland exceed 60 and there is no PAYE dispensation in place, the employer must operate Irish payroll taxes from the employee’s first workday in Ireland.
Business visits greater than 60 workdays and not more than 183 days per year
The conditions for this exception are the same as those for business visits between 30 and 60 workdays. However in addition, a foreign employer must apply to the Irish Revenue authorities for a dispensation from the requirement to operate Irish payroll taxes on the employee’s salary. There are a number of conditions to be satisfied before the Revenue authorities will grant a foreign employer the dispensation:
(i) The foreign employer must register as an employer in Ireland;
(ii) The foreign employer must apply in writing to Irish Revenue for the dispensation giving the employer’s full name, its address, its Irish employer’s registration number and confirmation that the relevant Double Taxation Agreement relieves the employment income from the charge to Irish tax.
The application for a dispensation must be made within 30 days of the foreign employee starting to carry out their employment duties in Ireland. An application can cover more than one employee but a new application must be made each year.
Where an application for a dispensation is not sought within 30 days of the employee taking up duties in Ireland, Irish payroll taxes must be operated on any salary paid to the foreign employee from the date the employee takes up duties in Ireland.
If Revenue refuse to grant a dispensation, Irish payroll taxes should be operated on salary in respect of all workdays spent in Ireland in the year.
This article has dealt with the Irish payroll tax compliance obligations for foreign employers with an employee who is engaged under a foreign contract of employment working in Ireland. Where a foreign employer must operate Irish payroll taxes on an employee’s salary, Irish social security contributions (PRSI) are also due unless there is a valid certificate of coverage or exemption in place.
In addition, depending on the number of employees that the employer has in Ireland and the type of duties they carry out, the presence of an employee in Ireland may create a “permanent establishment” of the employer in Ireland. If an employer has a branch or permanent establishment in Ireland, it may be obliged to pay Irish corporation tax on the profits of that branch. For employers in the construction sector, there could be a requirement to register for Value-Added Tax and or relevant contracts tax (RCT).
For more information, please contact Siobhán O’Hea, Partner in our Tax Services’ Department.
https://www.crowleysdfk.ie/wp-content/uploads/shutterstock_183862550-scaled.jpg25602560Alison Bourkehttps://www.crowleysdfk.ie/wp-content/uploads/crowleysdf-chartered-accountants-1.pngAlison Bourke2023-01-18 11:33:002023-01-18 11:33:00Guide to Global Mobility – Managing Tax Obligations of Inbound Workers
Tax-payers who pay third level fees on their own behalf or on behalf of another person will be happy to know that they can claim tax relief.
Tax relief at the standard rate is available in respect of certain third-level tuition fees paid to approved colleges. Revenue publishes a list each year of both private and public colleges approved for tax relief. The relief is given by way of a tax credit equal to the fees paid multiplied by 20% (the standard rate of tax). A credit for third level fees cannot result in an income tax refund.
What is an Approved College?
Revenue have provided guidance on what constitutes an approved college. This is a college or higher education institute in the state which provides approved courses (definition below) or an institute in the UK or another EU Member state which is maintained by recurrent grants from public funds of any EU Member State. The college in either the Irish State, the UK or in an EU Member State must be a duly accredited university or institution of that country.
What is an Approved Course?
Revenue have also provided guidance on what constitutes an approved college course. A full-time or part-time undergraduate course must be at least two academic years. A postgraduate course leading to a postgraduate award based on a thesis or on the results of an examination or both, which is between one to four years and requires the student to have a prior degree or an equivalent qualification.
Who can claim & how much can be claimed?
An individual can only claim the relief if they themselves incurred the cost of the fees. Relief is calculated on aggregated fees paid subject to a maximum of €7,000 per person, per course, per academic year where the first €3,000 (full-time) or €1,500 (part-time) is deducted. The general effect of this is that claimants who are claiming for more than one student will get full tax relief for 2nd and subsequent children in their claim.
Relief does not extend to payments such as registration fees, administration fees or student accommodation.
If in receipt of any grant or payment towards the fees, this must be deducted from the claim being made when claiming the relief.
How to claim tuition fees?
There is no specific form required to claim relief for tuition fees paid for third level education courses. An individual can use PAYE services in myAccount to apply for relief for tuition fees by completing the Form 12 or if income tax registered can claim this through their yearly tax return.
