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: 750,000
Gain: 749,999
Tax @ 20% (ER) 149,999
Ret. 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% 50,000
Balance of gain not qualifying for ER
749,999 @ 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).
Facts:
• Jules is, 55 years of age.
• Sells company for €1,000,001.
• Assume gain = €1,000,000
• Assume satisfies all the criteria for both Entrepreneur and Retirement
Relief.

Example Two: Jules
Proceeds: 1,000,001
Gain: 1,000,000
ER on first €1m
Tax @ 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 = €250,001
Half 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).
Facts:
• Catherine is, 55 years of age.
• Sells company for €2,000,001.
• Assume gain = €2,000,000
• Assume satisfies all the criteria for both Entrepreneur and Retirement
Relief.

Example Three: Catherine
Proceeds: 2,000,001
Gain: 2,000,000
Tax @ 20% on first €1m (ER) 200,000
Tax @ 33% on balance 330,000
Tax: 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 €1,000,000
ER 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
Business
Assets
€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
Shareholder
A B
Business
1
Business
2
Company X
Shareholder
A B
Business
2
Business 2
transferred to NewCo
New shares
issued 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
Transfer
of Business
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

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

Ronan Daly Jermyn Tax Update 2016

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