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Finance Bill 2021 is a chunky bill with little in terms of surprise since Budget day but we’re not done yet

Tom Maguire discusses Finance Bill 2021 in his Business Post column

I’ve previously written in these pages that the Budget has often been described as Oscar Night for accountants but the legislative detail behind that comes with the Finance Bill. That Bill was published just over a week ago. It comes in at a door-stopping 200 plus pages; last year’s Act came in at around 130 pages. But there was a lot to deal with this year. I thought we’d take a look at some issues facing individuals before moving on to look at companies. The Bill has a number of stages to go through before the President makes it an Act and so we may see some changes as it proceeds through the Oireachtas.

The human factor

We saw the increased standard rate band for income tax, increases to the personal tax credit, employment tax credit and the earned income credit as well as the increase to the second-rate band for Universal Social Charge. All welcome and then we saw the Finance Bill 2021 providing for income tax relief for remote working allowing employees who work from home to claim 30% of the cost of broadband, electricity and heating, apportioned based on the number of days worked from home during the year. This is based on the days worked at home as reduced by any amount reimbursed to the worker by their employer. Where the relevant expenses are shared by two or more people, the total costs are apportioned between them based on the amount of the expense paid by each person.

The increased relief for electricity and heating costs is welcome particularly at a time of increased utility costs. Nonetheless the monetary recognition that working from home brings about additional cost to employees while benefiting society is to be welcomed.

The Bill provides for changes in relation to benefit-in-kind (BIK) for electric cars and vans. Currently an electric car or van with an original market value of up €50,000 can be provided tax free with any excess over a value of €50,000 attracting a BIK charge. The BIK exemption for electric vehicles is extended out to 2025 but with a tapering effect on the vehicle value and takes effect from 2023.

The Bill brings about certain BIK exemptions that have been applied on a concessional basis by Revenue. These include exemptions for certain health and wellbeing related benefits such as qualifying medical check-ups, coronavirus testing and flu vaccines. Generally, there is an all for one approach here in that the benefits should be made available to all staff for all of these exemptions

The scaling-up of Irish business factor

On the matter of entrepreneurs and scaling Irish businesses we saw the start-up relief from corporation tax extended as well as the introduction of digital gaming relief at a rate of 32% on relevant expenditure up to €25 million per project.

The digital games credit run until 31 December 2025, however its introduction is subject to a commencement order as European State aid approval is required. The relief will take the form of a refundable corporation tax credit at a rate of 32%, which is available on the lower of (i) the sum of eligible expenditure (the portion of the qualifying expenditure that is expended on the development of the digital game in the State or the European Economic Area (EEA)), (ii) 80% of total qualifying expenditure (expenditure incurred by the digital games development company on the design, production and testing of a digital game) or (iii) €25m. There are some exceptions to the rules including a carve out for games developed primarily for the purposes of advertising and gambling. This is a welcome initiative and sits well alongside other forms of credit. While subject to a commencement order, companies can start a feasibility analysis to determine its availability and impact for them.

In addition to the above, a number of changes have been outlined in relation to the schemes for investment in corporate trades, in particular the Employment Investment Incentive Scheme (EIIS) and Start-up relief for entrepreneurs (SURE). Minister Donohoe announced in his Budget speech that reforms to these schemes would be forthcoming to make the scheme more attractive to investors. Part of the criteria for availing of these reliefs is for the relevant company to have spent 30% of the funds raised on a “qualifying purpose”. Until this target is met the company cannot issue a “statement of qualification” to the investors. The amendment removes the 30% requirement and changes the timeframe in which such a statement can issue. The proposed change states that the company may not issue a statement more than 4 months after the end of the year of assessment in which the shares were issued. In addition, further amendments are provided to expand the range of investors who are eligible to participate in the scheme. The legislation will now enable Investment
Funds to raise investments that qualify for relief, specifically Investment Limited Partnerships and Limited Partnerships that meet relevant criteria.

All of the above is welcome and regular readers will know that I’ve written previously about EIIS in these pages. I’d said that if you invest in an EIIS company and it succeeds then you pay CGT on any gain arising when you sell the shares, just as you would on any other investment. So in Ireland there’s no discrimination between investors where a gain arises. However, when an investor makes a loss on disposing of their investment in EIIS shares then that loss may not be an allowable loss for CGT purposes. Had that investor put his or her money or savings into a non-EIIS company and lost money on that investment then they would be allowed use that loss in reducing other capital gains in the same or future years.

