I. ICAI Press Release

Longer term Finance Bill benefits for business will not outweigh short term costs – ICAI

The Finance Bill published this afternoon does contain worthwhile enhancements to R&D, BES and our Double Taxation network, but these are unlikely to have immediate short term benefits. It's hard to see how any stimulus measures in this Bill are of a scale reflective of the country's very serious economic situation. Measures such as the exemption regime for small start-up companies, while welcome, may not be sufficient.

The focus of this Bill was to be one of “support for the enterprise sector by enhancing the knowledge economy”. However this message gets lost in the realities of accelerated tax costs, most notably a new corporation tax payment regime with its harshest cashflow implication arising in 2009.

The application of a 3% levy on income amounts exceeding €250,000 had been well signalled in advance of the Bill. The current version of the Levy regime retains the unwelcome feature of denying relief for pension contributions.

ICAI notes the extension of the protections of the European Convention on Human Rights for taxpayers needing to make settlements with Revenue – it is the single issue taking up most of the space in the Bill. At first reading it would seem that the proposed approach is overcomplicated for taxpayers who wish to sort out difficulties on their own initiative without being prompted by Revenue.

The car parking space levy looks increasingly like a negative tax – one which could cost more to administer than it will yield. As such it could be assumed that it is the first phase of a developing measure intended to combat congestion. It is extremely important that the enforcement of the parking space levy be deferred until mid 2009 – no employer can reasonably be expected to have payroll systems in place to collect any new levy with this complexity from 1 January next.

II. Specific Provisions

(i) Tax and Duty Civil Penalties

Schedule 5 of the Finance (No.2) Bill 1998 legislates for many of the features of the current Code of Practice for Revenue Auditors. The stated objective is to create a system of “appealable” tax penalties to maintain compliance with the European Convention on Human Rights, but in some respects the legislation goes further and may have other consequences, unintended or otherwise.

In broad outline a taxpayer will have an opportunity to have a court examine whether they are liable to a civil penalty for tax default. Unless the taxpayer agrees to the penalty determination (as is frequently the case in settlements under the existing Code of Practice) the penalty will not be imposed unless a court has determined that such penalty is due.

The court involved will be the District Court, Circuit Court or High Court, but not the Appeal Commissioners. The Law Reform Commission had recommended that the Appeal Commissioners be the first port of call in appealing penalties, but this is not the case in the legislation as drafted.

This has two consequences. Appeal Commissioners’ hearings are private – held “in camera”. The manner of hearings as proposed are not. While arguably up to now any judicial review of the implementation of a penalty would be in open court, the key to the success of the Qualifying Disclosure process has been the confidentiality of the settlement. This is particularly so for Unprompted Qualifying Disclosures which have been the backbone of the successive Revenue Investigations in recent years – Offshore Assets, SPIP and the like. There is a risk that with a more formalised, automatic appeals regime, we might all become more trigger happy in arriving at penalty determinations. This would make the incentive to settle to avoid publication largely redundant.

Secondly, the whole disclosure structure has become more tightly defined to facilitate the new appeals process. This is not of itself a bad thing, but tighter definitions shouldn't imply broader definitions. For example, if a penalty is to be appealable, the circumstances in which the disclosure is made must also be appealable and defined in law.

A qualifying disclosure is defined as “a disclosure that the Revenue Commissioners are satisfied is a disclosure of complete information in relation to, and full particulars of, any matter occasioning a liability to tax of the person made in writing to the Revenue Commissioners”. Unprompted Qualifying Disclosures have usually been accepted “as is”, with bona fides understood by both sides. The new definition suggests that each Unprompted QD will have to be examined by Revenue.

Furthermore, a QD was understood to cover tax shortfalls for whatever reason for the period or taxhead under examination with any consequential adjustments, along with tax shortfalls arising through deliberate default irrespective of the period or taxhead. It now appears that the QD must encompass all tax shortfalls, whether they arose through deliberate default or not. In a perfect world, this is the appropriate approach. In the bad old world we live in, which needs this kind of legislation in the first place, the QD bar may be impossibly high. This is especially true for Unprompted QDs.

It is clear that the existing Code of Practice for Revenue Auditors will have to be substantially revised to coexist with the new legislation. ICAI, through CCAB-I will be involved in that process, and we will keep members briefed on it. For the time being, other points to note may include:

• The new legislation will have effect from the date of passing of the Act, and therefore could apply to cases currently open.
• The new rules will apply both to fixed and tax geared (percentage of the tax at issue) penalties.
• The concepts of Deliberate Default, Gross Carelessness and Insufficient Care, which attract tapered penalties are being replaced with defined concepts of Deliberate Default, Carelessness and “Other Carelessness”, the latter being distinguished by the quantum (15%) of tax at issue. The same penalty mitigation rates appear to apply.
• The courts will be able to award costs in relation to a penalty appeal.
• In cases where penalties cannot be agreed under the Code of Practice procedure, Revenue will issue a formal determination, which the taxpayer can appeal within 30 days. It seems that even absent an appeal, Revenue will still have to get the court to confirm the determination.