Should you require any further information or assistance in claiming the tax relief, please contact us.
In July 2022, the Protected Disclosures (Amendment) Act 2022 was signed into Irish law. This Act gives effect to an EU Directive regarding the protection of whistleblowers and serves to amend and extend the Protected Disclosures Act 2014. This Act has made several substantial changes to the laws relating to whistleblowing in Ireland, generally expanding both the protections available to whistleblowers and the responsibilities imposed on companies regarding whistleblowing.
New Definitions of Protected Disclosures
The Amendment Act significantly expands the range of activities or acts of wrongdoing which are relevant to the purposes of the act. Whereas the 2014 Act describes a set of practices which may be relevant, the Amendment Act provides a broad list of areas in which, should an individual consider wrongdoing to be occurring, a Protected Disclosure may be made.
The Amendment Act has also clarified and expanded the types of individuals who can claim its protections when making a Protected Disclosure. The 2014 Act provides a definition of the types of “workers” who can claim the Act’s protections; the Amendment Act expands this definition both by adding new types of workers and also by clarifying that the information subject to a Protected Disclosure need only to have come to light in a “work-related” context.
Protections when making a Protected Disclosure
Under the Amendment Act, the range of protections available to individuals making a Protected Disclosure has also expanded. In particular, the Amendment Act has made extensive changes to the laws relating to any penalties an individual who has made a Protected Disclosure may have suffered. The 2014 Act provided a range of activities which it considered to be unfair penalisations of individuals who have made a Protected Disclosure; the Amendment Act has increased this list of penalties to include acts such as the withholding of training, negative performance assessment, harm to the individual’s reputation, and others.
Significantly, the Amendment Act also places the burden of proof on employers to prove that, should an individual who has made a Protected Disclosure suffer any of these penalties, that the penalty has no connection to the Protected Disclosure.
Requirements of Organisations under the Amendment Act
Under the Amendment Act, any organisation with 50 or more employees is obliged to develop internal reporting channels and procedures to facilitate whistleblowing for their staff. These obligations extend to private section organisations. A provision in the Amendment Act states that, for employers of between 50 and 249 employees, all obligations under the Act will not come into effect until December 2023.
The Amendment Act provides specifications regarding how these reporting channels should operate. These specifications are quite extensive and include timeframes for responding to Protected Disclosures, the appointment of an appropriate individual to investigate the Disclosure, provision of clear information to staff regarding the operation of these channels, as well as effort to ensure the confidentiality of individuals who make Protected Disclosures.
https://www.crowleysdfk.ie/wp-content/uploads/shutterstock_566736079-scaled.jpg17072560Alison Bourkehttps://www.crowleysdfk.ie/wp-content/uploads/crowleysdf-chartered-accountants-1.pngAlison Bourke2022-09-05 08:32:342024-01-24 15:16:09Everything You Need To Know About The Protected Disclosures (Amendment) Act 2022
Our previous article on RCT and VAT pitfalls for non-resident contractors provided a general overview of the RCT regime in Ireland. We will now look at a case study analysis of RCT and VAT treatment and explore scenarios in which we have observed mistakes commonly being made among taxpayers.
1. Supply of Labour for Relevant Operations
We have observed cases whereby contractors in the construction industry, particularly non-resident contractors, engage recruitment firms to supply labour to carry out construction operations on a site in Ireland.
While it is commonly interpreted that RCT only applies to construction operations, in fact the definition of “relevant operations” extends to both the carrying out of and the supply of labour for the performance of, relevant operations in the construction industry.
Case Study – Example 1
Company A (based in Spain) is engaged by Company B (based in Ireland) to carry out demolition works on a number of properties in Ireland. Company A, in turn, engages Company C (a recruitment firm based in the UK) to provide the personnel required to complete the demolition works in Ireland.
RCT Obligations
Company B is a Principal Contractor in respect of these works and is required to operate RCT on the payments made to Company A. This brings Company A within the scope of RCT as it is regarded as a Subcontractor carrying out construction operations in Ireland.
Whilst Company A is a subcontractor in respect of its engagement with Company B, Company A is also a Principal Contractor in respect of its engagement with Company C. Company A will be required to operate RCT on the payments made to Company C because Company C has arranged the supply of labour for the performance of the demolition works on the sites in Ireland.
This brings Company C, the non-resident recruitment firm, within the scope of RCT, as it is regarded as a Subcontractor carrying out construction operations in Ireland.
