Ronan Daly Jermyn Tax Update 2016

C O R K D U B L I N G A L W A Y L O N D O N W W W . R D J . I E

Tax Update 2016

Mark Barrett & Eoin Tobin


Overview

2

Mark Barrett

• Entrepreneur Relief v Retirement Relief (FA 2015)

• Revenue projects

• Revised Audit Code & Appeals System

• Review of Intermediary Structures

Eoin Tobin

• Reconstruction Relief (FA 2015)

• VAT Transfer of Business

• Update on Not-for-Profit Sector


Mark Barrett

Chartered Tax Advisor, Ronan Daly Jermyn


Entrepreneur Relief – Finance Act 2015

4

New Section 597AA TCA 1997

How does the relief work?

20% rate of CGT on the first €1m gain (lifetime limit) w.e.f. 1 January 2016

Key conditions for relief:

• Chargeable business assets• Qualifying business• 3 years ownership • No age limit• Minimum 5% shareholding for company, qualifying person• FA14 relief s597A TCA (“Old Relief”) takes precedence if lower tax liability

Caveat: No Revenue Guidance Notes issued to date


Interaction between:Entrepreneur Relief and Retirement Relief

Retirement Relief Entrepreneur Relief

Section(s) of TCA 598 and 599 (child) 597AA

Operates by: Relieving CGT arising on certain chargeable gains

Reducing rate of CGT to 20% on certain chargeable gains.

5

Issue: Overlap

• Retirement Relief operates by relieving ‘capital gains tax chargeable’

• Entrepreneur Relief operates by reducing the rate of tax.

• Therefore there is potentially an overlap which can result in Entrepreneur Relief being of little benefit.

C O R K D U B L I N G A L W A Y L O N D O N W W W . R D J . I E 6

Example One: Jim

Jim, has a business. He sells this business in 2016 (after introduction of ER) and starts a new business. He sells the second business after 3 years.

How do the two reliefs interact?

Facts:• Jim, 55 years of age. • Sells his first company for €750,000. • Co. incorporated 2005 for €1• Assume gain = €749,999• Assume satisfies all the criteria for Ent. Relief and Retirement Relief.• Assume all assets of company are CBA (for purposes of RR)



Part One: Disposal of First Business:

Proceeds: 750,000Gain: 749,999Tax @ 20% (ER) 149,999Ret. Relief (149,999)Final Tax: nil.

Note: ER is being used to reduce tax rate from 33% to 20%, but Jim is not getting any benefit from this as any tax arising would be eliminated by RR in any event.



Part Two: Disposal of Second Business.

Jim reinvests the proceeds from the sale of his first business in a second business. After 3 years he sells that business for €1,750,000. His base cost was €750,000, leaving him with a gain of €1million.

Gain: 1,000,000

Entrepreneur Relief (ER): 250,001 (€1million – 749,999) @20% 50,000Balance of gain not qualifying for ER749,999 @ 33% (per 597AA(4(b)) 247,499

Tax: €297,499

Effective rate 297/1000 = 29.74%

Note: No clawback of earlier RR, because 2nd sale does not qualify for RR.



Example Two:

Jules, has a business. He sells this business in 2016 (after introduction of ER).How do the two reliefs interact?

Facts:• Jules is, 55 years of age. • Sells company for €1,000,001. • Co. incorporated 2005 for €1• Assume gain = €1,000,000• Assume satisfies all the criteria for both Entrepreneur and Retirement

Relief.• Assume all assets of company are CBA (for purposes of RR)



Example Two: Jules

Proceeds: 1,000,001Gain: 1,000,000

ER on first €1mTax @ 20% (ER) 200,000

But Marginal Relief (retirement relief) limits tax to half the difference between Proceeds and €750,000.Difference = €1,000,001 - €750,000 = €250,001Half of that = €125,000

Final Tax: €125,001

Note: ER is being used to reduce tax rate from 33% to 20%, but Jules is not getting any benefit from this because ultimately the tax is being limited by marginal relief (retirement relief).



Example Three:

Catherine, has a business. She sells this business in 2016 (after introduction of ER).How do the two reliefs interact?

