The Department of Finance have estimated growth of 4.3% for 2017 in Ireland; this presents an opportunity for Northern Ireland companies to do business in the Republic of Ireland.

There are many issues to consider for Northern Ireland based companies operating in the south and although not all of these are tax related, tax often has a significant impact on operational decisions made. The construction industry in particular has significant compliance requirements in both jurisdictions and failure to meet these requirements could lead to cash flow issues.

This article will look at the various implications for a UK registered limited company operating in the Republic of Ireland (“ROI”).

Permanent establishment

The first step is to determine if the business has a permanent establishment in the ROI. A permanent establishment exists if:

• There is a place of business in the ROI such as an office or a factory
• The business is managed and controlled in the ROI,
• Employees operating in the ROI have the power to agree contracts with customers in there or
• The business is in the construction industry and has a contract in the ROI that exceeds 6 months.

A business with a permanent establishment in the ROI has to register for tax in the ROI.

Commercial vehicle

The next step is to consider the commercial vehicle used to carry out these activities in the ROI. The various options are as follows:

• Existing company
• Branch
• Subsidiary
• Standalone company

Existing company

A business without a permanent establishment in the ROI can operate through the existing NI incorporated business structure. There are no set up costs and any losses from the ROI activities can be set against all profits generated by the company. There is no corporation tax payable in the ROI and all ROI profits are taxed in the UK.

A business with a permanent establishment in the ROI has to register for Irish corporation tax. Branch accounts have to be prepared to identify the profits relating to the activities in the ROI reportable to the Revenue Commissioners with all profits also reportable in the UK and thus double taxation relief applying.

Branch

A business can elect to exempt the results of its foreign branches from UK corporation tax. This means that profits generated in the ROI are ring fenced from UK corporation tax. Profits are only subject to 12.5% corporation tax in the ROI. However if losses are generated from the ROI activities, these cannot be set against UK generated profits. This election is irrevocable. Some businesses delay making the election until they are established in the ROI and are confident of future profits.

Subsidiary

Many UK companies consider a subsidiary as an alternative structure as it separates the ROI business from the UK business. Provided it is incorporated, managed and controlled in the ROI, profits are only taxed at 12.5%, subject to the controlled foreign company rules. It is also easier to sell the ROI business if it is in a separate company. Surplus funds can be moved up to the holding company without any tax consequences by issuing dividends.

Losses generated by the ROI subsidiary cannot be set against the profits of the UK companies within the group except in very restricted circumstances. These loss provisions reflect the position HM Revenue & Customs and the relevant legislation took after the two Supreme Court and CJEU decisions as a result of the long running Marks & Spencer case. The legislation only allows losses if the UK company can show that the losses of the Irish resident subsidiary have not been used in previous or current accounting periods in the ROI or elsewhere.

Brexit might result in even these restricted circumstances for loss relief being removed.

Standalone company

A standalone company has the same advantages of a subsidiary except for the ability to transfer surplus funds to a UK company. It can result in a cash rich company having issues with cash extraction as dividends issued to individual shareholders are subject to income tax in the ROI.

Other taxes to be considered

VAT

There is no threshold for VAT registration for foreign traders. This means that any business physically operating in the ROI has to be VAT registered, with one exception. Businesses in the construction industry do not have to register for VAT if they are only subcontractors working for another business also operating within the construction industry. Instead, the reverse charge applies and the wording ‘VAT on this supply to be accounted for by the Principal Contractor’ should be included on ROI invoices issued by the subcontractors.

The main rates of VAT in the ROI are 13.5% for services and 23% for goods. The two thirds rule applies to a mixed supply of goods and services. If the proportion of goods exceeds two thirds of the total contract price, then the supply is treated as if it was for goods only and subject to the VAT rate of 23%. However, the two thirds rule is not applicable in the case of reverse charge scenarios.

Employment taxes

Any business operating in the ROI also has to consider reporting requirements for employees working in the jurisdiction.

A company required to be registered for corporation tax in the ROI has to operate payroll for any employee working more than 30 days in the ROI – any part of a day worked in the ROI counts as 1 day.

Revenue Statement of Practice SP-IT/3/07 ‘Employee payroll tax deductions in relation to non-Irish employments exercised in the State’ sets out the circumstances in which an exemption from operating ROI payroll applies for companies not required to be registered for corporation tax. In summary:

• Employee works less than 60 days in the ROI – no requirement to operate ROI payroll
• Employee works between 60 and 183 days in the ROI – register for ROI payroll and apply for exemption from operating it
• Employee works more than 183 days in the ROI – register for and operate ROI payroll from day 1

An employee hired to work in the ROI only needs to be processed through ROI payroll. Employees who were originally hired to work in the UK and who are then transferred to work in the ROI have to be processed through the UK and ROI payroll systems if the payroll costs are ultimately borne by a UK employer.

