Trans-Border Workers - Finance Act 1998 Provisions

Introduction

Tax Briefing Issue 32 contained a brief summary of the relief contained in Section 13 Finance Act 1998 for individuals who are resident in the State but who commute to their place of work outside the State. In response to requests from some practitioners, this article expands on the information contained in Issue 32.

Reduction in income tax for certain income earned outside the State

Section 13 Finance Act 1998 inserts a new section - Section 825A - in the Taxes Consolidation Act 1997.

The section is designed to give income tax relief to individuals who are resident in the State but who work outside the State. It applies to individuals who commute daily or weekly to their place of work outside the State and who pay tax in the other country on the income from their employment. By far the largest category to benefit are cross-border workers who commute daily to work in Northern Ireland. Individuals who travel to the UK and elsewhere to work, returning at week-ends, also benefit. The relief applies not only to cross-border workers but also to trans-border workers.

The new relief applies from 6 April 1998, and effectively removes the earnings from a qualifying foreign employment from liability to Irish tax where foreign tax has been paid. In simple terms, the effect of the measure is that Irish tax will only arise where the individual has income other than income from a foreign employment.

The relief - Section 825A (3)

Subject to meeting certain conditions an individual may have his or her income tax liability for a particular tax year reduced to the specified amount where liability would otherwise exceed that amount.

Specified Amount

The specified amount is the income tax which would be payable for a tax year, before credit for any foreign tax paid, reduced in the proportion that the total income excluding income from a qualifying employment bears to the total income. This can be expressed by way of the following formula:

Total tax liability under Irish rules X	Income other than Foreign Employment Income
	Total Income

Note

Where relief is granted under the new Section 825A, no credit is given for the foreign tax paid on the income of the qualifying employment.

Conditions

The conditions are:

• The individual must have earnings from a qualifying employment
• The duties of the qualifying employment must be exercised wholly outside the State in a country with which Ireland has a double taxation agreement. (In determining whether the duties of a qualifying employment are performed wholly outside the State, any duties performed in the State which are merely incidental to the performance of the duties outside the State, are regarded as performed outside the State.)
• The income from that employment must be subject to tax in the other country and must not be exempt or relieved from tax in that country
• The foreign tax due on the income must have actually been paid to the relevant authorities and must not be repaid or be eligible to be repaid
• For every week during which the individual works outside the State in a qualifying employment, he or she must be present in the State for at least one day in that week. (As is the case for the rules of residence, an individual is regarded as being present in the State for a day if he or she is present in the State at midnight.)

Qualifying employment

A qualifying employment is defined as an office or employment held outside the State in a country with which Ireland has a double taxation treaty and which is held for a continuous period of at least 13 weeks in a tax year. The definition includes an office of director of a company which would be within the charge to corporation tax if it were resident in the State, and which carries on a trade or profession. (However see below regarding exclusions for proprietary directors.) Excluded from the definition are all State employments as are employments with any statutory bodies established in the State.

Exclusions - Section 825A (2) and 825A (5) TCA 1997

The new relief does not apply where the income from the qualifying employment:

• Is subject to the ‘remittance basis’ of taxation (Section 71 (3) TCA 1997)
• Is subject to the ‘split year’ treatment (Section 822 TCA 1997). (Split year treatment applies where a taxpayer in the year of arrival in, or departure from, the State is deemed resident for part of the year only and is thus already entitled to favourable tax treatment.)
• Is income paid by a company to one of its proprietary directors or to the spouse of one of its proprietary directors
• Is subject to a claim for relief under the foreign earnings deduction provisions (Section 823 TCA 1997)
• Is subject to a claim for relief in respect of the new seafarer’s allowance (Section 472B TCA 1997).

The following important points should be noted:

Foreign Income is still assessable

The effect of the section is to reduce the amount of tax payable in respect of the individual’s total income to the specified amount. It is important to note that the income from the foreign employment remains assessable and that the legal obligation to return such income on the annual return of income remains. Income from a foreign employment is assessable under Case III Schedule D and, accordingly, the provisions of self assessment, including the payment of sufficient Preliminary Tax to avoid interest charges, apply.

Tax bills may still arise

A married couple, one of whom has income from a qualifying employment and the other of whom has income assessable in the State under PAYE, may decide to allocate the full married personal allowance and double rate bands against the income of the spouse with Irish income. In this case the amount of tax deducted under the PAYE system on the Irish income may fall substantially short of the couples’ ultimate liability (the specified amount) even taking account of the new relief. In such cases a substantial tax liability may arise.

