Revenue, in conjunction with the Department of Social and Family Affairs and the National Employment Rights Authority (as appropriate), will continue to focus on the issue of employed v self-employed across a multiplicity of sectors for the foreseeable future.

The purpose of this article is to set out Revenue’s position as regards the status (employed or self-employed) of individuals described, correctly or otherwise, as ‘locums’ in the fields of medicine, health care and pharmacy.

2. ‘Locums’

The term ‘locum’ (and, in particular, as regards engagements in the fields of medicine, health care and pharmacy) now appears to be a colloquial term used to cover a wide and disparate range of engagements and, perhaps, to describe non-permanent appointments or engagements.

Notwithstanding that an individual may, in relation to an engagement, be described, correctly or otherwise, as a ‘locum’, Revenue’s approach is to examine cases having regard to the Code of Practice for Determining Employment or Self-employment Status of Individuals and having regard to relevant case law on the subject of contract of service (employed) and contract for service (self-employed).

3. Code of Practice for Determining Employment or Self-employment Status of Individuals.

This is not a Revenue Code of Practice. It has its origins in the Employment Status Group (set up under the Programme for Prosperity and Fairness) which sought to provide clarity as to whether, in relation to an engagement, an individual is employed or self-employed. As outlined in the Code, “that group was set up because of a growing concern that there may be increasing numbers of individuals categorised as ‘self employed’ when the ‘indicators’ may be that ‘employee’ status is more appropriate”.

The Code of Practice was updated in 2007 with the assistance of –

-Irish Business and Employers Confederation

- Construction Industry Federation

- Small Firms Association

- Irish Congress of Trade Unions

- Department of Social and Family Affairs

- National Employment Rights Authority

- Department of Enterprise, Trade and Employment

- Revenue Commissioners

The Code does not espouse a “one cap fits all” approach but rather stresses that “it is important that the job as a whole is looked at, including working conditions and the reality of the relationship, when considering the guidelines. The overriding consideration or test will always be whether the person performing the work does so ‘as a person in business on their own account’.” As stated in the Code of Practice –

- “Its purpose is to eliminate misconceptions and to provide clarity”; and

- “It is not meant to bring individuals who are genuinely self-employed into employment status”.

The Code of Practice is available on a number of websites including Revenue’s (www.revenue.ie).

4. Assistance

Local Revenue Offices or Scope Section in the Department of Social and Family Affairs may be contacted for assistance in deciding the appropriate status of an individual or groups of individuals. The relevant contact details are in the Code of Practice.

5. Questions & Answers

Q.1. What is the tax treatment of payments to a ‘locum’?

A.1. Whether or not an individual is described, correctly or otherwise, as a locum is not the deciding factor. The deciding factor is whether, in relation to an engagement, the individual is engaged under either -

1. a contract of service [i.e. an employee]; or

2. a contract for service [i.e. self-employed]

If an Employee:-
If, having examined the facts, circumstances and evidence relating to an engagement, an individual is, in relation to that engagement, an employee, then his or her remuneration from that engagement is subject to deductions at source under the PAYE system.

If Self-employed:-
If, having examined the facts, circumstances and evidence of an engagement, an individual is, in relation to that engagement, self-employed, then –

1. the individual pays his/her tax under the self-assessment Pay & File system; and

2. depending on the nature of the service being provided –

a) the individual may be obliged to charge VAT on the provision of the service, opinion, etc; and

b) the payer (if a public body) may be obliged to deduct Professional Services Withholding Tax at source from payments made to the individual.

Q.2. I am a GP and I am about to engage a doctor and a nurse to work in my practice. I have put into the contract of engagement a specific clause that states – “Dr. / Mr. / Ms. XX is a self-employed doctor/nurse and is not an employee of this practice”. What is the Revenue view on this?

The content of written contracts between parties is, of course, a matter for those parties and/or their legal advisors. However, as outlined in the Code of Practice – “statements in contracts (considered by the Supreme Court in the case of ‘Denny’) such as –

- “You are deemed to be an independent contractor”,

- “It shall be your duty to pay and discharge such taxes and charges as may be payable out of such fees to the Revenue Commissioners or otherwise”,

- “It is agreed that the provisions of the Unfair Dismissals Act 1977 shall not apply etc”,

- “You will not be an employee of …….”,

are not contractual terms and have little or no contractual validity. While they may express an opinion of the contacting parties, they are of minimal value in coming to a conclusion as to the work status of the person engaged.”