Facts:• Catherine is, 55 years of age. • Sells company for €2,000,001. • Co. incorporated 2005 for €1• Assume gain = €2,000,000• Assume satisfies all the criteria for both Entrepreneur and Retirement

Relief.• Assume all assets of company are CBA (for purposes of RR)



Example Three: Catherine

Proceeds: 2,000,001Gain: 2,000,000

Tax @ 20% on first €1m (ER) 200,000Tax @ 33% on balance 330,000Tax: 530,000

Marginal Relief (retirement relief) is of no benefit. MR limits tax to half the difference between the proceeds and €750,000. Difference = €2,000,001 - €750,000 = €1,250,001 Half of that = €625,000

Final Tax: € 530,000



Example Three: Catherine

Tax without ER or RR = € 660,000.

Tax as a result of ER = €530,000.

Therefore, it appears that the introduction of ER saved Catherine €130,000.

However the saving is only €95,000 when one considers what her position would have been under Marginal Relief.

No Reliefs RR (MR) ER

Effective Rate: 33% 31.25% 26.25%

Tax/Gain 660/2000 625/2000 530/2000



Tax Planning Point:

If you have a client who:

(a) satisfies the criteria for ER, and (b) is about to satisfy the criteria for RR,

then consideration should be given to the timing of the disposals.



Example Four: Francis

Francis is 54 years old, he has a company valued at €2,000,001, with a base cost of €1. His gain is €2,000,000. He satisfies all the conditions for ER, and all the conditions (other than the age requirement) for RR.

While still 54 he sells half his interest to a third party for €1,000,000ER applies, and reduces the tax rate on the gain to 20%. Tax: €200,000

A year later, when he turns 55 he disposes of the balance of his holding for €1,000,000. RR(MR) applies to limit the tax to half the difference between the €1m proceeds and the €750,000 limit. i.e. €125,000 in tax.

Total Tax: €325,000.

Compare this to Catherine in example 3 who pays €530,000



Tax Appeals – New Regime?

16

• Finance (Tax appeals) Act 2015 – Signed 25 December

• Not yet commenced – parts to be implemented on different dates

• Implementation not imminent and timeline not clear (Election?)

• Two new Appeal Commissioners appointed in December 2015 under existing/old legislation: Mark O’Mahony and Lorna Gallagher

• One outgoing AC retired, one currently remaining



17

Transition

• Structure and resources of Tax Appeals Commission – commencement order needed. Staffing, systems, office location etc?

• Change in roles and functions of new appointees once the regime commences – has been factored in to contracts for new appointees

• Confusion between old and new regimes

• Capacity for new ACs to give direction on statement of case and/or for an outline of arguments to be shared between parties; joining hearings; written determinations; publication of anonymised determinations. When?

• How will Revenue handle cases during the transition?

• C& AG report June 2015 – 1,700 cases not yet listed



18

Transitional Procedures

• Where an appeal is already in step at the commencement date, the new regime will broadly apply, once commenced.

Some Old Rules Apply

• If case has been part heard, can still seek a rehearing at Circuit Court

• Right to appeal a Revenue refusal to hear an appeal


Revenue Focus 2016

19

Construction Sector – National/SW Region

• Proper application of eRCT system; payment and report on same day

• Proper classification of employees and subcontractors

• Unexplained high margins

• Cross border workers

• VRT/Diesel etc

• Site ownership

• JIU visits

• Follow the money (engineering companies, intermediaries etc)


Revenue Focus 2016

20

SW Region

• Case selection – new resources and approach

• eAudit and electronic interrogation

• Project on notice period for audits – 80% cancelled?

• VAT registrations - high risk

• Kerry Co-op shares; valuation for CAT/CGT purposes


Revenue Focus 2016

21

Medical Practitioners

• High profile

• 639 consultants investigated: 300 cases closed and 350 approx. ongoing

• €39m yield to date


Code of Practice for Revenue Audit and Other Compliance Interventions

22

Summary of main changes:

• Four major changes

• Effective from 20 November 2015

• Choice of which Code to use where a notice of a compliance intervention has been given on this date but matter not determined


Co-operation (1.10.4):

• Focus on full co-operation

• No change in overall policy on penalties (TALC audit)

• Highlight risk of losing the benefit of co-operation

• Revenue internal guidelines published March 2015 (link in the Code) –wide ranging and subjective



Reporting of Members to Professional Bodies (1.10.5):

• Reports must be approved at Assistant Secretary level

• Only serious cases reported

• Report cannot be made while intervention is open

• Revenue’s intention to make a report will not be discussed during the audit



RCT Penalty Regime:

• Updated to reflect the new regime which came into effect from 1 January 2015

• No-loss of revenue provisions remain in the Code

• Interaction between the two regimes not fully clear

Anti-Avoidance

• FA 2014: substantial changes to anti-avoidance legislation

• Chapter 8 of Code: Mandatory reporting and other aspects of anti-avoidance



• What is driving this?