In this example, Company B must register for RCT as a Principal Contractor, Company A must register for RCT as both a Principal Contractor and a Subcontractor, and Company C must register for RCT as Subcontractor.
VAT Obligations
The provision of the services by Company C to Company A and Company A to Company B falls within a reverse charge provision for the supply of labour and construction services, which is subject to RCT.
Company C, as a Subcontractor, does not have an output VAT liability in respect of the provision of services provided to Company A. As such, Company C will issue its invoices to Company A with no VAT charge.
Company A, as a Principal Contractor, must self-account for VAT on a reverse charge basis (typically at 13.5%) on receipt of the invoices from Company C. Company A should have an entitlement to a simultaneous VAT input credit as it has used the services to make taxable supplies to Company B.
Company A, as a Subcontractor, does not have an output VAT liability in respect of the provision of the services provided to Company B. As such, Company A will issue its invoices to Company B with no VAT charge.
Company B, as a Principal Contractor, must self-account for VAT on a reverse charge basis (typically at 13.5%) on receipt of the invoices from Company A. Company B should have an entitlement to a simultaneous VAT input credit as it has used the services to make taxable supplies to Company B.
In this example, only Company A and Company B are required to register for Irish VAT. Only Principal Contractors are required to account for VAT on the receipt of construction services that fall within the RCT regime.
Company C is not required to register for VAT in respect of its supplies to Company A.
2. Mixed Contracts
A major risk with the definition of a relevant contract arises for contracts that cover both RCT-type and non-RCT-type supplies.
Case Study – Example 2
Company A engages Company B to carry out repair and maintenance works on a number of properties in Ireland.
Is the contract liable to RCT?
The definition of “construction operations” includes contracts for repair work which is interpreted as the replacement of constituent parts i.e., the repair of a broken window by installing a new pane of glass, mending a faulty boiler etc.
However, the definition of “construction operations” specifically excludes maintenance work i.e., cleaning, unblocking of drains etc.
In this example, Company A and Company B have entered into a repair and maintenance contract. This is referred to as a mixed contract. Revenue’s view on mixed contracts is that if any part of a contract includes “relevant operations” then the contract as a whole is considered a relevant contract and all payments under that contract are liable to RCT.
As Company A and Company B have entered into a mixed contract, the contract as a whole, is considered a relevant contract, and all payments made by Company A to Company B are liable to RCT.
This treatment applies even where no repairs are actually carried out by Company B in completing a particular job under the contract.
In this example, Company A must register for RCT as a Principal Contractor and Company B must register for RCT as a Subcontractor.
A common pitfall we see in this area is for a company to raise separate invoices for the maintenance work and the repair work. They then only treat the invoice for the repairs as being subject to RCT. This is incorrect as it is the overall contract, not the elements being invoiced, that governs whether RCT should be applied or not.
However, if there are separate contracts, one covering maintenance and one covering repairs, then only the contract covering the repairs is subject to RCT.
3. VAT Reverse Charge
VAT is normally charged by the person supplying the goods or services. However, under the RCT regime, the person receiving the goods or services (i.e., the Principal Contractor) accounts for VAT as if they had supplied the service and pays it directly to Revenue. This is known as the VAT Reverse Charge.
We commonly see the VAT Reverse Charge being applied incorrectly in cases where a subcontractor supplies goods or services, other than construction services, as part of the overall contract.
Contractors must be aware that while the overall contract may fall within the RCT regime, that does not mean that the VAT Reverse Charge applies to all goods or services invoiced under that contract.
Case Study – Example 3
The facts are the same as in Example 2. See below for reference:
Company A engages Company B to carry out repair and maintenance works on a number of properties in Ireland.
In this case the repair and maintenance contract in place between the parties provides that a separate charge will apply where repairs are carried out.
Company B has now completed repair and maintenance works for Company A and is looking to raise a sales invoice to Company A for the following:
Repair Works – €4,500 (exclusive of VAT)
Maintenance Works – €10,000 (exclusive of VAT)
VAT Obligations
Generally, the VAT Reverse Charge only applies to payments that are in respect of construction operations which in this case, are the repair works.
Company B must therefore issue two VAT invoices as follows:
An invoice for the repair works of €4,500 on which the VAT Reverse Charge applies. Company A will be required to self-account for VAT at 13.5% on the receipt of this invoice from Company B.