(ii) Income Levy

The Income Levy is officially part of our personal tax liability from 1 January 2009. However, there are some notable amendments to the income levy in the Finance (No 2) Bill 08 from that originally announced in the October Budget. Under the Bill, a levy of 1% will apply on income up to €100,100, with a levy of 2% arising on the next €150,020 and a 3% levy arising on the remainder.

Low income earners are excluded from paying the levy where income is €18,304 or less. There is also an age related exemption for persons aged over 65 who have gross income of less than €20,000 with a provision for double that limit for a married couple. Social welfare payments and a number of similar type payments made by other Departments are also excluded.

Excess tax credits or reliefs cannot be set against any charge to the income levy and, pension deductions and capital allowances are not available on the calculation of the levy either.

The income levy cannot be circumvented by basing preliminary tax on 100% of the prior year as S.531H(3) ensures that preliminary tax payments in 2009 must include the income levy.

The only respite from the income levy appears to take the form of gifts of salaries to the Minister of Finance. So if you are so inclined, you will not be subject to a levy on the part of your income you gift to the Minister.

(iii) Research and Development

The Finance Bill contains worthwhile enhancements to tax relief for Research and Development. The effectiveness of these improvements to tax relief on R&D is, however somewhat reduced by complicated rules and conditions. Protective claims can be made in circumstances announced by Revenue today.

The enhancements and conditions to the R&D scheme can be summarised as follows:

Tax Credit for R and D Expenditure (Excluding Buildings) – S. 766

1. The base year for the purpose of calculating incremental expenditure is to remain as 2003.
2. The rate of the tax credit is increased from 20% to 25% of qualifying expenditure.
3. Any unused credit may be offset against any corporation tax of the preceding accounting period.
4. Any excess still remaining may be paid to the company by the Revenue in 3 instalments. The first instalment will amount to 33 per cent of the excess. The remaining balance will then be used to first reduce the corporation tax of the next accounting period and if any excess still remains, a second instalment amounting to 50 per cent of that excess will be paid to the company.
5. Any further excess will then be used to reduce the corporation tax of the following accounting period and if an excess still remains, that amount will be paid to the company as the third instalment.

Tax Credit on Expenditure on Buildings Used for R & D – S. 766(A)

1. The rate of the tax credit increases from 20% to 25% of specified relevant expenditure. The full amount of the credit may now be claimed in the accounting period in which the relevant expenditure is incurred.
2. Provided the R & D activities carried on by the company in the building or structure represent not less than 35% of all activities carried on in the building or structure in a “specified period” of 4 years, the credit may be claimed in respect of the proportion of use of the building for research and development activities.
3. Any unused portion of the tax credit may be used in the same manner as outlined in S.766.
4. The claw back provision will now apply where the building is sold or ceases to be used by the company for R & D activities or for the purpose of the same trade that was carried on by the company at the start of the “specified relevant period”.

The new provisions also include restrictions which take the form of a cap on amounts payable by Revenue to the greater of the corporation tax liability of the company for the 10 years prior to the period in which the expenditure was incurred, or the amount of PAYE, PRSI and levies, which the company is required to remit in the period in which the expenditure was incurred.

Revenue eBrief 68/08 states that businesses may lodge protective claims to repayment on or before 31 December 2008, in respect of research and development expenditure incurred in periods ending on or before 31 December 2007. The normal provisions in relation to a repayment will then apply to such claims. (See Revenue Source Documents)

(iv) Car Parking Levy

The legislation governing the new Car Parking levy in urban areas is contained in Section 3 of the Bill. It inserts 12 new sections to TCA97, which are in effect subject to a Ministerial Commencement Order, as indeed are the Urban areas where the levy is to apply – specific areas of Cork, Dublin, Limerick, Galway and Waterford.

The levy, which is to be collected by the employer from the employee is contingent on the employee's entitlement to use (as distinct from actual use) of a parking space. This quite broad, and includes situations where:

• the employee holds or has been issued with any type of authorisation to use a parking space or is given any type of permission (including arrangements or agreements with the employee) to use a parking space,
• the employee holds or has been issued with any form or means of access to a parking space;
• the employee has been allocated a dedicated parking space;
• the employee has been allocated a parking space on a shared basis or other similar arrangement,
• the availability of a parking space to the employee is on a first-come – first-served basis.