• Not focused on genuinely self-employed individuals

• Personal Service Company (PSC), Managed Service Company (MSC)

• Issues arising/potential loss to the exchequer

• International context

• Options for addressing tax and PRSI issues

• Deadline for submissions – 31 March 2016

Consultation on Intermediaries


Issues Arising

• Employers PRSI

• Indefinite deferral of the payment

• Payment of unwarranted tax-free expenses

• Pension planning opportunities

• Different tax planning opportunities



Options

• End user pays employer’s PRSI contribution

• Treat payment by end user (through intermediary) as liable to Schedule E

• Apply surcharge to undistributed income of the intermediary

• Deem undistributed income of an intermediary company to be paid to the individual carrying out the work (UK model)



Sundry Issues

29

• Expenses for Non-Executive Directors

• Contractors


Eoin Tobin

Partner, Ronan Daly Jermyn


Reconstruction

• eBrief No. 82/15 dated 3 September 2015

• “Use of section 615 TCA 1997 to avoid CGT on ultimate disposal of assets”

• Section 615 TCA 1997 – reconstruction or amalgamation

• CGT deferral

• It has come to the attention of Revenue that section 615 and section 617, were being used as part of a scheme to avoid CGT on ultimate disposal of assets

• Scheme eliminated (rather than deferred) CGT

• How did the scheme work?

31


TradeCo

SubCo

NewCo

Business Assets & Liabilities (Debt €50m)

s. 615

Business €50m

s.617

Debt€50m

NewCo issues shares to TradeCo

…Business

(1)

(2)

(2)


Sale of shares in NewCo to PurchaseCo for nominal

consideration €10

NewCo

PurchaseCo

NewCoSubCo

TradeCo

(3)


NewCo repays €50m debt to

TradeCo

PurchaseCo

NewCoSubCo

TradeCo

BusinessAssets

€50 m

(4)


Reconstruction

• How were such schemes to be dealt with?

• Challenged under section 811 TCA or section 811C TCA, as appropriate

• Tax the “true consideration” for the disposal

• 50M rather than the nominal amount paid by the purchaser to Tradeco for the shares in Newco

35


Reconstruction

• Instead (or in addition) we have ended up with section 41 Finance Act 2015

• New sub-section 615 (4A) TCA.

• “This section shall not apply …. unless it is shown that the reconstruction or amalgamation is effected for bona fide commercial reasons and does not form part of an arrangement the main purpose, or one of the main purposes, of which is the avoidance of liability to tax”.

• Applies to disposals made on or after 22 October 2015.

36


Reconstruction (TB 48)

37

Company X

ShareholderA B

Business 1

Business 2

Company X

ShareholderA B

Business 2

Business 2 transferred to NewCo

New sharesissued to A and B


Reconstruction

• How will the new statutory test impact on pre-sale reconstructions?

• Transfer of “target” business to Newco pre-sale leaving unwanted assets behind.

• Bona fide commercial reasons / concern around Revenue interpretation.

• Tax Briefing 48 – time for an update?

38


Transfer of Business

• eBrief 113/15 dated 30 November 2015

• Transfer of Business (TOB) VAT leaflet updated (including

examples in Annex 2)

• Clarification on the circumstances in which TOB treatment

applies to the transfers of property

• Changes to two paragraphs under the heading “Transfers of

Let Properties” has resulted in a fundamental change in the

way VAT must be considered in a significant number of

property transactions.

39



• Section 20(2)(c) VATCA 2010

• “Transfer to an accountable person of a totality of the assets or part thereof, of a business, even if that business or part thereof had ceased trading, where those assets constitute an undertaking or part of an undertaking capable of being operated on an independent basis, is deemed not to be a supply for VAT purposes”.

• Important trade facilitation measures aimed at reducing compliance costs for traders

40



• Mandatory application where criteria are met

• Any VAT paid in error will not be deductible as no

supply is deemed to have taken place

• What is my Capital Good?