An invoice for the maintenance works (i.e., not considered a construction service) of €10,000 on which VAT at the 13.5% rate is applied. Company A will be required to pay Company B the total invoice value including VAT amounting to €11,350.
RCT Obligations
As set out in Example 2, where a contract is for repair and maintenance, RCT applies to all payments under the contract.
As such, Company A is required to notify the total payment to Revenue. This should include the VAT exclusive payment for the repair works plus the VAT inclusive payment for the maintenance works. Assuming for the purposes of this example that only one payment is to be made by Company A to Company B for the works, Company A would file a Payment Notification with Revenue as follows:
Repair Works (VAT Exclusive) – €4,500
Maintenance Works (VAT Inclusive) – €11,350
Total Payment Reported to Revenue – €15,850
It is important to note that if a repair and maintenance contract provides for a single consideration for all works completed under the contract, then the VAT Reverse Charge must be applied to the full consideration.
Should you require any assistance in this area, please contact us.
https://www.crowleysdfk.ie/wp-content/uploads/pexels-pixabay-532079-scaled.jpg17032560Alison Bourkehttps://www.crowleysdfk.ie/wp-content/uploads/crowleysdf-chartered-accountants-1.pngAlison Bourke2022-08-17 08:48:542023-06-29 09:51:22RCT & VAT Pitfalls in the Construction Industry | Case Study Analysis
The Tax Appeals Commission’s (TAC) objective is to fulfil the obligations placed on it by the Finance (Tax Appeals) Act 2015 and the Taxes Consolidation Act 1997 (“TCA 1997”). To fulfil these, the TAC facilitates taxpayers in exercising, where appropriate, their right of appeal to an independent body against decisions and assessments of the Revenue Commissioners and the Criminal Assets Bureau.
The Issue for Determination
Recently, the TAC issued a determination regarding an Appellant’s complaint about the treatment of an IQA allowance he received in respect of his contributory pension for the years 2019 and 2020. The Appellant was dissatisfied with how he was assessed in relation to his contributory pension, in respect of which he received an increase for his spouse as a Qualifying Adult (Increase for a Qualifying Adult, or “IQA”).
The Background
The Appellant’s complaint related to how the Revenue Commissioners had interpreted an IQA allowance he received in respect of his contributory pension. According to the appellant, “this allowance [was] paid directly to his spouse”, who had “full and sole discretion over how it [was] expended”. In the appellant’s opinion, “whoever actually receives the money should pay the Tax on it. To expect someone else, who received none of that money, to pay the tax on it is unbelievable and very unfair”.
On 30 November 2021 and 6 December 2021, the Appellant received P21 Balancing Statements for the years 2019 and 2020. These indicated underpayments of income tax in the amounts of €3,660.36 and €3,810.69 respectively. On 16 December 2021, the Appellant duly appealed the P21 Assessments to the Commission, arguing that:
“Revenue’s position is that I am deemed to be the beneficiary of the Pension, plus the Increase for a Qualified Adult. They are clearly wrong in that stance. I am the beneficiary of the Pension only and my Wife is the beneficiary of the Qualified Adult Increase. Surely, the beneficiary has to be the person who actually receives the money and not somebody else? Regardless of what way the Government tricks around with the wording of the Acts, it cannot change that fact, which should override everything else.”
By contrast, the Revenue Commissioners’ position was that the IQA allowance was deemed to be the Appellant’s income for tax purposes, pursuant to section 126(2B) of the TCA 1997.
Opposing Arguments
The Revenue Commissioners submitted that “…it is incumbent upon [the Appellant] to demonstrate that Revenue has erred in the way he was taxed with regard to the QAD portion of his pension. Respectfully, the Respondent would argue that the assertion that Revenue is ‘clearly wrong’ does not meet that burden in a matter where the wording of the legislation is quite clear.”
For the Revenue Commissioners, that the appellant claimed “the government has tricked around with the wording of the Acts” implied dissatisfaction with the legislation itself, rather than with the Revenue Commissioners’ interpretation of the legislation.
Determination
The TAC in its determination considered all the facts and information presented, paying particular attention to the following:
Past case law examples – Lee v Revenue Commissioners [IECA] 2021 18 & Stanley v The Revenue Commissioners [2017] IECA 279.
