Recent developments in corporation tax for Irish companies

Revenue have introduced temporary measures in relation to close company surcharges and the imposition of surcharges and loss relief restrictions in relation to the late filing of returns.

Measures introduced by Revenue in relation to corporation tax, updated Revenue guidance on the close company and professional services surcharges, and release of Tax Appeals Commission Determination in connection with professional services surcharge case.

Revenue have updated the Tax and Duty Manuals in connection with the operation of both the close company surcharge applying to undistributed and investment income and also the professional services surcharge. The Tax Appeal Commissioners have found in favour of Revenue in their determination reference 108TACD2020 concerning the operation of the professional services surcharge.

Temporary measures in relation to the close company surcharge

Irish tax legislation provides for an additional charge to corporation tax on close companies. This surcharge is 20 per cent of the after tax investment and rental profits earned by a company in an accounting period where it remains undistributed to shareholders by way of dividend 18 months following the end of the accounting period in which it is earned. This surcharge applies to all close companies in receipt of rental and investment income. Additionally, for close service companies, a 15% surcharge applies to half the after tax trading profits to the extent they remain undistributed by way of dividends to shareholders 18 months from the end of the accounting period in which they were earned.

In recognition of the Covid-19 circumstances and the need of many companies to retain cash in order to support and protect their business, Revenue have announced they will extend the 18 month period for distributions by a further 9 months, on application, for those companies not in a position to pay out a dividend within the 18 month timeframe due to Covid-19 circumstances.

This will apply for accounting periods ending from 30 September 2018 onwards, for which distributions to avoid the surcharge would be due by 31 March 2020 onwards. If a distribution, which can be made at that time, is not made by the end of the 9-month extension, the resulting surcharge will be included in the corporation tax liability for the 12-month accounting period following that in which the surchargeable income is earned.

It is important to note that in such cases interest may apply to the late payment of the surcharge. Furthermore, Revenue may, after the end of the 9 month extension period, review the facts in relation to an applicant company to establish the impact of Covid 19 circumstances on the company and so a record should be kept, at the time the application is made, of the company’s situation that led to the application being made.

Applications should be made through MyEnquiries and should include the facts and circumstances that support the extension of the 18 month period.

Late submission of returns and the restriction of claims to relief

Revenue have updated the Tax and Duty Manual Part 47-06-04, in respect of accounting periods ending June 2019 onwards and due for submission by 23 March 2020 onwards. They have advised that where the return –

  • is filed late,
  • is not a return that is deemed to be filed late as a result of being an incorrect/false return, and
  • the late filing is the result of COVID-19 circumstances,

the late corporation tax return will not be subject to the usual restriction of reliefs that apply, such as loss relief and group relief. 

Revenue have advised on the Covid-19 pages on their website that the surcharge for late filing of corporation tax returns for accounting periods ending June 2019 onwards or iXBRL financial statements for accounting period March 2019 onwards is suspended until further notice. 

It is advised that taxpayers should continue to file tax returns even if payments in whole or in part are not possible.

Revenue have issued guidance on new “warehousing” of deferred tax debt and interest suspension arrangements for certain VAT and PAYE returns. Revenue have suspended debt collection and the charging of interest on late payment for the January/February, March/April, and May/June VAT periods and February to June payroll tax liabilities. Businesses are required to file the relevant returns so that Revenue has visibility on the level of unpaid debt arising from the Covid-19 crisis. Where a business is unable to file complete returns due to, for example, the absence of key employees or an agent due to Covid-19 related illness or restrictions, the business should submit returns based on the best estimate of the liability. SMEs, defined for this purpose as a business with an annual turnover of less than €3 million which is not dealt with by either Revenue's Large Corporate Division (LCD) or Medium Enterprises Division (MED), have automatic entitlement to the tax deferral and suspension of interest provisions. Businesses managed by either LCD or MED experiencing payment difficulties can contact the Collector General's Office or their LCD or MED branch contacts and will generally be requested to submit a tax deferral application to Revenue via MyEnquiries.