However, actual entitlement to and use of the space for less than ten days a year does not bring an employee into the charge. There is also provision for an employee to disclaim the space, and bring himself or herself out of the charge. The levy may be treated by the employee neither as a deduction nor as a credit against other taxes.

There are anti avoidance measures to prevent reversing out of the levy – the already terminally overworked connected party provisions in TCA97 are wheeled out, and back to back arrangements are not permitted.

Revenue have been nothing if not thorough in mulling over all the possible combinations and permutations of parking space usage – there's abatements for first come first served, ill health, maternity leave, employment for only part of the year, part time work and night duty.

This will be an administrative nightmare for payroll and human resource managers, not least because of the comprehensive record maintenance and retention requirements of the proposed scheme. There's also an annual return.

Fixed penalties of €3,000, or 15 times the standard levy, are to apply where the employer gets it wrong.

(v) Residence Rule

Possibly the shortest and certainly the most succinct provision of the Finance Bill concerns the change in the residency test.

Section 13 amends the “present in the State” test within TCA97 s819. Before this change, an individual was deemed to be present in the State for a day if the individual is present in the State at the end of the day, namely at midnight.

Now an individual will be deemed to be present in the State for a day if the individual is present in the State at any time during that day. The change takes effect as on and from 1 January 2009. This will mean for example that a day visit to the country, arriving in the morning and leaving in the evening will count towards the aggregate days for determining residence. The old rule, in most circumstances, would have entailed an overnight stay before a visit counted.

ICAI will be discussing with Revenue the implications of the new rule for people from Northern Ireland routinely crossing the border for family, social or business purposes.

(vi) Electronic filing

During his Budget speech, the Minister for Finance included the words mandatory e-filing and pro-business measures in the same breath when announcing an extension of the deadline for returns filed on ROS. The Finance Bill gives effect to the Budget Day announcement providing for a general extension to existing tax return and payment deadlines made using Revenue's online services with effect from 1 January 2009.

Where ROS is used, the measures will extend the existing deadlines for corporation tax, relevant contracts tax, VAT and PAYE/PRSI to the 23rd of a month. This results in the following extensions to returns and payment deadlines:

Corporation tax	two days
VAT	four days
Relevant contracts tax	nine days
PAYE	nine days

The extended deadline will also apply to the new preliminary corporation tax payment date introduced in the Finance Bill 2009. While the ICAI welcomes the streamlining of ROS payment dates across various tax heads, Revenue must ensure that its systems can cope with the user traffic concentrated on the 23^rd of each month. We welcome feedback on any issues encountered by our members on using ROS on the 23^rd going forward.

(vii) Resting in Contract

Finance (No. 2) Bill 2008 includes a proposal to repeal the current SDCA99 s110 and replace it with something almost identical, with some exceptions for Public Private Partnerships and certain specified incentive schemes. The Minister for Finance has stated that “The section is subject to a Commencement order being made and it is my intention to commence the provisions early next year.”

This statement was made by the Minister in the Second Stage Speech to the Dail on 25 November.

This position seems to be in contradiction to the Goodbody Economic Consultants’ Report on the effects of commencing section 110 of the Stamp Duty Consolidation Act 1999, “It is recommended that Section 110 provisions should not be commenced at this time. To do so, would run the risk of exacerbating the down turn in the property market”¹. In addition it states that “There are arguments for maintaining the current arrangements in the long term. These relate to the negative impacts of Section 110 on land market liquidity and the supply of housing. Government will need to assess the strength of these arguments, relative to the benefits of the tax revenues that would arise from introduction of Section 110.”

(viii) e-Stamping

The Finance Act 2008 contained provisions to allow for the introduction of electronic stamping of instruments, by way of ministerial order. This year's Finance Bill amends several technical sections of the Stamp Duties Consolidation Act 1999 in relation to e-stamping.

It is expected that the e-stamping system will be introduced in the second quarter of 2009 and that the user will be able to file, pay and receive an instant stamp without Revenue requiring sight of the deed.

Based on information currently available on e-Stamping, the taxpayer can still submit a paper tax return for stamp duty purposes and a digital stamped certificate will issue. While the ICAI welcomes all improvements to the process by which our members can make tax returns and tax payments to the Revenue Commissioners, we have made strong representations that the electronic filing of Stamp Duty returns and payments should not follow the recent introduction of mandatory e-filing and e-payments for companies. The introduction of mandatory e-filing and e-payments is not supportive of the need for flexibility towards Revenue's customers, being the taxpayer and their accountant.

1. Study of the potential Effect of Commencing the Section 110 Provision of the Finance Act 2007 Relating to Stamp Duty – Final Report, November 2007