About CCAB-I

The Consultative Committee of Accountancy Bodies — Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants. The combined membership of these bodies in Ireland is in excess of 30,000 professionals.

Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, 01-6377347) may be contacted if any further details in relation to any points made in this submission are required.

Introduction

The Irish economy is made up of a relatively buoyant export sector and a domestic sector which is in serious difficulty. The Exchequer figures for 2012 show that the economy is coming back under control, if not to actual recovery yet. These are difficult times for tax policy formulation, not just in Ireland but also within the Eurozone. The tax changes proposed by Minister Noonan on 5 December last will impact on the domestic sector most. It seems to us that many of the Budget proposals have collection as their priority, and opportunities for the use of the tax system as a lever for economic management could be missed. It is in this context that the following suggestions in connection with Finance Bill 2013 are being made.

Some of the suggestions within this document have already featured in our pre-Budget submission. Such suggestions have not ceased to be good ideas even though they did not feature in the Budget statement.

Tax Reliefs For Small and Medium Enterprise (SMEs)

General Observations

The sector of our economy struggling the most is the indigenous SME sector providing goods, services and employment within the domestic economy. At the Minister's own admission, the individual tax relief measures proposed for the sector are modest. However, his recognition of the role of the sector and the need for taxation supports is welcome. Given that the Exchequer outturn overall for 2012 was strong, perhaps there is some scope for bolstering some of the proposals announced on Budget Day?

We have already seen a 20% tax shortfall from the sector in 2012. This type of shortfall translates to one in five Irish SMEs not making enough money to pay income tax. As 99% of Irish Business falls into the SME category, this is a serious problem. The total full-year cost of the The 10 Point Tax Reform Plan for SMEs is estimated at marginally over €20 million. That isn't much in the context of a sector that should yield €1 billion or more, and which accounts for almost 70% of people employed.

It might have been better to concentrate on one or two significant tax reliefs, rather than make minor modifications to existing reliefs, some of which are not very successful to date. Raising the threshold for accounting for VAT on a cash receipts basis is one measure which will result in real benefits; adjusting the de minimis amount for the Corporation Tax surcharge perhaps less so.

Employment Investment Incentive Scheme (EIIS)/Seed Capital Relief

In our Pre-Budget 2013 Submission, we made a case for amendments to the EIIS and Seed Capital Relief which include removing these reliefs from the list of tax reliefs subject to the High Income Earners Restriction, tailoring the EIIS and Seed Capital Relief to provide a facility for company owner/managers to invest in their company and the extension of EIIS to professional service companies. These amendments are necessary if EIIS/Seed Capital Relief is to have any meaningful effect on stimulating the domestic economy.

The shortcomings of the EIIS as currently in place were borne out in a survey we conducted among our members. We shared these findings in our letter dated 22 October 2012 to the Department of Finance, which is enclosed in Appendix I for your reference. The issues identified in the survey and the recommendations set out above are vital if the EIIS/Seed Capital Relief is to have any realistic chance of assisting and encouraging sustainable domestic investment in the SME sector. We are currently polling firms again to assess the actual take-up of the relief now that the 2012 tax year has expired. While not all of the results are available, there would seem to be a trend emerging that actual take-up was very low.

The competition for investment has never been so aggressive and the Irish tax system needs to ensure that potential investors divert must needed funds into the Irish SME sector. A tax incentive for investment in smaller companies should be introduced similar to the new Seed Enterprise Investment Scheme recently launched in the UK. In the UK, this measure:

• is focused on smaller, early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade;
• makes available tax relief to investors who subscribe for shares and have a stake of less than 30 per cent in the company;
• applies to smaller companies with 25 or fewer employees and assets of up to £200,000, carrying on or preparing to carry on a new business;
• provides income tax relief worth 50 per cent of the amount invested up to £100,000 per individual investors with a stake of less than 30 per cent in such companies, including directors who invest in their companies.

The emphasis on encouraging indigenous industry in the Government's Action Plan for Jobs could be put into action on introducing a similar tailored EIIS for small Irish enterprises. We hope that the Bill will clarify the extension of the Seed Capital Relief scheme beyond 31 December 2013, along with the EIIS.

Research and Development Tax Credit

We acknowledge the positive step towards improving the Research and Development Credit as set out in Budget 2013 which sees the increase in the volume expenditure threshold from €100,000 to €200,000. This, however, does not address the inequity faced by companies established in the Irish R&D sector before 2003.

We note that a review of the R&D Tax Credit regime was also announced in Budget 2013. As part of this review we call for the removal of what we described in our Pre-Budget 2013 Submission as a high income restriction which impedes the average employee working in the R&D sector from availing of the tax relief as introduced in Finance Act 2012. Furthermore, the relief as currently structured is only available to companies who make sufficient profits to pay tax, and thereby excludes companies in the start-up phase who are in most need of a means of incentivising R&D personnel.