Therefore, regardless of how the parties to an engagement may describe themselves in contracts, all the relevant factors (including written, oral and implied details) that bear on the relationship between the parties are to be examined, given their proper weight and a decision made on their overall effect. In other words, Revenue may examine matters other than those contained in written contracts.

Q.3. I run a GP practice and the doctors and/or nurses that I wish to engage to work in my practice have informed me that they do not wish to pay tax via the PAYE system and that they will only work for me if they are engaged as a “self-employed contractor”. What is the Revenue view on this?

A.3 If, on examination of the facts, circumstances and evidence of an engagement, the individuals are employees, then they cannot simply ‘opt out’ of paying tax under the PAYE system (and paying PRSI) on the remuneration from that engagement (nor, indeed, can the payer of the remuneration opt out of PAYE / PRSI obligations).

In some instances, individuals or practices may be of the erroneous opinion that they can simply elect or decide that such individuals can be engaged either under a contract of service (i.e. an employee) or under a contract for service (i.e. self-employed). In such cases, it may be beneficial for both parties to examine the Code of Practice referred to above.

Q.4. What is the position as regards an individual who works only a few hours per week?

A.4. Depending on the facts, circumstances and evidence of an engagement, an individual may be a full-time employee, a temporary employee, a part-time employee or a casual employee or, indeed, may be self-employed. The fact that an individual may not have continual work under an engagement does not, of itself, make such individual a self-employed contractor in relation to that engagement.

Q.5.     What is Revenue’s view as to the tax treatment of ‘agency workers’?

A.5.    Revenue does not regard the taxation of workers engaged through agencies any differently to the taxation of workers engaged by any other means.  The article “Taxation of individuals engaged through agencies” published in Tax Briefing (Issue 31) in April 1998 refers.   This may be accessed through the following link http://www.revenue.ie/en/practitioner/tax-briefing/archive.html#year1998

Q.6.     We are a group of GPs which operates the doctor element of our local  “Doctors Out of Hours Service”.  We engage other doctors to do the work.  What is Revenue’s view as to the status (employed or self-employed) of these ‘other doctors’?

A.6.    From Revenue’s experience to date in such cases, the Revenue view is that such ‘other doctors’ are engaged under a contract of service (i.e. they are employees).

Q.7.     I own a pharmacy and have engaged a ‘locum’ pharmacist to work for me.  What is the correct tax treatment of the payments I make to the locum? 

A.7.    Once again, whether or not an individual is described, correctly or otherwise, as a locum is not the deciding factor.  From Revenue’s experience to date in such cases, the Revenue view is that such “locum” pharmacists are engaged under a contract of service (i.e. they are employees) and the remuneration from that engagement is subject to deductions at source under the PAYE system.

http://www.revenue.ie/en/practitioner/tax-briefing/archive/82/

Hence individuals who earned more than €500 a week for some weeks of the year, but who overall earned less than €26,000 in that year may be entitled to a refund of the Health Levy paid. This is more likely to arise in cases where an individual leaves his employment during the year and/or receives a pay-cut.

Refunds will only be issued for the years 2008, 2009 and 2010. In order to claim a refund, it is necessary to write to the Department of Social Protection at the below address, giving your name, address, PPS number and date-of-birth.

Department of Social Protection,

PRSI Refunds,

Oisin House,

Pearse St,

Dublin2.

More information can be found on the Department of Social Protection’s website (follow below link).

http://www.welfare.ie/EN/Topics/PRSI/Pages/refundhealthlevy.aspx

As part of the ongoing exchange of information arrangements between the Department of Social Protection (DSP) and Revenue, Revenue has received information from the DSP of long-term pension payment details covering the State pension, the Transition pension (paid to people aged between 65 and 66), Widow’s/Widower’s/Surviving Civil Partner’s and Invalidity pensions.

If someone receiving a DSP pension has no other sources of income, they will not be liable for income tax on the DSP pension. However if, in addition to the DSP pension, an individual also has an additional source of income – say an occupational pension from a former employer – they may be liable to tax on the DSP pension. A person who is 65 years of age or over in 2012 may have a DSP pension and other income sources but may still not pay any tax if their total income for the year is likely to be less than €18,000, if single, or €36,000, if married.

