Income tax

The Act made no unforeseen changes to the income tax platform. The more significant changes deal with a new property surcharge and the rules governing the carrying forward of capital allowances. These were well flagged in the Minister’s Budget Statement in December 2011.

Universal Social Charge: Share Remuneration

A number of changes were made to the Universal Social Charge (USC) to address some anomalies which arose following the application of the USC to shares and share options. These include the provision that a gain on the exercise, release or assignment of a share option will not be subject to the higher rate of USC i.e. 10%, which applies to self-employed individuals on income above €100,000. This brings the legislation into line with the Revenue’s stated position that the increased rate of USC does not apply to share option income.

The USC applies to the market value of shares appropriated under an Approved Profit Sharing Scheme (APSS). Previously the USC was payable on the early release of the shares from the APSS and also on the receipt of a capital receipt prior to release which would, for example, arise on a rights issue. The Act provides that where the USC is payable on the appropriation of the shares it will not apply on the early release of the shares or on a capital receipt prior to release. This removes a potential double charge to the USC.

The Act provides that the USC will not be payable on shares appropriated under an APSS where the shares were held by an employee under an Employee Share Ownership Trust (ESOT) prior to 1 January 2011.

These changes have effect from 1 January 2011.

The Act provides that an employer will be permitted to sell sufficient shares to cover the USC or part of the USC due on share remuneration where it is not possible to collect it from the payments to the employee or the employee has not paid the amount due to the employer. This addresses a practical issue for employers although many unapproved share plans provide that shares can be sold to cover any withholdings the employer is legally obliged to apply.

The Revenue stated in Tax Briefing 2/2011 issued in March 2011, that the USC is payable by the individual within 30 days of the exercise of a share option. The Act includes an amendment to copper fasten this position.

When a landlord sells a rental property on which he/she received S.23 relief, there can in certain circumstances, be a claw back of the relief which is treated as rental income in that year. Excluded from the definition of income to which the USC applies is this “deemed” rental income.

Forfeitable Shares 
The Act provides for a refund of income levy and USC, as appropriate, where forfeitable shares are forfeited. This is similar to the income tax refund available when such shares are forfeited.

PAYE Withholding on Share Remuneration

The Act amends the PAYE legislation to provide that an employer can withhold and sell sufficient shares to cover the PAYE applicable to share remuneration. This is permitted where the employee does not otherwise provide the employer with the funds to pay the PAYE due. Many share plans provide that the employer can withhold shares to cover withholding which the employer is legally obliged to apply. However this amendment is a welcome one for those companies where the plans may not have included such a provision.

Foreign Earnings Deduction

The Act re-introduces, in a limited form, the Foreign Earnings Deduction. A deduction will be available for employees working temporarily overseas in the BRICS countries (Brazil, Russia, India, China and South Africa). The deduction is subject to a maximum claim of €35,000 and shall apply for the tax years 2012, 2013 and 2014.

In order to receive this deduction the employee must spend at least 60 days working in a BRICS country in a tax year or in a continuous 12 month period. These “qualifying days” must form part of a period of at least 4 consecutive days spent working in the BRICS country.

The deduction does not apply to employees paid out of the public revenue of the State e.g. civil servants, Gardaí and members of the defence forces or individuals employed with any board, authority or similar body established by or under statute.

The deduction is calculated based on the amount of time spent working in the BRICS country and is calculated according to the following formula:

D*E/F

• D is the number of qualifying days in the tax year
• E is the net employment income in the tax year (including share awards and share option income but excluding benefits in kind, termination payments and restrictive covenants), and
• F is the number of days in the tax year that the individual held the office or employment.

An example of how this deduction works is as follows. An individual who is tax resident in Ireland spends 120 qualifying days working in Brazil. The employment income for the year amounts to €100,000. The Foreign Earnings Deduction is calculated as follows:

The deduction is claimed at the end of the tax year when making an annual return of income for that year. A deduction will not however be claimable where another relief is claimed by the employee e.g. split year relief, Trans-border Relief, Special Assignment Relief Programme, R&D Incentive and the limited remittance basis that still exists.