The introduction of an innovation income tax rate would also represent a worthwhile advancement of the R&D Tax Credit regime. As set out in our Pre-Budget 2013 Submission we suggest the introduction of a special 12.5% income tax rate on:

• income and bonuses paid to inventors, or
• bonuses paid to employees directly involved in the innovation process, and
• dividend income paid to shareholders of a company involved in innovation.

The amount of income/return taxable at this special income tax rate could be set relative to overall remuneration to ensure that the benefit of the reduced Income Tax rate is only available in respect of the contribution towards innovation. This approach would be very attractive in the commercial environment where the remuneration for an innovator and their team can be directly linked to the commercial return being made from their underlying work.

Close Company Surcharge

The amendment to the Close Company Surcharge regime as announced in Budget 2013 to raise the de minimis amount of undistributed investment and rental income from €635 to €2,000 before a close company surcharge is applied rather misses the point, given the need for extensive reform in this area. In our Pre-Budget 2013 Submission we called for the overhaul of the Close Company Surcharge to remove the discrimination against professional service companies and to exclude FDI companies from the surcharge.

For the purposes of increasing the attractiveness of inward investment, we recommend that existing and new foreign owned companies establishing a presence in Ireland should be excluded from close company legislation, including professional service companies which create employment here.

The exemption should apply to a foreign company which is controlled by non-Irish resident shareholders. The conditions for qualifying for this exemption could be modelled on the criteria in place for exemption from Dividend Withholding Tax i.e. it could apply to companies resident in a relevant territory (the EU or in a state with which Ireland holds a double taxation agreement) or the company is ultimately owned by persons resident in a relevant territory.

The close company anti-avoidance laws act as a disincentive to FDI considering locating to Ireland as such restrictions are not in place in competing jurisdictions. Introducing such an exemption would also encourage foreign trading companies to leave surplus cash in Ireland rather than repatriating the funds and would therefore facilitate the re-investment of those funds here in Ireland. Taking foreign-owned companies out of the definition of a close company would also remove much confusion surrounding companies currently or considering locating in the IFSC.

Value-Added Tax

We acknowledge the positive step towards assisting businesses in managing their cash flow by increasing to the VAT cash accounting threshold from €1 million to €1.25 million from 1 May 2013. However, at a time where customers are taking longer to pay and there is a strain on businesses’ cash resources we request that the proposed increase to the turnover threshold be extended further. Such an extension will be Exchequer neutral and will do more to alleviate the cash flow challenges facing many businesses today while also greater assisting start-up and expanding companies.

Real Estate Investment Trusts (REITs)

The introduction of REITs into the Irish tax system is a progressive measure which should contribute to the revival of the Irish property market. The seven-year CGT exemption on property gains as introduced under FA 2012 should be incorporated into the REITs legislation whereby the investor/shareholder would be exempt from CGT on profits derived from gains made by the REIT. The combination of the seven year relief and the REIT structure would have a real impact in stimulating the property sector. We look forward to seeing the detailed proposals on REITs in the Finance Bill.

Incentives to Support Foreign Direct Investment and Foreign Trade

The international market for Foreign Direct Investment is increasingly fierce. Countries which traditionally might have been regarded as sources of Foreign Direct Investment are now themselves competing for inward investment – the most notable example being our nearest neighbour, Great Britain. Measures announced in Budget 2013 fall significantly short of what is required if Ireland is to continue to remain competitive.

The Special Assignee Relief Programme (SARP) is in need of urgent attention in Finance Bill 2013 to remedy the failings of the amendments introduced in FA 2012. The failing as referred to in our Pre-Budget 2013 Submission are:

• a conflict between the emphasis on basic pay as a qualifying criterion for entitlement to SARP and the tax equalisation arrangements in place with many multinationals, over a certain threshold,
• less tax relief is available than was available in the pre-2012 scheme, and
• no relief is offered either from the USC or PRSI.

The SARP regime in Ireland is uncompetitive in comparison with other jurisdictions and urgent amendments are required to give Ireland every chance of attracting much needed foreign investment.

The extension of the Foreign Earnings Deduction for employment related travel only to certain African countries seems to overlook the further development of links with lucrative trading partners such as the US, Saudi Arabia, Switzerland, Singapore, Japan and Australia.

Film Relief

We note the findings of the economic impact assessment of section 481 Film Relief published by the Department of Finance in December last and the measures announced consequently as part of Budget 2013 to reform operation of the scheme. While the extension of the scheme to 2020 is a positive measure, it is not immediately apparent how the proposed move to a tax credit model from 2016 will enhance the scheme.

We also reiterate the competitive threat to foreign film investment in this country posed by the forthcoming enhancements to the UK tax lead supports to the film industry and other similar developments in the EU. Any reform of the Irish scheme of relief must at the minimum safeguard Ireland's competitiveness as a location for film investment.