The means by which a PAYE taxpayer pays income tax on their DSP pension is that Revenue reduces the taxpayer’s annual PAYE tax credits and rate band entitlements and this results in additional tax being stopped by their pension provider on their non-DSP occupational pension.

The long-term pension information recently received by Revenue from the DSP has been updated into Revenue’s records and PAYE tax credits and rate bands for 2012 have been adjusted for some taxpayers accordingly.

For some taxpayers, they will not notice any difference in the amount of tax they are paying from 2012 onwards simply because the pension information supplied to us by the DSP was the same as the details that Revenue already had, while others will see an increased tax deduction because the pension figure supplied by the DSP was greater than the figure that was already on Revenue records or Revenue had no record previously of that person getting a pension from the DSP. It is also possible that some taxpayers will see a reduction in the tax they are paying from 2012 onwards where the figure Revenue was using was greater than the actual DSP figure.

Revenue Communications approach

Revenue has recently sent a letter to each individual affected by the new pension information having been updated against his or her Revenue records. The letter has been tailored to the person’s particular circumstances.

Miscellaneous Questions & Answers

Q: Are pensions paid by the Department of Social Welfare taxable?

A: Income tax legislation provides that a range of benefits payable under the Social Welfare Acts are taxable. Long-term pensions like the contributory old age pension, for example, are consequently taxable. Where a DSP pension is a person’s only source of income, that person will not pay tax on the pension. However, an individual in receipt of a DSP pension who also has a second source of income may indeed be liable for tax.

Q: What has given rise to the change in some taxpayers PAYE tax credits and rate bands for 2012?

A: Revenue is supplied with a variety of pension and income details from the Department of Social Protection (DSP) on a regular basis. Long-term pension information was recently supplied to Revenue and this has been updated onto Revenue’s records for 2012.

Q: Under what legislation is information exchanged between DSP &Revenue?

A: There is legislation that specifically allows the DSP to share their pension and income details with Revenue – Social Welfare Consolidation Act 2005, section 261.

Q: How could it have happened that Revenue was carrying a different figure to the one they have recently been supplied with by the DSP.

A: Up until now, Revenue would have been advised by the taxpayer when they became entitled to the receipt of a DSP pension. Once advised, Revenue would have updated its records with the DSP pension details. However, it is likely that over time, some of the changes that have taken place in the amount of the DSP pension paid to an individual, say because a person’s entitlement increased due to changes in their circumstances, would not have been fully reflected if the pensioner did not advise us of the revised amount and so Revenue’s records might have fallen out of line with the amounts actually paid by the DSP.

Q: How is tax deducted on DSP pensions?

A: No tax is deducted at source by the Department of Social Protection on any pensions they pay. Instead, a DSP pension recipient who pays their tax through the PAYE system will have their annual PAYE tax credits and rate bands reduced which will result in additional tax being stopped from any other income they have. For 2012, pension providers and employers have already been advised of revised tax credit and rate band details reflecting the updated DSP pension amount. As a result, additional tax is deducted by a person’s pension provider or employer from any occupational pension or salary that the person has and this extra tax charge is spread evenly over the course of the year. A self-employed person is obliged to return details of any social welfare pensions that they have on the annual Form 11 return form and they pay tax on any DSP pensions they have when they are making their annual income tax payment.

Q: How can someone pay tax on their DSP pension even though their other income is very low?

A: For 2012, a person is exempt from PAYE if they are 65 years of age or over and their annual total income is less than €18,000 if single, or €36,000 if married. When updating taxpayers’ records with the new DSP pension information, Revenue could not differentiate people who are apparently tax exempt from everyone else so all DSP pension information was updated to Revenue’s records and the result is that annual PAYE tax credits and rate bands have been reduced in these potentially exempt cases also. These revised tax credits and rate bands have been notified to pension providers and employers already. In some cases, the combination of tax credits that a person has will be sufficient to cover any tax due on their non-DSP pension, however in other cases, the value of their credits will not be sufficient and tax will be deducted by their pension provider or employer. The deduction of tax in these cases is only temporary if a person is indeed exempt from tax. We will send a revised instruction to pension providers and employers who will refund any tax that has been deducted.

Q: What is the position with any DSP pension that a person’s husband or wife has, is that taxed?

A: Like DSP pensions in general, this too is taxable. If the amount paid by the DSP includes a portion for someone’s husband or wife and the couple are jointly assessed, the full amount of the DSP pension will be reflected on the Tax Credit Certificate under the assessable spouse.

