47 – 49 Pearse Street, Dublin 2

Agri-Taxation Review

Fiscal Division

Department of Finance

Government Buildings

Upper Merrion Street

Dublin 2.

24 March 2014

By email to: agritaxation@finance.gov.ie.

Dear Sirs,

Agri-Taxation Consultation

We refer to the consultation launched in February of this year as part of the overall Agri-taxation Review. CCAB-I is supportive of any initiative to ensure that tax reliefs are directed to maximise benefit to the economy and to the particular sector concerned.

We note from Annex A of the consultation document your proposal to survey accountants and other tax professionals dealing with the primary agriculture sector. Responses from our profession might be more appropriate to that proposed phase of the Review. However, in the context of the broader consultation currently ongoing, we wish to highlight some comments already made by this organisation to the Department of Finance in the context of the taxation of micro-enterprises. This is without prejudice to further comments to be made over the course of the survey.

Your consultation document makes reference to the levels of income derived by individual farmers. We suggest that it is equally important, when considering appropriate taxation measures for the agricultural sector, to consider individual outputs from farm enterprises. The Teagasc Farm Survey report for 2011 notes that the average gross output from family farms for that year is in the order of €67,000. By reference to this figure, the average family farm falls into the category of Micro-enterprise, being a business with a turnover of less than €75,000 per annum (as defined in the Department of Finance consultation paper of December 2012).

We believe that certain of the CCAB-I observations made in the context of the Micro-enterprise consultation might be helpful in the context of the current Review. In very brief summary, these are:

1. Unincorporated micro-enterprises should be given the option of calculating their taxable income on a simple cash receipts and payments basis.
2. In the calculation of taxable profits, the addbacks and deductions computations should be simplified principally to take a deduction for full capital expenditure on items purchased in the year up to an aggregate expenditure threshold of €10,000.
3. Accounts depreciation on business assets exceeding the aggregate expenditure threshold of €10,000 should replace the requirement to calculate capital allowances.
4. A micro-enterprise should make a single annual consolidated tax return of PAYE, VAT and “profit” tax with profit tax measured on a calendar year basis. PAYE and VAT would be paid on monthly direct debit basis with any balancing payments payable on filing the consolidated Tax Return along with profit taxes due for the tax year in February following the year of assessment.

For ease of reference, we attach a copy of our submission on the taxation of Micro-enterprises, which expands on these points (see here).

Freedom of Information

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. 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.

We note the scope of the Freedom of Information Act in regard to the submission. We have no difficulty with this response being published on the Tax Policy website of the Department of Finance. This response will be published on our own website and will be available to all of our members and the general public.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee

Attachment – CCAB-I Response to Consultation on Taxation of Micro Enterprises

1. Introduction

Tax simplification is a positive endeavour and CCAB-I has long supported a reduction in the compliance burden for businesses.

Compliance costs driven by the complexity of the tax system are indeed a key challenge to the survival of the micro-enterprise category of the SME Sector. The World Bank’s “Ease of Doing Business Index” recognises Ireland’s position as number 6 in world when it comes to doing business. This statistic may be skewed somewhat by the fact over 66% of personal tax returns are prepared by professional advisors such as accountants and tax advisors¹, and such a professional engagement is not always economically possible for many businesses in the micro-enterprise sector.

Ireland’s standing as a jurisdiction in which it is easy to do business from a tax perspective cannot mask the fact that the tax system is complex and daunting to the micro-entrepreneur whose key focus is to manage limited resources and keep their business afloat. If we consider that the average micro-enterprise must deal with at least four different taxes (income tax/corporation tax, VAT, PAYE, and commercial property rates) along with the mire of form filling (electronic or otherwise), tax deadlines and tax payments, then it is well past time that the costs of tax compliance for this sector were addressed.

Revenue dedicates significant time and resources each year in the pursuit of taxes from the black economy. Many of the businesses operating in this sector may have formed lawful tax compliance habits if the tax system had been more accessible to them in their start-up phase. One benefit of genuine reform of tax compliance for the micro-enterprise sector is the early deterrence of business falling into the black economy. Consequently Revenue’s resources can be redeployed to the more positive function of providing good quality customer service.

The stakeholder with the most to gain from genuine reform of tax compliance costs for the micro-enterprise sector is Government itself. In 2010, 58% of self-employed taxpayers were in the zero to €35,000 income bracket while the corresponding yield amounted to 3.63% of all income tax collected from the self-employed taxpayer². If tax compliance is simplified for such a substantial portion of the self-employed sector, then the administration costs of Revenue will also reduce. Simplicity from the perspective of the taxpayer should be the focus of any reform introduced if the objective of the Government’s plan is to succeed. This can only happen if there is an investment by Government in educating, assisting and introducing special measures to drive the reform of the tax compliance system for micro-entrepreneurs. Given the cost saving benefits for Government, an upfront investment to bring about such reform will pay dividends in the long term.