The following examples illustrate generally how the relief works and Example 2B, in particular, illustrates the effects of allocating the full married allowance and rate bands against the income of the spouse subject to tax under the Irish PAYE system. Where the only other source of income is income subject to PAYE, such tax liabilities can be avoided by allocating only the single allowance and single rate bands against the income of the spouse with the Irish income.

EXAMPLE 1

Single person resident in the State in 1998/99, employed in Northern Ireland earning £20,000 sterling with Irish rental income of £5,000.

1. Pre-Section 13 liability

N.I. employment income		(Stg £20,000)	*IR£23,530
Irish rental income		£5,000
Total Income		£28,530
Tax allowances 1998/99
Single personal allowance	£3,150
PAYE allowance	£800	£3,950
Taxable income		£24,580
Tax due	£10,000 @ 24%	£2,400
	£14,580 @ 46%	£6,706
		£9,106
Credit for UK tax paid (Stg £3,506)			IR£4,125
Liability to Irish tax		£4,981

*Conversion rate Stg£ = IR£0.85p used for illustrative purposes

2. Operation of Section 13

The specified amount is

Irish tax liability X	Income other than N.I. Employment Income
	Total Income

i.e.	£9,106 x £5,000	=£1,595
	£28,530

3. Effect of Section 13

The taxpayer’s Irish tax liability is reduced from £4,981 to the specified amount of £1,595 yielding a saving of £3,386.

Note

• If the taxpayer had no rental income, the specified amount would be zero.
• To avoid interest charges a Preliminary Tax payment, if based on the 90% rule, of £1,435.50 is required

EXAMPLE 2

Married couple resident in the State in 1998/99 with both spouses earning. Spouse A is employed in the State and earns £30,000. Spouse B is employed in Northern Ireland and earns £20,000 sterling.

1. Pre-Section 13 liability

Income		Spouse A	£30,000
Spouse B (Stg£20,000)		IR£23,530
Total Income		£53,530
Married personal allowance	£6,300
PAYE allowances	£1,600	£ 7,900
		£45,630
Tax	£20,000 @ 24%	£4,800
	£25,630 @ 46%	£11,789
		£16,589
Credit for
Mortgage interest 1	£600
Health insurance 2	£168	£768
Tax due		£15,821
Credit for UK tax paid (Stg£3,506)			£4,125
Liability to Irish tax		£11,696

2. Operation of Section 13

The specified amount is

Irish tax liability X	Income other than N.I. Employment Income
	Total Income

i.e.	£15,821 x £30,000	= £8,866
	£53,530

3. Effect of Section 13

The couple’s Irish tax liability is reduced from £11,696 to the specified amount of £8,866 yielding a saving of £2,830.

4. Section 13 may not rule out a tax bill

In cases where a couple decides to use the full married allowance and double rate bands in the calculation of the tax of the spouse with the Irish income, the specified amount will exceed the amount of Irish tax deducted through the PAYE system, for instance, from the spouse with the Irish income, during the year. In such cases Irish liability will only be discharged on the payment of a further substantial amount of tax to bring the total tax for the year up to the specified amount. Example 2B illustrates the position.

¹ Assume interest of £3,375 x 80% - £200 = £2,500 @ 24% = £6002

² Assume health insurance of £700 @ 24% = £168

EXAMPLE 2A

Assume Spouse A uses the single personal allowance and rate bands for the purposes of paying PAYE on the Irish income of £30,000.

Income Spouse		£30,000
Personal allowance	£3,150
PAYE allowance	£800	£3,950
		£26,050
Tax	£10,000 @ 24%	£2,400
	£16,050 @ 46%	£7,383
		£9,783
Credit for – Mortgage interest and health insurance		£768
Tax paid under PAYE		£9,015

In this case the tax of £9,015 paid under the PAYE system exceeds the specified amount of £8,866 giving the taxpayer an entitlement to a refund of £149. In these circumstances a payment of Preliminary Tax would not be necessary for 1998/99

EXAMPLE 2B

Assume Spouse A uses the married personal allowance and rate bands for the purpose of paying PAYE on the Irish income of £30,000.

Income Spouse A		£30,000
Personal allowance	£6,300
PAYE allowance	£800	£7,100
		£22,900
Tax	£20,000 @ 24%	£4,800
	£2,900 @ 46%	£1,334
		£6,134
Credit for – Mortgage interest and health insurance		£768
Tax paid under PAYE		£5,366

In this case the tax of £5,366 paid under the PAYE system falls substantially short of the specified amount of £8,866 leaving a net liability of £3,500 to be made up. In these circumstances a payment of Preliminary Tax of £3,150 (assuming the 90% rule applies) is necessary.