Q: Will the change in the USC exemption limit that the Minister for Finance mentioned in the Budget affect someone’s position.

A: Firstly, DSP pensions are not liable to USC and so are not taken into account in determining whether the USC exemption applies or not. Regarding the revised exemption limit, if a person’s non-DSP income is likely to be less than the €10,036 limit that applies for 2012, the USC exemption should apply. Revenue has already informed pension providers and employers of those individuals where it is likely that the USC exemption will apply for 2012. However, if you are currently paying USC and your annual non-DSP income for 2012 is less than €10,036, you should contact your local Revenue office.

Q: If too much tax was deducted from your pension because the DSP pension was overstated, when should someone start to get the benefit of the reduction in their taxable pension?

A: People might see a difference in your first pension/salary payment of 2012. In mid-December last year, pension providers and employers were advised of the revised tax credit and rate band details for 2012 that reflects the updated DSP pension amount and this should have the effect of increasing someone’s net pension or salary.

Q: Will people be entitled to refunds for earlier years if the DSP pension was overstated?

A: Revenue hopes to examine the position for all those people where the amount was overstated in 2011 and see whether any refunds are due. If a refund is due, we will make that refund as quickly as possible. If a person feels that they have overpaid in years prior to 2011, they should make the claim in writing to their local Revenue office.

http://www.revenue.ie/en/personal/dsp-pensions.html

Incorporation consists of setting up a new company which will be owned by the farmer. This company will then take-over the farming trade, which means that all farming profits will “belong” to the company and hence it will be the company, and not the farmer that has to pay the tax on these profits. It would be normal for the company to pay a salary to the farmer for his services.

Transferring the land & farm buildings into the company could have significant Stamp Duty and Capital Gains Tax implications, so in many cases the farmer would retain the land in his personal ownership and simply rent it to the company. However, all other farming assets, such as livestock, farm machinery etc. could be transferred into the company with minimal tax implications. An overall value will be placed on the assets transferred and the company would then owe this amount to the farmer.

Tax rates

A farmer pays Income Tax at a rate of 20% on the first €32,800 of his income and at rate of 41% on all the rest. In comparison, if the farm was run through a company, the company would pay Corporation Tax at a rate of only 12.5% on all of its profits.

It is important to note that the farmer would still have to pay Income Tax on any money which he extracts out of the company, whether it be in the form of wages or rent. However, there would be more scope for him to plan how much tax he would pay each year as he could control the amount of income which he receives.

This allows excess profits to build up within the company in a tax efficient manner, and these profits can then be used for reinvestment in the business or to repay loans. However, it is really only in cases were the farming income is considerably higher than that which is needed by the farmer & his family to live on, that there is any advantage to incorporating. Also, if a farmer is currently claiming capital allowances on farm buildings, it would be advisable that he does not incorporate the farm until all his capital allowances have been utilised.

Other advantages/disadvantages to incorporation 

- A company offers very tax–efficient pension planning opportunities compared to those available to a self-employed individual. 

- There is a higher administration burden and cost associated with running a company.

- At present, there are generous tax reliefs available when a farmer who is over 55 either transfers his farm to his children or sells it to an outside party. However, in some cases, transferring a farm into a company can jeopardise the availability of these reliefs, which could result in very high tax costs. 

- A company offers the advantage of limited liability. So should the farming business ever run into difficulty, the personal assets of the farmer will be protected from the company’s creditors (unless he has given a personal guarantee over the loans of the company). 

- There is a certain loss of confidentiality as anyone can view a company’s accounts for a small fee. 

- A company cannot avail of income averaging. Also, a tax liability can be triggered when a farmer who has been availing of income averaging transfers the trade into a company. 

These are only some of the many issues that need to be carefully considered by a farmer before going down the company route.  In general, incorporation is more likely to suit high-income farmers who are a long way from retirement. However each farmer’s case needs be examined individually.

Changes to Income Tax

There is no change in the standard rate (20%) or the marginal rate (41%) of Income Tax. There is also no change to the standard rate bands or tax credits.

Universal Social Charge

From 1 January 2012 the exemption threshold for the Universal Social Charge will increase from €4,004 to €10,036. Hence individuals whose income is less than €10,036 will not be subject to the USC.