The approach of Revenue has been sympathetic towards business and they are working with agents and taxpayers, assisting with tax deferral applications in certain situations. On 2 May 2020, it was announced by Government that legislation will be introduced to warehouse deferred tax debts associated with the Covid-19 crisis. This will involve the effective parking of these unpaid VAT and payroll tax liabilities for a period of 12 months from when trading is resumed and the application of a lower interest rate of 3% per annum, reduced from the usual 10% rate, after that date. The period covered by these arrangements is the period of time during which the business was either unable to trade or was trading at a significantly reduced level, due to the Covid-19 related restrictions and includes two months after the business re-commences "normal" trading. Three periods are outlined in the scheme and tax clearance will not be affected by a business availing of tax debt warehousing. It is also noted that refunds and repayments of tax which arise will be paid, notwithstanding that the business owes VAT and payroll tax liabilities built up in Period 1 outlined in the scheme, the Covid-19 restricted trading phase.

As yet, they have not specifically addressed situations where preliminary corporation tax is underpaid and how underpayments or late payments of corporation tax might be dealt with. It is hoped that interest at the statutory rate of 8% per annum will not be charged for underpayments or late payment of preliminary tax during this time and that this will be announced shortly, to provide those countless businesses impacted with some breathing space until such time as finances stabilise. Many compliant taxpayers who have paid their taxes on time across all tax heads throughout their trading history and have contributed significantly to employment and their communities are now looking at substantially reduced taxable profits. Where they ultimately underpay corporation tax or pay it later than what is provided for in the legislation, they should not become exposed to interest at 8% per annum, where the underpayment or non payment arises from a combination of having no real level of insight as to the ultimate profitability level of the company for the year combined with struggling to manage cashflow across multiple pressing commitments.

At least until Revenue make any announcement around payments of corporation tax, it will be necessary to engage with Revenue on preliminary tax where the requirements are not met or are not expected to be met. It is essential to engage with Revenue to outline the circumstances at the time corporation tax payments fall due, rather than waiting until an interest assessment is raised.

Updated Revenue Guidance on the close company and professional services surcharges

Revenue Tax and Duty Manual Part 13-02-05 has been updated to include reference to the 9 month extension to the usual 18 month timeframe discussed above where a company wishes to retain cash for the additional 9 month period due to Covid-19 circumstances, conditional on an application to Revenue being made via MyEnquiries.

Revenue Tax and Duty Manual Part 13-02-06, which deals with the close company surcharge for service companies dealt with in s441 TCA 1997 has been updated for the following:

  • to clarify the treatment where services of a medical practitioner are provided to an unconnected party;
  • to state that the guidance of a professional body will be an important factor in establishing if a company is a service company; and
  • to state that preliminary or preparatory work can be considered as being an integral element of a professional service.

The manual states in respect of companies providing medical locum services that where a company is providing the services of a medical practitioner to an unconnected party, their business is considered to be the provision of staff rather than the carrying on of a profession or the provision of professional services.

In relation to guidance of a professional body, it is mentioned in the manual that where a professional body provides guidance regarding the activities of the profession, the guidance will be an important factor in establishing if a company is a “service” company.

Where preliminary work is done which of itself could be considered “nonprofessional” in nature, but which is integral to enabling the company to provide a “professional” service, such work should not be classified in isolation as nonprofessional but rather will be considered to be integral to and part of a “profession/professional service”. One example of this would be preparatory work which is carried out in the production of financial accounts.

The update to the guidance appears to be on foot of increased Revenue attention to the area of the professional services surcharge. The professional services surcharge is aimed at countering avoidance of tax arising from the non-distribution of income of certain close companies, usually arising from professional activities, which would otherwise attract income tax at the higher rate. An outline of a recent Tax Appeals Commission Determination in this area, issued during May 2020, is set out below.

Tax Appeals Commission Determination 108TACD2020

The determination issued relates to an appeal against assessments raised in connection with the operation of the surcharge on undistributed income of service companies (the professional services surcharge).

The case considered in the Tax Appeals Commission Determination involves an accountancy practice and the proportion of its income derived from professional and non-professional services. A Revenue audit was carried out to establish whether the professional service close company surcharge should be imposed on the profits for the accounting periods 2012, 2013, and 2014. The view of the Irish Revenue Commissioners was that s441 TCA 1997 applied for the years to 30 April 2012 and 30 April 2013 and amended notices of assessment were issued for the two years with total additional tax payable of €97,253, including related 10% late filing surcharges. The appeal was determined in favour of the Irish Revenue Commissioners and it was concluded by the Appeal Commissioner that the amended notices of assessment issued should stand.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below:

Staff Member

Position

Email

Telephone

Frank Greene

Tax Partner

fgreene@mazars.ie

01 449 6415

Nóirín Cahalane

Tax Director

ncahalane@mazars.ie

01 449 4414

June 2020