Relief for employees engaged in R & D activities

The Act includes provides for the tax relief for employees engaged in R&D activities referred to by the Minister in the Budget. Key employees will be able to claim a relief for R&D tax credits surrendered to them by their employer.

Where the employer surrenders an amount to a key employee the employee can have the income tax charged on their employment income reduced by the amount surrendered. The relief can be claimed for the tax year following the accounting period to which the amount surrendered relates. However, the employee’s effective income tax rate on their total income, including that of their spouse or civil partner where relevant, cannot be reduced to less than 23%.

If the amount surrendered cannot be claimed in one year due to the 23% rate restriction the excess can be carried forward and offset against the income tax charged on the employee’s emoluments in the next or future years. The relief can be carried forward until it is fully claimed or until the individual ceases to be an employee of the company which surrendered the R&D credit.

A key employee is one who:

• Has never been a director of the employing company or an associated company and is not connected to such a director
• Does not, and did not, have a material interest in the employer company or an associated company and is not connected to a person who has or held such a material interest, and
• In the accounting period to which the surrendered credit relates performed 75% or more of the duties of the employment on qualifying activities

The employer will also have to satisfy a number of conditions. Details of these conditions can be found in the Corporation tax analysis of the Act . 

The relief could generate income tax savings of up to 18% for individuals and may be an effective method of incentivising key employees in the R&D space.

Special Assignment Relief Programme

Relief Programme to attract key personnel to Ireland.  The first step in this process covered in the Act is the removal of an existing relief which had been available over the last few years to certain foreign employees working in Ireland.  The existing relief which partially re-introduced a limited remittance basis of taxation for certain foreign employees, is removed for new employees with effect from 1 January 2012. For employees engaged before this date, the old relief will continue to be available for a maximum of 5 years as follows:

• If first year of entitlement was 2009 – relief is available up to and including 2013
• If first year of entitlement was 2010 – relief is available up to and including 2014
• If first year of entitlement was 2011 – relief is available up to and including 2015.

The new relief is available for those arriving between 2012 and 2014 and is welcomed in that it will encourage new workers (or returning workers who have been outside Ireland for at least 5 tax years) to come to or return to Ireland.  Specifically while a number of conditions apply in order to obtain the relief it is not limited to either foreign employments or non-Irish domiciles. Clearly this is designed to encourage the Irish Diaspora to return home and help the economic recovery.  

Subject to conditions the relief is available for 5 consecutive tax years.

In its basic form the relief will allow a relevant amount of compensation otherwise liable to tax in Ireland to be excluded from tax.  The relevant amount is valued at 30% of compensation between upper and lower thresholds (€500,000 upper and €75,000 lower).  

In determining whether an individual is entitled to the relief, the amount of compensation excluding:

• Benefits in kind including company cars and preferential loans
• Termination/ex-gratia payments
• Bonus payments whether contractual or otherwise
• Stock/Equity Options, and
• Other share based remuneration must exceed €75,000.

For example an individual coming to Ireland for the first time with a basic salary of €200,000 and assuming all other conditions are met would be entitled to have their taxable income reduced for that first year by an amount of €37,500 (€200,000 minus €75,000 @ 30%) thereby generating a tax saving of €15,375 i.e. €37,500 @ 41%.

The relief is however only for income tax and does not apply for the Universal Social Charge.

Additional conditions apply for both the employee and the employer in order to obtain the relief and care will need to be taken to ensure that the detailed conditions are adhered to including the tax residence position of both the employee and employer (or associated employer) at various points. The relief is specifically designed to complement Ireland’s Double Taxation network and countries with which Ireland has a tax information exchange agreement.

On a positive note it is possible for employees and employers to obtain relief through the PAYE system so that the relief can have an immediate impact rather than waiting until the tax year end to make a claim.  Employees making a claim however will automatically become chargeable persons for the year of claim which will result in a requirement to file tax returns.

Employers will also have a reporting requirement to Revenue for various details surrounding such employee claims.

Employees will however have to take care before making a claim to ensure the relief provides the best tax answer for them as making a claim will negate other possible claims which may reduce tax e.g. a Foreign Earnings Deduction, Trans-border Relief, R&D incentive and possibly the limited remittance basis that still exists.