Deposit Interest Retention Tax (“DIRT”)

The standard DIRT rate has been increased by 3% from 27% to 30%. (The rate which applies to interest paid less frequently than annually will be increased to 33%). These increases apply to interest payments made on or after 1 January 2012.

Mortgage Interest Relief

The rate of mortgage interest relief is increasing to 30% for first time buyers who purchased homes in 2004 to 2008. For other first time buyers, the rate of mortgage interest relief in 2012 will be 25% while for non-first time buyers it will be 15%. Mortgage interest relief will be no longer available to those who buy a house after the end of 2012 and will be fully abolished from 2018.

Pensions

Tax relief at the marginal rate is still available for pension contributions, although the Minister has stated that the existing scheme of tax relief for pensions will have to be reformed in the future. The annual imputed distribution which applies to the value of assets in the highest value ARFs and similar products, is being increased from 5% to 6%. The rate of tax which applies on the transfer of ARF assets to a child over 21 on the death of the owner is being increased from 20% to 30%.

BUSINESS TAX

Corporation Tax rate

The standard rate of Corporation Tax remains unchanged at 12.5%.

Tax exemptions for start-up companies

The existing scheme which exempts new start-up companies from tax on income and gains for the first three years of trading is being extended to start-up companies which commence a new trade in 2012, 2013 or 2014.

Investor Capital Allowances

A 5% surcharge will be introduced with effect from 1 January 2012 on individuals with gross income over €100,000. The surcharge will apply at a rate of 5% on the amount of income sheltered by property reliefs (i.e. Section 23-type reliefs and accelerated capital allowances) in a given year.

Investors in accelerated capital allowances schemes will no longer be able to use any capital allowances beyond the tax life of the particular scheme where that tax life ends after 1 January 2015. Where the tax life of a scheme has ended before 1 January 2015, no carry forward of allowances into 2015 will be allowed.

Research & Development Credit

The R&D tax credit is being amended so that the first €100,000 of research and development expenditure is allowed on a volume basis (as opposed to an incremental basis as is currently the case). The incremental basis will continue to apply to expenditure in excess of €100,000, using 2003 as the base year.

Capital allowances – energy efficient equipment

The scheme of accelerated capital allowances for expenditure by companies on certain energy efficient equipment is being extended for a futher 3 years to the end of 2014.

FARMERS

Stock Relief

An enhanced 50% stock relief (100% for certain young trained farmers )is being introduced for registered farm partnerships and will run until 31 December 2015, subject to approval from the EU.

Retirement Relief

Full Retirement Relief from Capital Gains Tax for intra-family transfers of farming assets will be maintained for individuals aged 55 to 66. Where the farmer is over 66, an upper limit of €3m on Retirement Relief will be introduced. Where a farmer is over 66 and sells farming assets to an outside party, the current limit of €750,000 will be reduced to €500,000. (If he is aged 55 to 66, the €750,000 limit will still apply.)

VAT refund on the purchase of wind-turbines

The existing order which allows unregisterd farmers to reclaim the VAT on certain expenditure (e.g. farm buildings, fencing, drainage etc.) will be extended to the VAT incurred on the purchase of wind-turbines from 1 January 2012.

Double Tax Deduction

Farmers will be allowed a double income tax deduction for increased costs arising from changes in carbon tax.

CAPITAL ACQUISITIONS TAX

The rate of Capital Acquisitions Tax has been increased by 5% from 25% to 30%. This increase applies to gifts & inheritances taken after 6 December 2011. The current Group A tax-free threshold (which applies to gifts/inheritances received by a child from a parent) is being reduced from €332,084 to €250,000. The reduction applies to gifts & inheritances taken after 6 December 2011.

CAPITAL GAINS TAX

The rate of Capital Gains Tax has been increased by 5% from 25% to 30%. This increase applies to disposals made after 6 December 2011.

A new relief from Capital Gains Tax will apply for properties which are purchased in the period from 6 December 2011 to 31 December 2013 and which are held for more than 7 years. Where the property is held for 7 years, any capital gain accruing in that 7-year period will be exempt from CGT.

STAMP DUTY

There was previously a number of rates of duty on commercial property which ranged from 1% to 6% depending on the value of the property, with the highest rate of 6% applying when the value was greater than €80,000. These multiple rates will now be replaced with a single rate of 2% which will apply to all transfers of commericial property, regardless of the value. The new 2% rate will apply to instuments executed after 6 December 2011. There are no changes to the rates which apply to residential property.