Charitable Donations

We acknowledge the measures announced in Budget 2013 to amend the scheme of tax relief for charitable donation with the aim of simplifying the scheme and reducing the administrative burden for claimants. While a move towards simplification of the scheme is positive step, we recommend that the legislation providing for the proposed changes be drafted also with simplification in mind. It would be quite easy to undo any proposed simplification by introducing convoluted procedures.

Pension Issues

The plan to allow access to pre-retirement funded Additional Voluntary Contributions as set out in Budget 2013 is worthwhile. However, for the purpose of giving as many taxpayers as possible the necessary flexibility in accessing their pension funds, we believe that the withdrawal option should also extend to PRSA and RAC contributions.

Tax on Savings

The tax withheld on savings and investments now represents at a minimum one third of the income following the 3% increase in the rate of retention tax from 1 January 2013. This increase, coupled with the proposed extension of PRSI to unearned income for individuals subject to employee rate contributions from 1 January 2014, will mean that up to 40% of income will be taken in tax and PRSI from next year. We believe that such a penal tax regime is counterproductive and inequitable and any further increase to the rate of retention tax is undesirable.

The increases in these retention rates are reminiscent of the old 35% default withholding tax rate for Relevant Contracts Tax purposes, which had been designed to be a penal rate.

Capital Taxes

The 3% increase in the rate of both capital gains tax and capital acquisition tax, coupled with the 10% reduction in the capital acquisitions tax thresholds will do no more than adversely impact families passing on their assets and overall transaction activity. We particularly note that the reduction in the Group A threshold to €225,000. The threshold is now less than the average value of a family home in Dublin, and thereby reintroduces Capital Acquisitions Tax to the masses.

VAT Rate Treatment Mismatch

The increase in the standard rate of VAT from 21% to 23% in Finance Act 2012 has been complied with, but has highlighted an anomaly in the VAT legislation.

Section 67(3) of the Value-Added Tax Consolidation Act 2010 (VATCA10) provides for the necessary remedy to deal with a case where the VAT charged on the original invoice is at a higher rate than the applicable rate. Currently however there is no provision in the legislation to rectify a situation where the VAT originally invoiced was at a rate which was lower the rate of VAT applicable. This means that the taxable person who has made the supply must account for VAT at the incorrect higher rate but does not have right to recover the differential from the recipient.

We request that a mirror provision to that currently provided for by section 67(3) VATCA 2010 be introduced to deal with the situation where the VAT originally charged was lower than the applicable rate.

Residency Consultation

The CCAB-I has made a submission in response to the Department of Finance's Residency Consultation under a separate brief. We wish to reiterate that care should be taken to ensure that any new laws introduced on foot of the residency consultation should not damage Ireland's prospects for attracting FDI.

Reform of Appeals Process

The CCAB-I met with Minister of State Brian Hayes TD in late 2011. The Minister noted concerns we expressed over the need to modernise the Tax Appeals process. In our Pre-Budget 2013 submission we made a further call for the commencement of a consultation process among stakeholders for the purpose of modernising the Tax Appeal process with the objective of setting out the legislative and administrative changes required. It is inexplicable why reform of Appeal Process is not forthcoming. A robust Tax Appeals Mechanism must underpin any tax system to ensure its probity and fairness. Any such reform is proportionate and timely considering the year on year increase in the scope of Revenue powers.

Fairness in Dealing With Taxpayers with A History of Business Failure

It should be acknowledged that despite the downturn, Irish business has sustained remarkably high levels of tax compliance, as confirmed in the Revenue Headline Results for 2012 published on 4 January 2013.

However numerous concerns have been raised by our members over the last year in respect of Revenue's right to require surety in the form of a bank guarantee or cash payment before allowing VAT refunds or VAT registrations to take effect (section 99(3) and 109 VATCA 2010). Under both sections, Revenue has the power to decide when and how to apply these sanctions with little or no recourse open to the taxpayer to appeal such a decision. These bonding requirements may be disproportionate.

It is proper that the tax system should protect against so called “phoenix companies” or taxpayers who manipulate insolvency laws to avoid paying their taxes. However, transparent and balanced criteria to determine when and how the highlighted sections of the VATCA 2010 should be invoked must be introduced. The recession has put countless taxpayers out of business and the tax system should not prevent entrepreneurs with a recorded bona fide business failure from starting up a new business venture.

The area could be improved by following the recommendations of the First Interim Report on the Loss of Fiduciary Taxes arising from abuse of Limited Liability by the Committee of Public Accounts in 2010. In particular we point to its recognition of the importance of limited liability, and the inherent risks which will be associated with making the fiduciary tax system too restrictive. The report sets out hallmarks for Phoenix companies, which might form the basis of fairer criteria for invoking legislation such as section 99(3) and 109 VATCA 2010.

Source: Extract from CCAB-I Pre-Finance Bill 2013 Submission. Chartered Accountants Ireland. www.charteredaccountants.ie.