VAT, Brexit and funds
As the UK completes its exit from the UK in December, many players in the Irish asset management industry look now look to surrounding VAT implications. What are some of the key considerations for the asset management industry in navigating the changing VAT landscape?
Richard McDaid, Tax Director, Deloitte
: Brexit, per se, will not have any immediate VAT impact on the Irish asset management industry. Irish VAT law and practice will continue to apply to those Irish managers. Management fees from Ireland domiciled mutual funds will remain to be VAT exempt, non-mutual Irish funds will be VATable and off-shore undertakings VAT-free. That said, Irish funds with portfolios consisting of UK assets and investments should see some VAT deduction benefits once those holdings are reclassified as non-EU and Irish managers may be able to share in any such cost reductions.
While it will be free from the constraints of EU VAT law, changes to the UK VAT system should not see UK suppliers suddenly charging UK VAT to Irish managers. Such cross-border services should remain to be free from UK VAT, with the Irish reverse charge VAT position remaining to be assessed under Irish VAT law and practice. Any support or technical services provided to an Irish manager by its UK branch or by an affiliate company within a UK VAT group will need to be assessed (both now and post-departure) to determine the Irish reverse charge VAT position.
One of the VAT legacies of the UK’s membership of the EU will be the many CJEU decisions that originated in the UK. In particular, a recent decision addressing single supplies of management services delivered by way of a software system in respect of Specialised Investment Funds (SIFs) and non-SIFs is likely to impact the market both before and long after the UK’s departure, in particular where no distinction is made between the services supplied to SIFs and non SIFs.
Having affirmed that only the management of SIFs is VAT exempt, the CJEU held that exemption could not apply to that single supply as to do so would extend the reach of the VAT exemption beyond its legislative purview to the management of non-SIFs. The CJEU dismissed any suggestion that the management services in this particular scenario could be apportioned.
For Irish asset managers of mixed client portfolios, for the SIF element to be within the scope of VAT exemption, suppliers of management services will need to provide and cost such services separately within the contractual terms. But even if such services could be apportioned, that may not automatically confer VAT exemption for SIFs managed by specialist software. The degree to which specialist software which performs the specific and essential activities of managing SIFs can qualify for VAT exemption should be answered by the CJEU in the coming months in DBKAG (C-59/20).
Gross roll up - more clarity to be welcomed
In August, the Irish Revenue Commissioners published a guidance document on the treatment of the taxation of ‘gross roll up’ as it applies to domestic funds. What are the implications, and does the overall comprehensive guidance document contain any important other findings for Irish funds companies?
Seamus Kennedy, Tax Director, Deloitte
: Recent updates to guidance on the tax treatment of investment undertakings provide for changes made in Finance Act 2018 – in particular the changes focus on the operation of exit tax for certain investors and also on the treatment of certain payments made.
In addition, the guidance has been updated with the address of the branch of Large Corporates Division responsible for investment funds. While the clarifications are helpful in bringing guidance up to date for Finance Act 2018 changes, further insight is still required by the investment management industry regarding the application and impact of more recent changes in tax law, such as the mandatory disclosure rules. While significant interaction and stakeholder engagement has taken place, a lack of clarity remains as to the types of arrangements caught by the reporting obligations.
In an unprecedented year for ad hoc tax policy on the corporate and personal taxation fronts, due to Covid- 19, can you summarise some, (circa four) of the most important outstanding areas of clarification regarding the temporary measures that can be expected to crystallise in legislation in the Budget?
Ben McDonnell, Tax Manager, Deloitte
: While the Employment Wage Subsidy Scheme (EWSS) expands the pool of workers for employers previously covered by the Temporary Wages Subsidies Scheme (TWSS) as well as providing some security in extending the scheme to March 2021, it has reduced the subsidy payments available.
One benefit has been the extension of the reduced rate of Employers PRSI of 0.5% for employees of Covid19 affected businesses. A welcome inclusion in Budget 2021 would be clarity on whether this rate will be extended for 2021 irrespective of whether EWSS is extended beyond its expected end date in March.
One of the most significant measures introduced by the Irish Government to assist businesses impacted by Covid19 to try and improve cash flow is the warehousing of VAT and PAYE liabilities including suspending the charging of interest on late payment of liabilities for a period of 12 months. At the end of the warehoused 12 month period, a reduced interest rate of 3% will apply on the repayment of the debt. While Revenue have confirmed that the timeframe to repay the debt will be flexible, we may see companies in the future still in need of assistance in a post COVID world. Some recognition of this in the Budget, perhaps by extending the relief to corporation tax, would be welcome. Where this is not an option, a commitment in the Budget to providing easier VAT relief on bad debts would likely enhance relief to companies dealing with post COVID related liquidity issues.
Tax Loss Relief
The introduction of the early carry-back of losses in 2020 (subject to certain restrictions) allowed businesses that were profitable in 2019 and are now suffering due to Covid19 to get immediate access to cash by way of refund of some or all the corporation tax or income tax paid in 2019 through an ‘interim’ claim. The carry-back of losses is available to not only companies but also self-employed traders (again subject to certain restrictions) and as recommended in the CCAB-I Pre-Budget Submission 2021. The carry-back of losses was already available to companies (although not this quickly) however this option was not available to self-employed individuals and one wonders if this will be a permanent change in the Budget to allow self-employed individuals to carry-back losses and certain unused capital allowances to a prior period and providing self-employed with similar support as corporates.