PROPERTY TAX

A household charge of €100 in being introduced in 2012 as an interim measure pending the design and implementation of a full property tax in 2014. This charge will not be applied to those on mortgage interest supplement and for those residing in certain categories of unfinished housing estates.

VALUE ADDED TAX

The standard rate of VAT will be increased by 2% from 21% to 23% with effect from 1 January 2012.

MOTOR TAX

Motor Tax across all categories will increase with effect from 1 January 2012.

EXCISE DUTY

Excise Duty on a packet of 20 cigarettes is being increased by 25c, with a pro-rata increase in other tobacco products, with effect from midnight on 6 December 2011. Carbon Tax will be increased by €5 to €20 per tonne on fossil fuels. The increase on petrol & auto-diesal will come into effect from midnight on 6 December 2011, but the increase on home heating fuels will not come into effect until 1 May 2012. The increase will not apply to solid fuels such as coal, briquettes etc.

BETTING DUTY

The upcoming Betting (Amendment) Bill will extend the betting duty of 1% to remote betting and will introduce a betting intermediaries’ duty to cover betting exchanges. It is expected that the new taxation regime will commence from the second quarter of 2012.

All communication between the principal contractor and the Revenue will now be online only. There will be no “paper” alternative. So all principals will have to be registered on ROS.

Everytime a principal enters into a new contract with a subcontractor, he must notify the Revenue Commissioner about it and give the relevant details. This is called “contract notification” and must be done online.

The Revenue will then acknowledge the notification and will then advise the principal of what rate of RCT applies to that particular subcontractor

There will be 3 rates of RCT under the new system, 0%, 20% and 35%. Subcontractors who satisfy the current criteria for a C2 card will qualify for the 0% rate. Most other subcontractors will qualify for the 20% rate. It will only be subcontractors who are unknown to the Revenue Commissioners or who have serious compliance issues that will be subject to the 35% rate.

Before a principal makes any payment to a subcontractor, he must notify the Revenue of the amount he intends to pay. This is called “payment notification” and is done online. When the Revenue receive such a “payment notification”, they will immediately electronically issue a “deduction authorization” to the principal setting out the rate of RCT and the amount of tax to be deducted from the payment. A principal cannot make any payments to a subcontractor until he has received a “deduction authorization” from the Revenue Commissioners and then can only pay the amount set out in this deduction authorization. The principal should give a copy of the deduction authorization to the subcontractor.

At the end of the relevant RCT period (which is generally monthly or quarterly) Revenue will issue a “deduction summary” to the principal that contains details of all payments advised to them. This summary acts as a RCT return. The principal should review the details on it carefully. If the details are correct, all he needs to do is pay the tax before the due date and the return will automatically be deemed to have been made. If the details are incorrect, he is obliged to make the necessary amendments online and submit the return by the due date. The annual RCT 35 Return will be no longer required.

From a subcontractor’s point of view, the RCT deducted can be offset against his other tax liabilities such as VAT and PAYE. However, no interim refunds of RCT will be made to the subcontractor during the year, as is currently the case. Instead, the subcontractor will have to wait until he files his annual Income Tax Return before any refund will be issued.

Additional points

As stated above, principals will have to notify the Revenue off all relevant contracts. This doesn’t just apply to new contracts entered into after 1 January 2012:-  it also applies to contracts currently in place, where payments will be made after 1 January 2012. In order to help principals convert to the new system, the Revenue have stated that they will automatically pre-populate ROSwith details of contracts currently in place (from information they have on their records). Principals should be able to access the new system from 28 November 2011, and they should check that all details in respect of contracts they currently have in place are correct and complete. 

For 2012 only, where a principal contractor has multiple contracts with a particular subcontractor, only one “contract notification” will be required. However, this is a transitional measure only.  From 2013 onwards, each contract will have to be separately notified to Revenue.

There is a lot of more detailed information about the new RCT system on the Revenue’s website. Follow below link

http://www.revenue.ie/en/tax/rct/rct-changes-2011.html

Capital Gains Tax (“CGT”)

For CGT purposes you will be treated as if you sold the land for its market value, regardless of what your son or daughter actually pays you for it (if anything).

You will then be subject to CGT at a rate of 25% on the difference between the current market value of the land and its value when you originally acquired it. You are allowed to increase the original cost/value of the land by a certain factor to give some relief for inflation.