Finally, in addition to the exclusion of a relevant amount from tax an employer will also be able to bear the cost of certain items for a relevant employee without creating an addition tax cost.  
These include the cost of one return trip for the employee and family to the overseas country they are connected with as well as Primary and/or Post Primary School fees of up to €5,000 per annum per child where the school has been approved by the Minister of Education.

Overall the new relief has to be seen as a positive step in encouraging new employees to move to Ireland and specifically to encourage the Irish Diaspora to return.  

Property Surcharge 

The Act introduces a new property surcharge from 2012 onwards, by means of an extension of the Universal Social Charge. It applies once certain conditions are satisfied:

• Where an individual’s “aggregate income” (i.e. employment income and self-employed/investment income) exceeds €100,000 per annum, and
• The individual is claiming certain “specified property reliefs”

The definition of “specified property reliefs” is extensive, but in broad terms captures certain area based capital allowance schemes (e.g. Custom House Dock, Temple Bar, Designated areas, Enterprise areas etc) where allowances were granted on an accelerated basis (i.e. generally an initial allowance of 50% of the capital expenditure was granted in year 1). It also includes capital allowances granted on the construction of holiday camps, third level institutions, childcare facilities, and tourist facilities. It includes capital allowances claimed in a particular tax year, and also any unused capital allowances carried forward from earlier tax years.

Once the above conditions are fulfilled, the 5% additional USC applies to the amount of the specified reliefs that an individual uses to shelter his/her income.

In addition, where this additional 5% USC applies to an individual in 2012, his/her preliminary tax for 2012 must be calculated as if this additional surcharge applied in 2011.

Health Insurance Premiums 

The tax credits available for individuals on health insurance premiums has changed over the last number of years, with the introduction of age related enhanced credits which heretofore were increased at 10 year intervals. The Act amends the credit system so that the increased credits will be given at 5 year intervals.

Illness Benefit 

In previous years, when an individual was receiving illness benefit, the first 36 days payment from the Department of Social Protection was exempt from tax. From 2012 onwards, this exemption has been abolished.

Mortgage interest relief 

As was announced in the Budget in a move that was welcomed at that time, the Act confirms an enhanced rate of interest relief of 30% for individuals who purchased their homes between 2004 and 2008.

As was previously aluded to, mortgage interest relief will no longer be available for individuals who take out a loan after 31 December 2012, and will be completely abolished from 2018.

Relief for the long term unemployed

Individuals who have been long term unemployed and subsequently return to the workforce are entitled to tax deductions from their income for the first three years. The basic deduction is €3,810 in the first year, €2,540 in the second year and €1,270 in the third year. This relief has been broadened to include individuals who sign on to claim for PRSI credits.

Third level fees 

Tax relief for third level fees has been modified over the last number of years. The Act provides that the first €2,250 and €1,125 of fees are to be disregarded for full time and part time courses respectively.

High Earners Restriction 

The Minister announced in his Budget speech that he intended to revisit the operation of the “High Earners Restriction” in Budget 2013. As expected there are no fundamental changes to the mechanics of the restriction in the Act. In broad terms one of the conditions of the restriction was that an individual’s income was above certain limits. Under the current rules individuals who suffered a claw back of S.23 relief, or a claw back of capital allowances on the disposal of a property (i.e. in both cases the claw back is treated as additional income) may have been classified as a High Earner.

New provisions in the Act, ensure that this “deemed” income does not cause an individual outside the scope of the restriction to be brought within its parameters.

Legacy property reliefs

An Economic Impact Assessment dealing with the proposed changes to legacy property reliefs has been completed. Previous Finance Acts had provided that S.23 relief and certain capital allowances to be significantly curtailed. However, as aluded to in the Ministers Budget speech, the conclusions drawn by the Impact Assessment ensure that the proposed curtailments are revoked in the Act. This will be welcomed by many investors who are currently vulnerable to insolvency.

The second element of the Act deals with the carry forward of capital allowances in respect of property incentives. The rules prior to this Act allowed individuals with a pool of unclaimed capital allowances arising from a particular investment to carry these allowances forward against future rental income indefinitely until fully utilised.

However, the Act introduces a number of measures with regards to the carrying forward of such capital allowances for “passive investors”. These new measure will not apply to a trade in which the individual is an active partner/trader.

