81A Restriction of deductions for employee benefit contributions

Summary

This section determines the timing of deductions, in computing an employer’s taxable profits for a chargeable period, for employee benefit contributions made by an employer through, for example, an Employee Benefit Trust (EBT). It aligns the timing of the tax deductions that are granted to employers in respect of contributions for such purposes with the time the benefit from those contributions becomes taxable in the hands of the employees. An employer is entitled to a deduction for employee benefit contributions made in any chargeable period provided that taxable benefits are received by employees during that period or within 9 months from the end of it. Otherwise, the employer will be granted the deduction for the period in which the benefits are eventually provided to employees. This restriction on the allowability of contributions does not apply in the case of employers’ contributions to approved employee share schemes, approved pension arrangements or certain accident benefit schemes.

Details

(1)(a) “accident benefit scheme” identifies a type of employee benefits scheme which is not affected by the restricted allowability in respect of contributions imposed by this section;

“chargeable period” is defined by reference to section 321;

“employee benefit scheme” indicates the type of arrangement that is covered and specifically includes employee benefit trusts (EBTs);

“qualifying expenses” defines the expenses incurred by a “scheme manager” (such as a trustee of an EBT) that are qualifying expenses for the purposes of restricting deductions under subsection (3). These are expenses of operating the employee benefit scheme (but not the cost of the benefits themselves) which, had they been incurred directly by the employer, would have been allowed as a deduction in the calculation of the employer’s taxable profits – essentially expenses incurred wholly and exclusively for the purposes of the employer’s trade or business.

“scheme manager” means any person who administers an employee benefit scheme or any person to whom the employer makes a money payment or transfers an asset to keep or use for the provision of benefits under an employee benefit scheme to employees of the employer.

(1)(b) For the purposes of the section —

1. an employee benefit contribution is made if, as a result of any act or omission, any property is held, or may be used, under an employee benefit scheme, or where the total value of such property is enhanced. This covers, for example, contributions by an employer to an EBT or to any other intermediary but it also covers any other action that has the effect of creating or enhancing the value of employee benefit contributions.
2. qualifying benefits are provided where money is paid or assets are transferred (which involves an actual payment or transfer not a loan) and the recipient or someone else is (or would be if resident, ordinarily resident and domiciled in Ireland) chargeable to income tax on the benefits provided, and
3. a reference to a person’s employee includes the holder of an office under the person.

Application

(2)(a) This section applies where —

1. there is a computation of a person’s taxable profits to be charged under Case I or Case II of Schedule D for a chargeable period beginning on or after 3 February 2005, and
2. a deduction would (were it not for this section) be allowed for that period in respect of employee benefit contributions made, or to be made, by that person (the employer).

(2)(b) The section does not apply in regard to the deductions listed in subsection (7).

Restriction on deduction

(3)(a) The deduction that would otherwise be allowed in respect of employee benefit contributions made by an employer for a chargeable period is restricted to the extent that the scheme manager (for example, a trustee of an EBT) —

1. provides qualifying benefits from the contributions, or
2. pays qualifying expenses from the contributions,

during that chargeable period or within 9 months from the end of it.

(3)(b) Any qualifying benefits provided (or qualifying expenses paid) by the scheme manager after that scheme manager obtains employee benefit contributions from the employer are to be treated as provided or paid “out of” those contributions in an amount up to the total of the contributions less any amount previously allowed. No account is taken of any other receipts and expenses of the scheme manager.

Previously disallowed amount

(4)(a) Where a deduction for an employee benefit contribution has previously been disallowed (under subsection (3)), such an amount will be allowed for a subsequent chargeable period to the extent that qualifying benefits are provided during that subsequent period.

(4)(b) The limit on this amount is the total amount of contributions less amounts previously allowed under subsection (3)(a) or subsequent (4)(a). Again, in this regard, no account is taken of any other receipts and expenses of the scheme manager.

Transfer of asset

(5)(a) This subsection is relevant where the qualifying benefit is the transfer of asset.

(5)(b) The amount of the benefit is the total of —

• the amount (if any) spent on the asset by the scheme manager, or where the asset is new shares in a company connected with the employer (or rights in respect of such shares) issued by the connected company, the market value of those shares or rights at the time of transfer,
  and
• where the asset is transferred to the scheme manager by the employer, the amount that would (but for this section) be allowed in respect of the transfer.

(5)(c) Where the amount arrived at under paragraph (b) is greater than the amount of which an income tax charge arises on an employee (which could happen due to a fall in value of the assets since the scheme manager obtained it from the employer), the allowable deduction under subsection (3) or subsection (4) is limited to the lower amount on which an employee is chargeable.

Calculation of profits or gains – timing

(6) Where an employer calculates profits or gains for a chargeable period and does so less than 9 months after the end of the period, the taxable profits are to be calculated by reference only to benefits provided, expenses paid or contribution made up to the date the calculation is made. Should qualifying benefits, etc., be made between that date and the end of the 9 months period, the employer may adjust the calculation, as necessary, to reflect this position.

Deductions outside section

(7) Particular allowable deductions to which the section does not apply are deductions —

• in respect of consideration for goods or services provided in the course of a trade or profession – this would cover payments made by employers for goods or services from which employees may benefit,
• in respect of contributions under an accident benefit scheme,
• under Part 17, in respect of the provision of employee profit sharing and share ownership schemes, and
• under Part 30, in respect of the provision of retirement benefits.

Relevant Date: Finance Act 2019