The Commissioner determined that the Appellant had failed in his appeal and had not succeeded in demonstrating that the tax was not payable. It was noted that there is no discretion as regards the application of section 126(2B) of the TCA 1997 and the Revenue Commissioners were correct in their approach to the IQA income for the years under appeal.
The Tax Appeals Commission’s (TAC) objective is to fulfil the obligations placed on it by the Finance (Tax Appeals) Act 2015 and the Taxes Consolidation Act 1997 (“TCA 1997”). To fulfil these, the TAC facilitates taxpayers in exercising, where appropriate, their right of appeal to an independent body against decisions and assessments of the Revenue Commissioners and the Criminal Assets Bureau.
The Issue for Determination
Recently, the TAC issued a determination addressing a taxpayer’s assertion that their amended assessment for tax year 2016, issued by Revenue Commissioners in January 2018, was incorrect. The taxpayer’s assertion related to certain payments received following the termination of his employment. The taxpayer contended that this payment – “success fees” – was a payment linked to the termination of his employment, taxable under S123 TCA 1997 (to which certain reliefs can be applied via S201 and Schedule 3 of TCA 1997). The amended assessment, however, had treated the payment as being a payment made in connection with his employment and therefore liable to income tax under S112 TCA 1997 (Schedule E).
The Background
Prior to the above complications, the taxpayer had been a senior employee of a company, (“his Employer”) by way of employment contract, since 2010, holding an annual salary of €150,000 and certain conditional share option entitlements. In July 2015, having had differences of opinion with the Chairman regarding the future strategic direction of the company, the taxpayer and his employer entered a further written agreement (“termination agreement”). The termination agreement included dates for the earliest termination of the employment. While the potential date of termination was dependent on certain deliverables, the final date for this was to be no later in any event than March 2016. The termination agreement stated that “your salary and other contractual benefits will be paid up to the Termination Date less tax, employee PRSI, USC and any other deductions required by law”.
The termination agreement set out various types of payments to be made on termination. These included payments in excess of €500,000 (“success fees”), on the successful raising of finance by the taxpayer for the employer.
Opposing Arguments
The taxpayer argued that the “success fees” were not contingent in fact on the raising of finance for the company as this work was already substantially completed. The taxpayer argued that the termination agreement in this respect was drafted to give the Board of the company a belief that they were getting most value for money for the large termination payment.
The Revenue Commissioners argued that the “success fees” were intrinsically linked to the performance of the taxpayer’s employment and were not termination-related payment.
Both sides quoted differing Irish and UK cases and indeed the Revenue Taxes and Duties Manual (part 05-09-19) to aid their respective positions.
Determination
The TAC in its determination considered all the facts and information presented, paying particular attention to the following:
The termination agreement expressly stated that all payments were conditional upon the taxpayer agreeing to all the terms of the agreement. These terms included the termination of his employment and no future right to sue his employer
The termination agreement drew a distinction between the taxpayer’s entitlements in connection with the termination and those from his employment contract
The taxpayer’s circumstances within in the company gave the taxpayer no option but to leave the company
The TAC determined that the taxpayer was entitled to succeed in his appeal, that he was overcharged to income tax, and that the Notice of Assessment be reduced accordingly.
https://www.crowleysdfk.ie/wp-content/uploads/shutterstock_657337522-1-scaled.jpg16962560Alison Bourkehttps://www.crowleysdfk.ie/wp-content/uploads/crowleysdf-chartered-accountants-1.pngAlison Bourke2022-06-23 08:18:462022-06-23 08:18:46Tax Appeals Commission Determination | Income Tax: Payments Received Following a Termination of Employment
Passing on your business and developing your exit strategy is one of the most important business decisions you will ever have to make.
Many of the tax reliefs one may wish to claim on a transfer of assets can be subject to very stringent conditions, such as minimum periods of ownership or active involvement in the business. Succession planning can often seem like something which should be considered close to retirement. However, the risk of waiting is that many of the key tax reliefs available to business owners are not accessible when the time comes to pass on assets, as the relevant conditions cannot be met.
What can help avoid this problem is advance planning. Through preparation, a business owner can identify some of the key conditions required to avail of certain tax reliefs, allowing them sufficient time to take the necessary steps to qualify for these reliefs. Therefore, it is not unusual to see a succession plan being put in place 5 to 10 years prior to its implementation.