The allowances that are impacted are as follows:

• Allowances arising on certain industrial buildings (e.g. hotels, mental health centres, private hospitals, sports injury clinics etc),
• Allowances arising on tourist infrastructure, childcare facilities and third level institutions etc. and,
• Area based capital allowances (Temple Bar, Custom House Dock, Enterprise Area etc).

The restriction applies by basically applying a “guillotine” to the carry forward of unused capital allowances. No unused capital allowances can be carried forward beyond the tax life of a building. Where the tax life of a building has already ended, or is due to end before 31 December 2014, then any unused capital allowances can be brought forward for relief until 31 December 2014.

Farming Taxation

A number of welcomed measures as highlighted in the Budget have been introduced in the Act. Farmers will now be entitled to a double deduction when calculating their taxable profits for the increase in the rate of carbon tax on farming diesel. This will be effective from 1 May 2012.

In addition, for individuals who farm through a farming partnership, enhanced stock relief of 50% is available. For young trained farmers, this relief is increased to 100%. This is subject to EU approval under State Aid rules and will come into effect from a date to be determined by the Minister for Finance.

Domicile Levy

A Domicile Levy was introduced by Finance Act 2010 and ensured that certain individuals who are domiciled in and a citizen of Ireland, with worldwide income exceeding €1 million, Irish property with a market value of more than €5 million and an Irish tax liability of less than €200,000 are subject to an additional domicile levy of €200,000. Credit is given against the levy for any income tax paid at the same time as or before the Domicile Levy is paid.

The conditions for the application of the Domicile Levy have been amended to ensure that it will no longer be a condition that an individual is a citizen of Ireland for the levy to apply, hence ensuring that individuals cannot renounce their citizenship to avoid the levy.

Tax administration

Penalty Provisions 
The Act amends the legislation which imposes penalties for deliberately or carelessly making incorrect tax returns and extends the penalty provisions so that they will now apply to returns that are required in respect of the Domicile levy and the Universal Social Charge.

Revenue Powers 
Additional sections empower the Collector General to request a Statement of Affairs from persons who have outstanding tax liabilities. Such a Statement of Affairs must contain details of all assets and liabilities of the person. In relation to assets, the Statement of Affairs must contain details, such as a full description of the asset, its location and the cost of acquisition to the person beneficially entitled to the asset. Certain assets of minor children and trustees must also be included in the Statement of Affairs. In addition, the Spouse or Civil Partner of the tax payer may be required to provide a Statement of Affairs. All Statements of Affairs submitted to Revenue under this provision must be signed by the person completing it to the effect that it is correct to the best of the person’s knowledge and belief.

The Collect General is also empowered to require a person carrying on a business to give security to the Collector General in relation to fiduciary taxes such as PAYE / PRSI, VAT, Relevant Contracts Tax (RCT), where the Collector General is of the view that such security is necessary in order to protect Exchequer receipts. Any person required by the Collector General to provide such security may not carry on business until such security is provided to the Collector General. There is a right of appeal to the Appeal Commissioners against a requirement by the Collector General to provide security.

Revenue’s powers have also been increased to  allow Revenue access documents for the purpose of investigating serious Revenue offences. An authorised officer of the Revenue Commissioners may apply to the District Court for an Order requiring a person to produce documents or to provide information required by Revenue in carrying out an investigation. Any person who fails to comply with an Order under this Section, or who supplies false or misleading information may be liable to a “Class A” fine, or imprisonment for a term not exceeding 12 months, or both, on summary conviction, or on conviction on indictment, to a fine or imprisonment for a term not exceeding 2 years, or both. There is provision for documents subject to legal professional privilege not to be delivered to Revenue.

Other provisions 
A number of the sections in the Act contain technical provisions designed to modernise and simplify assessing rules for direct taxes, i.e. income tax, corporation tax and capital gains tax. The principal feature of these provisions, which run to over 75 pages of the Act, is to introduce a system of full self-assessment for direct taxes from 2013. This change requires tax payers to submit a calculation of the tax due when filing their tax return and paying their tax for a particular year.

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Pádraig Cronin
Partner, Head of Tax
T: + 353 1 417 2417

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