Budget 2010: pre-Budget commentary

In light of the impending budget changes, we have outlined below the current law on a number of areas that may be targeted.

Loss utilisation
Maximising reliefs in respect of losses can generate refunds of tax paid in prior years, thus improving a company’s cash position. Below are some ideas that can assist you in maximising the quantity and use of tax losses:

• In some circumstances, it may be appropriate to trigger the cessation of a company’s trade, thus providing opportunities to make terminal loss relief claims (allows trading losses in the final 12 months of the company’s trade to be set back against trading profits of the preceding three years), generating tax refunds
• Consideration should be given to merging activities of different group companies, in an appropriate manner where the trades can be treated as one trade so that the benefit of any trading losses carried forward can be accelerated
• To accelerate the benefit of tax deductions, you should ensure that all appropriate accruals, provisions and stock write-downs are maximised in the accounting period, providing opportunities to shelter current year profits or obtain refunds of tax from a preceding period
• Consider the acceleration of the recognition of gains, where appropriate, to maximise the utilisation of losses
• Where capital gains arise, consider crystallising capital losses to shelter such gains, or consider whether there is an opportunity to make negligible value claims

Potential Budget amendments to loss relief 
The upcoming Budget may attempt to restrict the ability of taxpayers to use trading losses in certain circumstances:

• It may contain provision for the removal (or restriction) of the availability for trading losses to be carried back against trading profits of the same trade in the prior accounting period
• Certain restrictions on the offset of trading losses against other income earned in the current year may be introduced
• There may be a restriction of loss relief allowed for the investment by domestic companies in certain other companies (S247 relief)

In this regard, where a company has incurred trading losses in 2009, but has other non-trading income (ie bank interest/rental income) in the same year, or had earned trading profits or other income in the prior year (ie 2008) on which tax was paid, it may be worthwhile considering shortening the accounting period of the company to, say, 31 October 2009, to ensure that a loss relief claim to utilise the 2009 losses is submitted to Revenue prior to Budget day, 9 December 2009.

How can Deloitte assist?

• We can assist you in ensuring that the cash tax value of current year trading losses is maximised by ensuring claims for the carry-back of trading losses to a prior period, or for an offset of trading losses against other (non trading) income in the current period, are made prior to Budget day
• Many companies are currently re-examining the way they do business, determining core business areas and restructuring to focus on these areas. In this regard, there may be circumstances where buying a loss-making company is attractive due to the customer base/list, a trade name or where it is felt that economies of scale could be achieved to drive down costs. If a potential acquisition for the expansion of your Irish operations exists, we can also work with you to structure acquisitions so that any losses incurred to date in the operation being acquired are available for use within your group
• We have worked with many clients and businesses in reviewing the utilisation of tax losses in their company/group to ensure their cash tax value of loss utilisation is being maximised. These reviews cover all areas of tax losses, including ensuring group relief for “trapped losses” of foreign subsidiaries is maximised, maximising tax relief/tax credits available for withholding tax costs, maximising the utilisation of non-trade or capital losses and maximising the utilisation of tax losses on certain acquisitions. We would be happy to discuss how such a review could benefit your business

Gift or inheritance tax
As recently as November 2008, our rate of gift/inheritance tax was at 20%, although in the intervening period the rate has been increased to a current rate of 25%. In addition, business and agricultural relief for gift and inheritance tax purposes has applied at a rate of 90%, and a total relief from capital gains tax (retirement relief) also applies where assets are gifted by a parent to a child.

In the context of additional taxes on wealth and assets, there is a concern that either the gift/inheritance tax rate will be increased or that business relief and retirement relief (following the Commission on Taxation report) will be scaled back and exist in some less advantageous form. Our view is that some change is on the cards; however, in planning succession to a family business we would not advise anyone to make decisions of this nature solely for tax reasons. If, however, it was anticipated that some degree of ownership in the family business would transition in the near future, then it may be appropriate for tax purposes to accelerate such a decision and to effect it before the budget in December.

Employees with long years' service/high earnings – termination of employment
Non contractual ex-gratia packages provided to an employee on the termination of an employment may be subject to favourable taxation exemptions and reliefs. One of the most favourable reliefs is the Standard Capital Superannuation Benefit (SCSB), which is generally applicable to employees with high earnings and/or long years' service. Generous ex gratia packages are also typically offered to this category of employee. An individual’s entitlement to receive a tax free lump sum at normal retirement age under the company pension scheme is also taken into consideration when calculating the SCSB.

The Commission on Taxation report and strong Budget rumours have indicated that there is likely to be a restriction or cap, currently suggested at €200,000, on the combined SCSB and tax free lump sums receivable from company pension schemes. On this basis, we suggest that any imminent terminations for employees in this category are effected before Budget day.

Retirement from pension fund

• Following the publication of the Commission on Taxation Report in September this year, it is likely that the government will reduce the current limits for retirement tax free lump sums from 25% of fund or 1.5 times final salary (subject to a maximum of €1,354,521) to a maximum tax free lump sum of €200,000, with any balance being taxable at the standard rate. This will have an impact on taxpayers with a final salary in excess of €133,333. We are working with our clients at present to arrange early retirement from their respective pension arrangements in advance of this widely anticipated change so that they can avoid any Budget generated restrictions on benefit
• Another item in the Commission’s report recommends a reduction of the overall funding threshold amount from its current maximum of €5,418,085 down to a figure widely anticipated as being €2,955,000 in line with 2009 reduction of earnings cap from €275,239 to €150,000. Thus, clients who have scope to fund their pensions to the current level should look at the possibility of doing this prior to the Budget.

Pension contributions
The Report recommends that the current system of tax incentives for pension provision be revised to provide a system whereby the Exchequer contributes €1 for every €1.60 contributed by the taxpayer towards their retirement provisions. However, it looks increasingly likely that the preferred system will be one where there is a flat 30% rate of tax relief. This may have a detrimental effect on pension provision, particularly for those currently in the higher tax bracket, as it will effectively mean individuals will be taxed at a higher rate at retirement than the rate received at point of investment and overall relief will have dropped from 49% to 38%.

If you feel that any of the above matters may be relevant to you or your company and would like further advice in this regard, please do not hesitate to contact the people listed above or your usual Deloitte contact.