CCAB-I Pre Finance Bill Submission 2007
Mr Brian Cowen T.D.
Minister for Finance
Government Buildings
Merrion Square
Dublin 2
Dear Minister
CCAB-I Pre Finance Bill Submission 2007
Thank you for addressing in your Budget announcement many of the suggestions contained in the CCAB-I pre-Budget submission. Perhaps the most far reaching of these will be the changes in the area of Preliminary Corporation Tax. This simplification measure will be of immediate benefit to corporate taxpayers, which are of special concern to accountants working both in business and in practice. Your BES measures will also be of great assistance to SMEs, and we see no merit in any of the criticisms of this policy which have recently been reported.
I am now writing to you on behalf of CCAB-I to highlight a number of other matters arising in the context of your Budget for 2007, which we believe require your attention as the Finance Bill passes through the Oireachtas.
Please contact either myself or Brian Keegan, Director of Taxation at the Institute of Chartered Accountants, if you require anything further on any of the matters we are raising. We will follow the progress of the Finance Bill with considerable interest over the next several weeks and wish you well with your work.
Yours sincerely
Liam Lynch
Acting Chairperson, CCAB-I Tax Committee
cc Mr Frank Daly, Chairman, Office of the Revenue Commissioners
Mr Eamon O'Dea, Assistant Secretary, Office of the Revenue Commissioners
CCAB-I Pre Finance Bill Submission – Contents
Holiday cottages
Dual purpose developments
Hotel Projects
Addressing transactions involving tax uncertainties
Registration with the Private Residential Tenancies Board
Refunds of PRSI to self employed persons on foot of pension contributions
Professional Services Withholding Tax
Interest on late payment of tax
Relevant Contracts Tax – Rate of Withholding Tax
Treatment of Offshore Funds
CGT Rules
Holiday cottages
Relevant Legislation TCA97 ss 268(3) 352, 353
To retain the tax relief, holiday cottages, holiday apartments or other self-catering accommodation may not be let long term. Longer winter or other off season lettings are impossible in practice.
We suggest that the rules governing the letting of holiday accommodation be relaxed for the off-season, while retaining the conditions regarding short term summer season letting. This would:
- Increase the availability of rented accommodation, so reducing localised inflationary effects on rents.
- Help deal with the problems of deterioration of vacant property in the off-season
In order to preserve the intention of the restrictions set out in the legislation, we would propose that rental income from “non-holiday” rentals would not be sheltered by capital allowances, but would not of itself prejudice the availability of capital allowances for holiday lettings.
Dual purpose developments
Relevant Legislation TCA97 s372AM
A recent trend in the property market is the development of dual function premises, intended for use both for residential purposes and to provide home office or workshop or studio facilities. Because such units are not residential units in the customary sense, they may fail some of the tests for eligibility for relief, in particular under TCA97 s372AM which require premises to be used “solely as a dwelling”.
We ask that a legislative change be considered to allow such dual function units qualify for the various capital incentives that remain.
Hotel Projects
Relevant Legislation TCA97 s268, s270, s272
Where a hotel project whose planning application met the December 2004 deadline under TCA97 s272 now requires a new planning application, the entire tax relief is lost. This is logical in the context of a change to the structure of the building. However, a planning application may also be required where the use of part of the building and not its structure, will change. This situation also entails the loss of tax relief. Situations can arise where permission is sought, for example, to allow part of the restaurant to be used by members of the public who are not residents of the hotel but no structural changes or additional expenditure are envisaged.
We request an amendment, as appropriate, to TCA97 s272 which permits applications for change of use as in the circumstances described above.
Addressing transactions involving tax uncertainties
Relevant Legislation: TCA97 s598, TCA97 Part 6, Ch9, TCA97' s626B.
We request that it be made possible to proceed with certain identified and time sensitive transactions without exposure to interest or penalties. If it transpires that the tax interpretation applied might have been incorrect, immediate settlement of any balance of tax would be made.
This would apply to transactions where there is a defined and available tax relief:
- capital gains tax retirement relief – TCA97 s598
- company buy back of shares – TCA 1997 PART 6 Ch9
- eligibility for the participation exemption reliefs – TCA97 s626B
and where it is clear that the taxpayer was not negligent in considering the tax aspect at the time of the transaction.
The process would be contingent on the use of “tax certificates” – a form of pre-purchased savings bond which could be used to discharge tax without interest or penalty, and which could be of considerable benefit both to the Exchequer and to the taxpayer in the management of cases involving technical difficulty.
Registration with the Private Residential Tenancies Board
Relevant Legislation: FA06 s11 as it amends TCA97
The integrity of our tax system is prejudiced by the use of Revenue powers and Revenue sanctions to police and penalise activities mandated by another arm of the State. FA06 introduces a tax sanction for failure to register with the Private Residential Tenancies Board.
It should be repealed because:
- The requirement for landlords to register residential tenancies is governed by Part 7 of the Residential Tenancies Act 2004, and has been in force for some time. There are sanctions for failing to comply with Part 7. If that sanction is deemed inappropriate, it should be remedied there, not in the tax code.