The stimulus plan introduced in July included a temporary reduction to the standard rate of VAT in Ireland for a six month period from 1 September 2020 to 21% (from 23%). Unfortunately for some sectors that were worst hit by this pandemic such as the hospitality and tourism sector, the change in the standard rate of VAT will not impact the VAT treatment of most sales in these sectors, The VAT rate for hospitality and tourism was temporarily reduced from 13.5% to 9% back in 2011 and the question arises will this be replicated in Budget 2021.
Inclusivity for self employed individuals
In the wake of the July Stimulus (discussed in last Month’s Irish Tax Monitor) there were a number of clarifications on the operation of Covid tax reliefs, notably in regard to Income Tax Relief for self-employed individuals adversely impacted by Covid-19 restrictions. What is your assessment of the current guidance on this?
Stephen Lowry, Senior Tax Manager, Deloitte
: The July stimulus plan introduced a number of welcome, albeit temporary, income tax measures to assist self-employed individuals who have been adversely impacted by the Covid-19 restrictions – the specific detail of which has now been further expanded upon by Revenue. Under the first of these measures, self-employed individuals can claim to have their 2020 losses and certain unused capital allowances carried back and deducted from their profits for the year of assessment 2019, thus reducing the amount of income tax payable on those profits. Under these provisions, a limit of €25,000 on the total amount that may be carried back will apply. While such a provision already exists for companies, to date no correlating provision had existed for the self-employed so its introduction is to be welcomed and should arguably be kept in place on a permanent basis going forward to align with the rules for incorporated businesses.
The second measure introduced as part of the package effectively builds on this relief by allowing self-employed individuals to make interim claims based on the estimated amount of relief available to them. According to the latest Revenue guidance on this, an individual will thereafter be able to revise his or her interim claim as the year progresses, including increasing the claim where it is estimated that the loss will be greater than previously expected. Again, this marks another welcome initiative that should give a much needed cash flow boost to self-employed taxpayers during 2020. Finally, the third measure introduced in July gave an option to individual farmers to step out of income averaging for the tax year 2020, notwithstanding that the farmer may also have stepped out of income averaging in one of the four preceding tax years. This means a farmer can elect to pay tax based on the actual profits for 2020, rather than on averaged profits. A farmer may wish to do this if the actual profits for the year are lower than the average profits which would otherwise be assessed to tax. Where a farmer makes such an election, tax due on the average profits that would have been taxed in 2020 is deferred. In all, the additional guidance is timely and should hopefully prove useful in assisting self-employed taxpayers understand the range of new tax supports available to assist with improving cash flow at this extraordinarily difficult time for many businesses.
The Revenue Commissioners have recently published renewed guidance on the high-income individuals’ restriction (HIIR) (which is intended to limit the total amount of specified reliefs that can be used by a high-income individual to a maximum amount each year). (In its Tax and Duty Manual Part 15-02A-05). Will the new guidance result in any significant changes in the regime as it has worked up to now?
Stephen Lowry, Senior Tax Manager, Deloitte
: The updated guidance recently issued by Revenue essentially reiterates the current rules for the high earners restriction as introduced in Finance Act 2010 but also now incorporates relevant information from a number of archived tax and duty manuals (including the operation of the restriction before 2010, the 2010 Finance Act changes and related issues as well as the manual on carrying forward excess HIIR relief for married couples and civil partners) together with some updates to the schedule of specified reliefs and some new worked examples in its appendices.
The new 21% VAT rate
As part of the July Jobs’ Stimulus, Ireland’s standard rate of VAT is temporarily being reduced from 23% to 21% for a six month period starting on 1 September. What are the main considerations for businesses?
Ciara McMullin, Tax Director, Deloitte
: As the temporary cut in the standard rate of VAT is not targeted at any particular sector, most companies and traders in all sectors are impacted. Organisations will need to ensure they fully understand the rules around tax points and output tax obligations as there are knock-on implications for invoicing and VAT accounting requirements. All businesses should also take any necessary steps internally within their systems to account for this temporary rate reduction, in particular from a tax coding, ERP, system capability, VAT compliance and invoicing perspective.
Personnel within organisations need to be made aware of this temporary reduction in the standard rate of VAT and internal controls and procedures appropriately updated – from the accounts payable and receivable teams to those dealing with orders, IT departments, shared service centres and the wider finance function, legal department, sales and marketing staff.
The change in the VAT rate may also be used by businesses as an opportunity to review their pricing policies, update contracts, terms and conditions and perhaps consider any efficiencies that could be made around the timing of supplies. The pricing question is especially relevant when businesses adopt VAT-inclusive pricing or are supplying businesses that have restricted input VAT recovery.
Businesses with input VAT blockage should consider if there are opportunities to maximise the benefit of the temporary VAT rate cut of 2% whilst ensuring all VAT reporting requirements are being appropriately met. Partially exempt businesses should also consider acquisition VAT, in particular reverse charge VAT obligations, intercompany agreements and timing considerations. The basis for accounting for VAT on bought-in services from outside of the State is particularly relevant where there is restricted input VAT recovery and should be closely monitored.
As the standard rate of VAT applies to a broad range of activities in Ireland the impact of this temporary change should be felt by all, traders and private individual alike, in some form.