Exiting an investment is just as much a consideration when debating whether to make such an investment in the first instance. How many times do we say “what’s the worst that can happen” when considering any investment? However, ensuring loss relief on EIIS investments would serve to reduce, but not eliminate, the element of risk when investing in such companies and by definition increase the attractiveness of such investments to would-be investors.

Such a relief is not in the Finance Bill and may be unlikely (although never say never) to come about at later stages given that the Bill’s provisions reflect the Budget written following a public consultation earlier this year. That said, the Commission on Taxation (or as I’ve been calling it in this column “COT2.0”, given it’s the second such Commission of the noughties) issued a public consultation recently. It notes in Chapter 6 of its document that “SMEs account for 99.8% of all Irish enterprises and they are responsible for employing over two-thirds of Ireland’s workforce across multiple sectors. …The Commission is examining how best … to support small and medium sized enterprises (SMEs) and entrepreneurs to start, scale or grow a business while meeting emerging changes in social behaviour, business models and value drivers.” Will we see loss relief in COT2.0’s report next July?

Overall, the provisions of Finance Bill 2021 with regard to the taxation of individuals and entrepreneurs are largely in line with what was announced in the Budget but that doesn’t mean that COT2.0 won’t take matters further.

The corporate factor

There were some technical changes to the sci-fi sounding Hybrid Rules and the introduction of a reverse hybrid rule. I’ve referred to these previously as the “you say potay-to, I say potah-to” type rules in that the hybrids legislation was originally enacted in 2020 and sought “to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that look to differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more territories. In other words, one country could look at an entity one way e.g. as through it was a partnership and another country looks at the same entity another way e.g. as though it was company. Both countries would then treat the entity differently for tax purposes. This year’s Bill brings about the necessary changes to deal with some technical matters and also the last bits of the EU Anti-Tax Avoidance Directive (ATAD) that we have to put into our law. Corporate groups which may have entities within these rules should assess their impact.

As announced on Budget 2022 Day and having been well publicised over the last year, including in this column by yours truly, Finance Bill 2021 implements the interest limitation rules as required by the ATAD. These rules seek to limit corporation tax relief on net interest expenses of companies (in a nutshell, interest expense reduced by interest income) to 30% of Earnings Before Interest Depreciation and Amortisation (EBITDA) but this is subject to certain group and equity ratio provisions and other exclusions. It will come into effect with respect to accounting periods commencing on or after 1 January 2022. Critically, “interest” is really the term used here for a wider expense category including foreign exchange gains and losses on interest, amounts incurred directly in connection with raising finance including guarantee fees, arrangement fees and commitment fees.

That’s the bad news, the good news is that there are exceptions including instances where the Irish taxpayers net borrowing costs are less than €3million. In addition interest on debt where the terms were agreed on or before 17 June 2016 is excluded from the restriction. Where the restriction applies, it will reduce the amount of borrowing costs that can be deducted for Irish tax purposes increasing the tax payable by that company in that year. On that basis companies that are subject to this rule should carefully consider their financing arrangements with the necessary impact assessment or brace for impact moment.

However, we all know that there’s just so much going on in relation to global corporate tax at the minute. We have to wait and see the devil in the detail surrounding international tax reform following our signing up to the OECD agreement, US tax reform and other transitional measures some of which are not expected to take effect until at least 2023 so time will tell.

We’ve had specific transfer pricing in our law since 2010 and that was amended substantially in the 2019 and 2020 Finance Acts. Some of these amendments came about as a result of the Coffey report. One of the 2019-2020 changes was the so called “domestic to domestic exception”. That sought to exempt certain transctions between Irish companies from applying the transfer pricing rules. These rules basically require that a transction between related parties below an arm’s length price have to be accounted at the arm’s length price for tax purposes. The changes in this year’s bill that bring about additional clarity in relation to the application of the exemption are welcome and are effective for chargeable periods beginning on or after 1 January 2022.

Overall there were few surprises in this year’s Finance Bill but we’re not done yet and we may see additional changes as the Bill progresses through the Oireachtas.

 

Please note this article first featured in the Business Post on Sunday 31 October and was re-published kindly with their permission on our website.

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