Foreign tax credit can be applied for. This means that the tax paid in the ROI can be set against the tax paid in the UK on the same wage with the tax set off restricted to the lower of the UK and ROI tax.

It is important to note that the ROI and UK have the same income tax rates – basic rate of 20% and higher rate of 40% but the UK has an additional tax rate of 45% for income above £150,000. The ROI also has the universal social charge which ranges from 0.5% to 8% and a further 3% for non-employment income above €100,000. This means that in most cases the effective tax rate is higher for individuals in ROI than in the UK. Most employees would not be happy to have reduced take home pay each week because they were working in the ROI. This means that usually the employer absorbs the cost and this has to be factored in when pricing jobs in the ROI.

Employees taxable in both the UK and the ROI should apply for exemption from PRSI (the ROI NIC equivalent) by completing the A1 application.

From 6 April 2016, the UK introduced the option of payrolling most benefits provided to employees such as company car and private medical insurance. The ROI has been payrolling benefits for many years. The payrolling of benefits in the ROI is not optional.

Also the business will need to consider which tax regime applies in respect of expenses paid for travel and subsistence. The Revenue Commissioners recently issued eBrief No 49/17 ‘Tax treatment of their reimbursement of Expenses and Travel and Subsistence to Office Holders and Employees’. This includes revised civil service rates for travel and subsistence and clarifies the position in respect of country money which is applicable to the Construction Industry.

Relevant Contracts Tax

Relevant Contracts Tax (RCT) covers the Construction Industry, Meat Processing and Forestry. It includes haulage for hire of materials in these industries which means that hauliers are frequently within the scope of RCT.

Principal contractors have to check the rate of tax to be deducted from payments made to subcontractors. The rates of tax are 0%, 20% and 35% on the total amount payable including VAT. The rate depends on the subcontractor’s compliance record with the Revenue Commissioners. The 35% rate is generally for businesses which are not registered for RCT but should be registered and for non-tax compliant subcontractors.

Foreign companies can submit a RCT refund claim at any time during the year and there is no limit to the number of refund claims that can be made in a year. However, it can take at least 3 months to obtain the refund and if the business is not compliant or suspected of not being compliant, the Revenue Commissioners will not release the refunds until they are fully satisfied that they are not owed other taxes. On the plus side, RCT withheld can be set against any other tax payable by the business. This can reduce the cash flow impact of suffering the RCT deductions.

Therefore, it is important to obtain the 0% tax rate as soon as possible. This is where the business structure may have an impact. The history of compliance in the UK can be used to obtain the 0% in the ROI provided you are operating in the ROI through the existing business structure, branch or subsidiary. However, a standalone company will have no history and the Revenue Commissioners will expect at least one year of filing all relevant forms including the first corporation tax return and paying all relevant taxes on time before considering applying the 0% rate.

The last point to be aware of is that what is given can also be taken away – the 0% can be changed by the Revenue Commissioners without warning but if the issue that resulted in the change in RCT rate is resolved e.g. RCT return for a month was not submitted, then the 0% can be restored just as quickly.

Proprietary directors

A director of a ROI resident company is required to submit a personal tax return in the ROI unless the director is unpaid or is non-proprietary. A proprietary director is defined in the ROI as a director who is a beneficial owner or a director able to directly or indirectly control more than 15% of the ordinary share capital of an ROI resident company.

A director who is not resident in the ROI has to report ROI sourced income only in the ROI personal tax return. Late filing surcharges of 5% and 10% apply to a director’s personal tax return submitted late. These surcharges apply to income tax payable before accounting for tax already deducted at source such as PAYE.

Conclusion

There are many issues that need to be considered when considering operating in another country and they are complex and interlinked. Tax is only one aspect but it is important to understand the scope and implications for the business as failure to use the correct commercial vehicle and to comply with the tax legislation in the ROI can have far reaching consequences for cash flow and ultimately the viability of the business.

Each business will have its own issues and should always seek professional advice that is tailored to its own needs.

Denise Heaney is a Tax Consultant with Cavanagh Kelly

Email: Denise.Heaney@cavanaghkelly.com