- FA06 s11 introduced a significant additional administrative burden on taxpayers, concerning rental income deductions and the operation of evidential requirements of registration with the PRTB.
- It is not clear that the changes to the Returns of Income required to implement FA06 s11 are in accordance with the provisions of TCA97 s879(1).
Refunds of PRSI to self employed persons on foot of pension contributions
Relevant Legislation: s21, s38, Social Welfare Consolidation Act 2005.
Though a revision to the tax law here is not within the ambit of the Finance Bill, it is perhaps appropriate to mention it in the context of Finance Bill amendments. An employed taxpayer can claim a PRSI refund where he or she makes a pension contribution, but a self employed person can not. This is inequitable
Where a payment is made either to a Personal Retirement Savings Account, an occupational scheme or a qualifying premium under an annuity contract approved by the Revenue Commissioners, a refund of PRSI is generally available to taxpayers. The legislation governing the repayment mechanism, s38 and s21(1)(c) of the Social Welfare Consolidation Act 2005, operates to prevent a PRSI refund in respect of “reckonable income” (trading income) as opposed to earnings which are subject to PAYE under Schedule E.
We would ask that this PRSI treatment for the self employed be brought into line with the treatment for employed persons.
Professional Services Withholding Tax
Relevant Legislation: TCA97 Part 18 Chapter 1
At present, certain foreign professional services providers can claim a refund of PSWT provided they are resident in either an EU country or in a country with which Ireland has a DTA and are not operating as a branch. The administrative process would be greatly simplified if foreign based service providers could avail of an exemption from the withholding tax on provision of appropriate declarations. A procedure with close analogies already operates for Dividend Withholding Tax.
There would be significant commercial advantages for Semi State companies if such a procedure were to be adopted, as there is evidence that the cash-flow and administrative costs of the tax are passed on by foreign providers in the overall cost of contracts.
Interest on late payment of tax
The proposal of the Revenue Powers Review Group should be adopted in full by reducing the 12% rate of interest on late payments to 10% for all tax heads.
The reduction of the rate of interest on overdue tax to 10% per annum, introduced in Finance Act 2005 was welcome, but confined to late payments of the Direct Taxes. The lower interest rate does not apply to indirect taxes such as excise duties and VAT and taxes such as PAYE, relevant contracts tax, professional fees withholding tax, DIRT and other withholding and exit taxes which are collected by employers and others on a fiduciary basis.
The 12% rate operating here should now be reduced to 10% also, to ensure equality of treatment for taxpayers.
Relevant Contracts Tax – Rate of Withholding Tax
Relevant Legislation: TCA97 s531(1)
During 2006, Revenue conducted a well publicised campaign into the Construction Industry. We understand, recognising that these are provisional figures, that approximately 29% of all audit activity during 2006 was directed at the Construction Industry. This resulted in a yield of some 20% of total yield from audit activity that year.
As well as the audit activity, Revenue went some considerable way towards consolidating and systematizing the forms and procedures associated with Relevant Contracts Tax.
In the context both of these new procedures and the outcome of the Revenue campaign, the 35% rate of withholding tax should be re-examined. The 35% rate was set at a time when the standard rate of income tax was also 35%, a situation which has not prevailed for many years now. It is counterproductive to impose a rate which is too penal. Very few businesses of any type pay income tax at a rate of 35% of turnover.
The comparable Construction Industry Scheme, established with the same aims in the UK, functions with an 18% withholding tax rate (though this rate is likely to be increased to 20%). The use of a 20% rate here could well result in greater yields and greater overall compliance rates within the industry.
Treatment of Offshore Funds
Relevant Legislation: TCA97 Part 27, Chapter 2
There have been signals from Revenue in recent weeks conflicting with the operation of the Offshore Funds regime and the scope of the legislation as presently understood.
A Revenue Tax Briefing issued in late December confirms what had been the generally accepted principle that income from such funds will not be taxed twice, that is to say both on a look-through basis and under TCA 97 s747D. However, the statement makes reference to the treatment of certain funds in accordance with “first principles”. We would take the view that recourse to “first principles” is taken only in the absence of legislation to address the specific instance. The appropriate definition for this specific instance, i.e. a material interest in offshore funds, is to be found in TCA97 s743 (1).
TCA97 s743(1)(a) refers to “arrangements… which take effect by virtue of the law of a territory outside the State” yet the article refers to “foreign entities that are treated in Ireland as transparent”. It would seem that two sets of criteria are being used – Irish first principles being applied to an entity constituted under foreign law for which nonetheless there are specific Irish tax provisions. The Offshore Funds legislation in Chapter 2 of Part 27 uses as its criterion the legal form of the entity given effect by virtue of the law of a territory outside the State.
It is not clear that this change in approach is necessary given the current legislation.
CGT Rules
Relevant Legislation: TCA97 s556(3)
There should be an option to determine market value for assets held long term by reference to 5 April 1974 or 31 December 1991, the latter date being the commencement date for CAT aggregation purposes.
There are enormous administrative difficulties, both for Revenue and for taxpayers, in determining 30 year old values as well as addressing the significant inflation problem in taxing gains derived from the disposal of such assets. The need to re-base becomes more acute with every passing year.