• Experience of inconsistent application within Revenue

• Wider application of TOB – will it only cause more

uncertainty?

41



Previous Guidance

• Transfer of a let property was capable of qualifying

for TOB

• Purchaser had to be an accountable person in

respect of the business being acquired

• Must exercise the landlord’s option to tax in respect of

those lettings.

42



Current Guidance

• Purchaser must be an accountable person but not

necessarily accountable in respect of the asset being

acquired

• The property is let, or has been let, for a period of

time on a continuing basis

• Specific examples in guidance

• Shopping Centres / Office Blocks /Property Portfolio

43


VAT: Transfer of Business

44


AP buys w/ sitting Tenant

Tx Bus. buys w/ sitting

Tenant

T buys for own

business

Tx Bus. buys w/ vacant possession

AP buys w/ vacant

possession



• Issues

• What is meant by a letting?

• If was let in the past is there a temporal limit?

• What if the property is vacant?

• Annex 2 examples are some help but leave more

questions than answers?

45


Not for Profit

• Where are we a year after the establishment of the Charities Regulatory Authority?

• What can we expect next?

• VAT on Charities Working Group Report.

46


Not for Profit

• The Charities Regulatory Authority was established on 16 October 2014

• “Charities play a vital role in our society and economy. We want to support them in this by putting in place a system of regulation that is proportionate, responsive, and sensitive to the needs and concerns of both charities themselves and the donor public”.

Minister for Justice and Equality, 23 January 2013

47


Not for Profit

• By April 2015 only 200 of the estimated 4,000-plus charities required to register with the CRA had done so, despite the threat of stiff fines for non-compliance

• The Minister for Justice and Equality, Frances Fitzgerald announced a 12 month extension to the deadline after discussions with the Charities regulatory Authority.

48


Not for Profit

• Charities Regulatory Authority nationwide information

campaign

• Religious organisations

• FOI

• Payments to Charity Trustees – guidance?

• Revenue Commissioners – Charities Act 2009 and

Companies Act 2014

• Donation Scheme

• VAT and Charities

49


Not for Profit

• VAT burden on charities

• St Vincent DePaul’s annual VAT bill is €3.5M to deliver services

• Build4Life estimates a 500K VAT bill to provide outpatient clinic and inpatient ward services for adults & children with CF

• Irish Heart Foundation paid 525K VAT on its FAST stroke campaign

• Focus Ireland had a 266K VAT bill in 2014

50


Not for Profit

• Charitable tax exemption operates across all main tax heads

• It does not entitle a Charity to receive goods and services free from VAT

• ICTR has been seeking a compensation mechanism operating outside of the VAT system for some years

• A claim for repayment of VAT can be made in the case of purchases of certain specific items

• See details of Ministerial Refund Orders in 2014 at www.budget.gov.ie/Budgets/2016/Documents/VAT_on_charities_working_group_report_pub.pdf

51

http://www.budget.gov.ie/Budgets/2016/Documents/VAT_on_charities_working_group_report_pub.pdf


Not for Profit

• VAT burden is felt most keenly in relation to

fundraised income

• Creates opportunity cost for investment in vital public

benefit initiatives

• Promotes over-reliance by Charities on state grants

and the taxpayer

• Penalizes good governance in Charities that use

professional financial, legal and training services

• This is at odds with Government efforts to regulate

the sector.

52


Not for Profit

• VAT on Charities Working Group Report

• Published Budget Day 2016

• Most of the 28 Member States do not offer any

special VAT treatment to charities.

• Denmark, the UK and Netherlands are the exceptions

• Danish model – refund proportionate to amount of

private donations

• UK scheme – range of goods & services can be

supplied to charities free of VAT and VAT refund

scheme

• Netherlands scheme – focus on international aid

53


Not for Profit

• Working Group list a number of options without any

recommendation.

• Limited Sectorial Scheme similar to UK / Netherlands.

• Compensation Scheme similar to Danish Model.

• Administrative issues associated with both.

• Would be at a cost to the Exchequer.

• May encourage greater privately sourced fundraising

by the sector.

• Budget Day 2017?

54


Questions?

55

W W W . R D J . I E

Date post:	20-Feb-2017
Category:	Law
Upload:	aine-hayes
View:	538 times
Download:	2 times

Ronan Daly Jermyn Tax Update 2016

Law