While we do address the Consultation’s stated objective of “cutting compliance costs and making starting a business much less daunting by introducing a simplified accounting and profit calculation regime for micro businesses”, we also take this opportunity to recommend other reforms of tax compliance for the good of the micro-enterprise sector. The combination of a simplified means of calculating taxable profit and a simplified tax compliance process will free up time and resources to build sustainable businesses and create much needed employment which in turn generates tax revenues for the Exchequer.

As acknowledged in the Consultation document, efforts by numerous tax jurisdictions are currently in progress to encourage the small business sector by reviewing the tax compliance burden. HMRC’s consultation “Simpler Income Tax for the Simplest Small Business” was responded to by the UK accountancy bodies.

2. Who should benefit from Reform?

The Consultation specifies that only sole-traders/partnerships should be the beneficiaries of a simplification measures to reduce compliance costs. Reform will be defeated from the outset if incorporated micro-enterprises are excluded from the simplification measures. Surely the 23,000³ incorporated micro-enterprises face the same compliance burdens and costs as the unincorporated businesses and therefore cannot be ignored. Incorporated micro-enterprises are excluded on the grounds that the earnings basis of accounting is a legal requirement for companies. The recommendations we make in section 4 takes this particular constraint into consideration and offers a workable solution to include companies in the reform process.

All small businesses will benefit from a reform of tax compliance costs but in particular, start-up businesses will benefit the most from the simplified accounting regime.

3. Simplified accounting and profit calculation for Sole Traders

We agree with the Consultation’s suggestion that unincorporated micro-enterprises should be given the option of calculating their taxable income on a simple cash receipts and payments basis. Many such enterprises will by definition be in their early years of operation.

Eligible Micro Entities

The turnover threshold suggested by the Consultation is very modest. According to CRO data for Quarter 3 2012, the average wage in Ireland is €36,138. In service industries, frequently about one third of turnover is allocated to payroll costs. A turnover eligibility threshold of €75,000 is not helpful to an employment generating business. A threshold of €250,000 is more appropriate for a job-creating micro-enterprise.

A static threshold could also discourage business growth or full disclose of income. We therefore recommend that the threshold should be increased over three years starting from when the micro-enterprise commences to operate under the simplified accounting regime. The suggested thresholds are €250,000 for year 1, €275,000 for year 2 and €300,000 for year three and onwards.

Where the turnover threshold is exceeded, the taxpayer should advise Revenue accordingly. A period of grace should be applied before migration to the earnings basis of accounting. The turnover threshold should be reviewed periodically to reflect economic conditions at that point in time to ensure that true micro-enterprises do not fall outside the regime.

Arriving at taxable income

The proposed simplified regime must not be imposed; taxpayers should be required to make an active choice to apply the proposed cash/payment basis or continue to apply the earnings basis as prescribed under the Taxes Consolidation Act 1997. Similarly, taxpayers should have the option to opt out of the cash/payment basis. The facility to opt in or opt out should be a straightforward notification to Revenue and confirmation should be automatic. Once a taxpayer has left the regime they should not be able to opt back in.

The cash/payments method of accounting will yield the profit before tax figure. Tax law requires various adjustments to the profit before tax figure in the form of addbacks and deductions to calculate the taxable Schedule D, Case I or II figure which is then used for the purposes of calculating the income tax liability. In our view these adjustments give rise to complexity in terms of record keeping and add another step to the calculation of taxable profits. We therefore recommend that the addbacks and deductions should be simplified principally:

• to take a deduction for full capital expenditure on items purchased in the year up to an aggregate expenditure threshold of €10,000 and,
• as appropriate, a deduction for pre-trade expenses in the year the enterprise commences to trade.

Other than these adjustments, the taxable Schedule D, Case I figure could be derived from the accounting profit before tax figure.

A taxpayer who opts out after year one of trading under the simplified accounting regime should be entitled to the “commencement year” treatment under section 66 TCA 1997 to assist in the transition to the earnings basis of accounting. Any unutilised loss attributable to the trade while operating under the simplified accounting regime would not be available for carry forward for use against future trading income under section 381 TCA 1997 once the taxpayer opts out of the regime.

Capital Allowances

Accounts depreciation on business assets exceeding the aggregate expenditure threshold of €10,000 should replace the requirement to calculate capital allowances.

Other adjustments such as finance lease capital and interest expenses could also be ignored to ensure that the calculation is simplified as much as possible.