The transfer of a business can trigger several taxes such as:
Capital Gains Tax (CGT) which is a tax payable by the person selling or transferring an asset. The current rate of CGT is 33%.
Capital Acquisitions Tax (CAT) which is a tax payable by the person in receipt of a gift or inheritance. The current rate of CAT is 33%.
This article will focus on the key tax reliefs available to business owners and their family members on the transfer of their business.
CGT Reliefs
In order to mitigate or eliminate the CGT liability on the transfer, there are two main reliefs which may be availed of provided certain conditions are met. These are:
Retirement Relief
Entrepreneur Relief
Retirement relief provides for relief from CGT on the disposal of qualifying assets.
To qualify for this relief, the main conditions are that the individual must be aged 55 or over and must be disposing of or transferring qualifying business assets. In addition, the individual must have been a working director of the company for 10 years and a fulltime working director for at least 5 of the years prior to the transfer. The latter condition can be a stumbling block for many individuals seeking to claim this relief. For example, an individual may be a director of more than one company and therefore may not meet the full-time working director requirement. This is why it is so important to prepare a succession plan early in your lifetime.
If retirement relief is not available, the individual may qualify for RevisedEntrepreneur Relief which limits the rate of CGT to 10% on the first €1m of gains on the disposal of certain business assets. In contrast to retirement relief, this relief has no age requirement and the individual can qualify for it at any stage provided the relevant criteria is met. To qualify for the relief, the individual should have owned the shares in the business for a continuous period of 3 of the last 5 years and spent 50% or more of their working time as an employee or director of the company.
CAT Reliefs
An individual can receive gifts/inheritances up to a certain amount tax-free throughout their lifetime. Currently, a child can receive a gift or an inheritance up to €335K from his/her parents.
In the context of a business, a child may, on receipt of a relevant business property, qualify for what’s known as Business Relief. This reduces the value of the gift or inheritance being received to 10% of the market value of the business property, resulting in a significant tax saving. Similar to the reliefs already discussed, there are certain conditions that need to be met around ownership and the level of involvement in the business.
Farmers may qualify for Agricultural Relief on the receipt of a gift or inheritance of agricultural property. Agricultural property includes agricultural land, crops and trees growing thereon and farm buildings appropriate to the property. By qualifying for this relief, the market value of the property being received will be reduced by 90%. This makes it a very valuable relief.
There are two tests that need to be passed before a person can avail of the relief:
The farmer test requires 80% of the beneficiary’s assets to be agricultural property immediately after receipt of the inheritance.
The trading test requires the individual to farm the land themselves for at least 6 years or alternatively lease the land out to a qualifying farmer for 6 years.
If a CAT liability arises with or without claiming any of the CAT reliefs, it may be possible to reduce or eliminate the liability by claiming a credit for the CGT paid by the parent on the transfer of property.
Although there are many commercial considerations to be made when passing on wealth as well as discussions with family members as to suitable successors, tax plays a key role in informing the business owner as to the extent of any tax liability. Knowing this information prior to implementing a succession plan enables the owner to make more informed decisions and allows for maximising the amount of reliefs that may be claimed. This will reduce the overall tax costs of the transfer.
For more information on tax reliefs related to your exit strategy, please contact us.
https://www.crowleysdfk.ie/wp-content/uploads/Succession-Planning-1-scaled.jpg16512560Alison Bourkehttps://www.crowleysdfk.ie/wp-content/uploads/crowleysdf-chartered-accountants-1.pngAlison Bourke2022-05-31 08:05:522023-06-29 09:52:51Exit Strategy: How to Pass your Business on to the Next Generation
As the expansion of remote working continues, more employees are no longer obliged to work at their employer’s premises or, indeed, even in the same country as their employer’s premises. This presents a number of opportunities and challenges for employers. In the first of our global mobility series, we will examine the tax compliance obligations for Irish employers with employees working abroad.
Situation One – an Irish employer hires a new employee based abroad
An Irish employer does not need to operate Irish payroll taxes on the salary of an employee who:
is not resident in Ireland for income tax purposes
was recruited abroad
carries out all the duties of their employment abroad
is not a director of your company; and
has no Income Tax liability in Ireland.
For any employee in these circumstances, an Irish employer does not have to apply for a PAYE Exclusion Order to Irish Revenue and is not required to include the employee on the employer’s payroll submissions to Revenue. Employers should maintain a record of each such employee with a record of any payments made to them each year.