Example

For example, let’s say the current value of your land is €500k and that you paid €50k for it in 1974. The €50k would correspond to €376,400  in today’s money. Hence the gain that would arise on the disposal would be €123,600 (€500,000 – €376,400) and this would be taxed at 25% resulting in a tax liability of €30,900.

Such a CGT liability is likely to lead to financial difficulty, as unlike the case of a sale to an outside party, there are no sales proceeds out of which the tax liability can be paid.

Retirement Relief

Fortunately however, there is a relief from CGT, called “Retirement Relief” that in many cases will apply to a transfer of a farm to a son or daughter. In order to qualify for the relief, a number of conditions have to be met, the main ones being that the farmer must be over 55 at the date of the transfer and must have owned and farmed the land for at least 10 years prior to the transfer. When the relief applies, it reduces the CGT liability to nil, regardless of the value of the land being transferred.

 Capital Acquisitions Tax (“CAT”)

 A child can receive total gifts and inheritances from their parents up to a value of €332,084 before they have to pay any CAT. (This limit was previously as high as €542,544 but has been progressively reduced in recent Budgets). Any amount which the child receives in excess of this €332,084 limit will be subject to tax a rate of 25%. (Note: CAT is payable by the child receiving the gift of the farm, unlike CGT, which is payable by the parent who is disposing of the farm)

 Example

Let’s say you transfer your farm which is worth €500k to your son or daughter. The first €332,084 of value will be tax free, but they will be subject to CATat a rate of 25% on the remaining €167,916, resulting in a tax liability of €41,979. (However they will be given credit for any CGT which you may have paid on the transfer).

Agricultural Relief

There is a relief from CAT called “Agricultural Relief” which can apply to a gift or inheritance of agricultural property. In order to qualify for the relief, your son/daughter must pass an “asset test” at the date of the transfer i.e. at least 80% of their total assets must consist of “Agricultural Assets” (agricultural assets would include farmland, farm-buildings, farm equipment, livestock etc.).

Agricultural relief operates by reducing the value of the gift to 10% for CAT purposes. So if your son/daughter qualifies for Agricultural Relief, then instead of receiving a farm worth say €500,000, for CAT purposes they will be deemed to receive a farm worth only €50,000. As €50,000 is well below the tax-free threshold of €332,084, there will be no CAT liability and your son/daughter will still have €282,084 (i.e. €332,084 – €50,000) of their tax-free threshold remaining for use against any future gifts or inheritances.

Stamp Duty

Your son/daughter would have to pay Stamp Duty on the market value of the land that is being transferred to them. The rate of Stamp Duty that would normally apply to the transfer of farmland is 6%, but when the transfer is between relatives, the rate is reduced by half to 3%. So for example if the value of the land being transferred was €500,000, the resulting Stamp Duty cost would be €15,000.

 Young Trained Farmer’s Relief

There is a relief from Stamp Duty on the transfer of agricultural land to a “young trained farmer”. In order to qualify for the relief, your son/daughter must be under the age of 35 at the date of the transfer, they must have an appropriate agricultural qualification and they must spend at least 50% of their normal working time actively farming the land for the next 5 years. When this relief applies, it reduces the Stamp Duty liability to nil. However, Young Trained Farmer’s Relief is due to terminate on31 December 2012.

Next December’s Budget

We can’t know for sure what changes next December’s Budget will bring but it is predicted that the availability of Retirement Relief from CGT and Agricultural Relief from CAT will be curtailed. It is also possible that the rates of CGT and CAT (currently both 25%) could be increased and that the current tax-free threshold of €332,084 which applies to gifts/inheritances from parent to child could be further decreased.

Therefore if you are considering transferring your farm to your son or daughter, it may be advisable to act before the date of the Budget (6^th December 2011), while all the relevant tax reliefs are still fully available.

It is believed that these provisions will not come into effect until the tax year after the year in which the Impact Assessment is eventually published. Hence the earliest tax year that they can apply to will be 2012 (and with a bit of luck it might be delayed even longer than this). It is hoped that the results of the Impact Assessment may lead to some relaxation of these very penal proposals.

This delay is a good sign :- hopefully it means that the Government are beginning to realise how completely unfair (and perhaps unconstitutional) these restrictions are and are backing off a bit. The only problem is with the election coming up, we don’t know what the next Government’s opinion on the matter will be.

Regards,
Jennifer