Special Income Tax Rate for Unincorporated Micro-Enterprises

The taxable profits of an unincorporated micro-enterprise should be subject to a special income tax rate of 12.5%. This puts unincorporated business operating in this sector on an equal footing with incorporated businesses. The real gain for the exchequer in supporting the micro-enterprise sector in this manner will be through the generation of payroll taxes and VAT on sales along with social welfare saving.

Capital introduced to the Micro Entity

We recommend the introduction of a tax credit for equity investment made by the micro-entrepreneur into his/her business. This credit would operate on a similar basis to section 253 TCA 1997 which provides for a deduction for interest on loans used to invest in a partnership.

The tax credit for the equity investment would be based on the commercial interest rate applicable if the investment had been borrowed from a bank. For example if the entrepreneur commits €20,000 of his own savings to his business, a tax credit equal to €20,000 x the appropriate commercial interest rate (say 6%) = €1,200 is available against the entrepreneur’s income tax liability for each year his funds remain committed to the business.

We support the introduction of a tax relief for equity investment as identified by Forfás ⁴ to introduce neutrality in tax reliefs for debt and equity investments.

4. Simplification measures to reduce compliance costs for companies

We see no reason in principle to exclude incorporated businesses from participating in a simplified method of deriving taxable Schedule D, Case I income. If the compliance cost cutting initiative is to be fair and successful, then it should be available to all taxpayers. We do not recommend that the company’s accounts should be based on the cash receipts method of accounting for the valid company law considerations raised in the Consultation paper.

However, the profit before tax figure could form the primary basis for arriving at the taxable Case I figure. We have already made suggestions regarding deductions for capital expenditure etc.

5. Tax Compliance System Reform

While the Consultation’s objective of simplifying accounting and profit calculations for micro-enterprises is a good starting point, a genuine effort to assist this sector must be accompanied by the introduction of special compliance measures under other tax heads.

Single Annual Tax Returns

The micro-enterprise should make a single annual consolidated tax return of PAYE, VAT and “profit” tax with profit tax measured on a calendar year basis. PAYE and VAT would be paid on monthly direct debit basis with any balancing payments payable on filing the consolidated Tax Return along with profit taxes due for the tax year in February following the year of assessment. If the owner of the unincorporated micro-enterprise has other sources of income, these would be filed as normal in his/her annual Form 11 on ROS and the micro-enterprise profit and tax would be collated in the Form 11 on ROS (similar to how PAYE details are pre-populated in ROS returns) and ring-fenced.

Value Added Tax

The VAT registration threshold for micro-enterprises should be increased for supplies of goods and services up to the maximum permitted under the VAT Directive.

Payroll Taxes

Micro-enterprises within the qualification threshold for simplified arrangements for incorporated and unincorporated entities as set out in section 3 and 4 should have access to the employer PRSI rate of 4.25% in respect of all employees employed by such enterprises.

The recently published “Action Plan for Jobs 2013” describes a new employment incentive to be known as JobsPlus. Details of this incentive have yet to be released but we would strongly recommend that micro-enterprises should have automatic access to this incentive on creating employment and should not be subjected to complicated terms and conditions.

The terms of reference of the Consultation state that any measures introduced for the micro-enterprises should be revenue neutral. However we contend that what at first appears to be a generous tax relief for this sector is actually a cost saving measure when consideration is taken of the cost to the State of paying jobseekers allowance and ancillary state support to 14.6%⁵ of the population currently out of work. We calculate that when a person earning €35,000 per annum loses their job and has to avail of Jobseekers Allowance, the annual cost to the State is over €20,000 per annum between lost taxes, PRSI and additional Social Welfare benefits.

Revenue services for micro-enterprises

We note the measures put in place by Revenue to reduce the administrative burden on businesses generally since 2008. However, if compliance costs are to be further reduced particularly for the micro-enterprise sector then the quality of customer services provided by Revenue must also improve. For example a restricted telephone service is currently being operated by a number of Tax Districts and this combined with slow telephone answering rates is adding to the compliance burdens of taxpayers. The information guide for taxpayers starting in business on the Revenue’s website is six years out of date and is therefore of little use to the taxpayer.

If the objective of supporting and encouraging the micro-enterprise sector is to be achieved, then a cohesive support service should also be in place.

Source: Chartered Accountants Ireland. www.charteredaccountants.ie

NOTES

1. Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2010), at Table 39.

2. Revenue Commissioners Statistical Report 2011: Distribution of (i) number of incomes, (ii) gross income charged and (iii) tax, by range of gross income for mainly earned income assessed under Schedule D. TABLE IDS3.

3. P.4 Taxation of Micro Enterprises: Reduction in Compliance Costs Consultation Paper, December 2012.

4. P.9 “A Review of the Equity Investment Landscape in Ireland” Forfás, 31 January 2013.

5. Central Statistics Office, Seasonally Adjusted Standardised Unemployment Rates, January 2013.