This is a useful exemption for Irish employers who recruit employees to work abroad as it means the non-resident employee does not need to apply for a PPS number.
Situation Two – an existing employee of an Irish employer moves abroad
An Irish employer may find that an existing employee, who lives and works in Ireland, decides to move abroad indefinitely while retaining their existing employment. In this instance, the tax obligations for the Irish employer depends on the employee’s tax residence in Ireland. This must be reviewed each year.
An individual is tax resident here if they are in Ireland for 183 days or more in the calendar year or for 280 days or more across the current and preceding calendar years. An individual is not tax resident in Ireland if they are here for 30 days or less in any calendar year.
a. The employee is tax-resident in Ireland in the year of departure
An Irish employer can apply to Irish Revenue for a PAYE Exclusion Order where an employee:
leaves Ireland during the year
becomes tax resident elsewhere
will carry out their employment duties wholly outside of Ireland, and
will be resident outside Ireland in the following tax year.
Once issued in these circumstances, the PAYE Exclusion Order will relieve the employer from the obligation to deduct Irish income tax and USC from that employee’s salary from the date of departure.
b. The employee is not tax-resident in Ireland
An Irish employer can apply to Irish Revenue for a PAYE Exclusion Order where an employee:
is not resident in the State for tax purposes for the relevant tax year, and
carries out the duties of the employment wholly outside of Ireland.
Once issued in these circumstances, the PAYE Exclusion Order will relieve the employer from the obligation to deduct Irish income tax and USC from that employee’s salary for the full tax year.
PAYE Exclusion Orders have an expiry date. An employer may apply for another PAYE Exclusion Order if the employee continues to work abroad after that date and continues to be non-resident.
It is important to note that the PAYE Exclusion Order does not cover PRSI. Determining the country in which social insurance is to be paid by and on behalf of the employee is a separate issue.
Situation Three – an existing employee of an Irish employer splits their year between working in Ireland and working abroad
This situation is arguably the most complex for an Irish employer. If the employee remains tax-resident in Ireland, Irish Revenue will not issue a PAYE Exclusion Order. As a result, the employer must continue to apply Irish payroll taxes to the employee’s salary as normal.
However, the country in which the employee is working may require the employer to apply local payroll taxes on that part of the salary that relates to work carried out in that country.
Where there is no relief available, employers may have dual payroll withholding responsibilities in both Ireland and the foreign country. They will often run what is known as a “shadow payroll” in respect of an employee’s salary. Shadow payroll is run to ensure that tax compliance obligations are met in both countries without affecting the employee’s net take-home salary.
Running shadow payroll is an extra compliance burden for the employer. Furthermore, the Irish employer must contribute payroll taxes to the Revenue authorities in both countries. This can come as an unpleasant surprise to both employers and employees.
It is therefore crucial that an Irish employer recognises if they will have to operate shadow payroll before an employee carries out any work abroad.
If shadow payroll is required, an employer must establish what is required in both countries and must agree with their employee how any duplicate deduction of payroll taxes can be reclaimed.
Often, to reclaim some or all of the payroll taxes withheld, the employee will be required to submit an income tax return. In this instance, any refund due will issue from the Revenue authorities to the employee. This can leave the employer out of pocket if a clear agreement is not put in place with the employee at the outset.
Conclusion
We have seen here the Irish tax compliance obligations for employers. An Irish employer with employees working abroad should always check their tax and social security obligations in the country where the employee is working. Often, the employer will be required to register for payroll taxes in the employee’s country and apply local payroll taxes on the employee’s salary.
In addition, depending on the number of employees that the employer has in that country and the type of duties that they carry out, the presence of these employees in that country may create a “permanent establishment” of the employer in that country. If an employer has a branch or permanent establishment in a foreign country, it may be obliged to pay local income or corporation tax on the profits of that branch.
For more information, please contact Siobhán O’Hea, Partner, Tax Services.
https://www.crowleysdfk.ie/wp-content/uploads/Global-Mobility-Tax-Obligations-of-Outbound-Workers.jpeg13001733Alison Bourkehttps://www.crowleysdfk.ie/wp-content/uploads/crowleysdf-chartered-accountants-1.pngAlison Bourke2022-04-26 09:59:302023-01-17 16:32:36Guide to Global Mobility – Managing Tax Obligations of Outbound Workers
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