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Stage 3 Module 3 Tax Losses and Charges

Chartered Tax Consultant . Mary Murphy 29 th & 30 th June 2012 Chartered Accountants House. Stage 3 Module 3 Tax Losses and Charges. Tax Losses & Charges . Building on Applied Tax Sole Traders / Partnerships / Companies Income Tax / Corporation Tax / CGT

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Stage 3 Module 3 Tax Losses and Charges

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  1. Chartered Tax Consultant Mary Murphy 29th & 30th June 2012 Chartered Accountants House Stage 3 Module 3 Tax Losses and Charges
  2. Tax Losses & Charges Building on Applied Tax Sole Traders / Partnerships / Companies Income Tax / Corporation Tax / CGT Outlining / Interpreting / Applying Revenue material Case law Practical tax planning tips
  3. Overview
  4. Sole Traders & Partnerships Schedule D Cases I & II Losses and Charges Trading loss before CA’s is computed in same manner as trading profit How are losses used? Sec 381 TCA 97 Other income in current year Sec 382 TCA 97 C/F against trading income Sec 385 TCA 97 Terminal Loss Relief
  5. Sec 381 TCA 1997 Losses
  6. Sec 381 TCA 1997 Losses Should a Sec 1018 TCA 1997 claim be made? Offset against spouse – only where joint assessment applies Are losses likely? Does Sec 1017 TCA 1997 apply? Consider current economic climate
  7. Sec 381 Claim v Carry fwd Loss? Sec 381(5)(b) TCA 1997 Loss claim = total income Portion of loss cannot be claimed Tax Credits and reliefs may be lost Check that there is sufficient income at higher rate of tax to absorb loss Should loss be carried forward instead?
  8. Example
  9. Trading Losses Forward Sec 382(2) TCA 1997 No time limit for claim Losses used against first available profits Balance carried forward to subsequent year(s) Consider each client’s circumstances Sec 381 or Sec 382 claim? Cash flow and tax savings comparison
  10. Losses on Commencement Section 66 TCA 1997 Rules of assessment for commencement
  11. Tax Losses Sec 381 TCA 97 Strict position for Sec 381 claim Tax adjusted loss sustained in the year of assessment Revenue accept loss for basis period in cases of continuing business Tax losses for commencement and cessation – calculated on actual basis
  12. Case Law IRC v Scott Adamson Period in which loss occurs forms basis of assessment for > 1 year of assessment Loss restricted to actual loss Tax Briefing 35 (worked examples) Example: Commenced to trade 1 July 2010 Y/E 30th June 2011 = Loss (€18,000) Y/E 30th June 2012 = Profit €6,000
  13. Example
  14. Losses on Cessation Sec 67 TCA 1997
  15. Cessation Client’s accounting year tax year? Plan for cessation date where possible Penultimate year revision? PT for final year may be insufficient Avoid additional tax and interest
  16. Terminal Loss Relief Section 385 TCA 1997 No specific time limit Sec 865(4) TCA 97 – 4 year time limit Tax losses and unrelieved CAs of last 12 months trading Carry back against Case I/II for 3 years of assessment prior to cessation Sec 385(1) TCA 1997
  17. Terminal Loss Relief Sec 385(3) TCA 97 Relief against income of most recent year first Sec 386(2) TCA 97 relief: Loss from 1st Jan to date of cessation + CA in year of cessation + Loss in part of preceding year of asst commencing 12 months before cessation + Same proportion of CA as 3 above
  18. TLR set against Trading Profits Sec 387(1) TCA 97 – terminal loss may be set against:- Full profits assessable for that year Less CA for Year of Asst (Incl. Cas b/fwd) Less Annual Payment/Losses deductible where not set against other sources of income Sec 387(2) TCA 97 – TLR reduced by annual payment which has reduced taxable profits for any of 3 years
  19. TLR Example
  20. CA & Loss Relief Claims Chapter 2 Part 12 TCA 1997 Order of set off for losses and CA Order depends on whether losses or CA arise in current year v carried forward Sec 392(1) TCA 97 claim – increase/create current year loss under Sec 381 TCA 97 by deducting current year CAs Sec 393 TCA 97 – deduct BC in c/y from CA first
  21. CA & Loss Relief Claims Where income < Loss + CA CA not set off in Sec 381 claim are available for carry forward Sec 392(2) TCA 97 specifies trading loss used against other income first CA carried forward are maximised Claim Sec 381 in current year and opt to carry forward CA to obtain tax efficiency?
  22. Loss & CA Set Off 2010 CA net of BC = €4,400 2011 Sec 381 claim for losses = €12,000 No Sec 392 claim made for 2010 No loss of tax credits 2010 2010 CA carried fwd and claimed in 2011 Tax efficiency achieved No Sec 392 claim made
  23. CA carried forward CA forward cannot be used to create/increase loss under Sec 392 TCA 97 CA forward can be used to: Sec 393(2) TCA 97 – absorb BC in future yr Sec 391(2)(b) TCA 97 – reduce taxable profits before current year CAs deducted BC not fully absorbed by CA fwd must be deducted from current year CA CA fwd used in priority to current year CA
  24. CA & Losses E.g. page 368
  25. Losses C/Fwd and CAs Sec 382 TCA 97 Trading loss forward offset future against profits of same trade V’s CA fwd can reduce future profits of same trade and set against BC of trade Sec 391(2)(b) TCA 97 – CA b/fwd used in priority to current year CA
  26. Order of Offset Losses forward; current and carried forward CAs CA forward reduced by current year balancing charges Current year CA reduced by any remaining current year balancing charges Finally use trading losses forward
  27. Order of Offset E.g. Page 372 Current Year and C/Fwd Losses and CA
  28. Sec 381 ClaimE.g. contd. Sec 382/304 claim(s) first made for losses/CA Where amended Sec 381 claim made later (within 2 years) Original claims may need to be reduced
  29. TLR & CA TLR includes CA for final 12 months Sec 386(2) TCA 1997 Tax losses and CA for TLR calculated after revision for penultimate year TLR cannot be increased by CA c/fwd from earlier year Sec 386(1) TCA 97 CA utilised against profits of that year Sec 381/Sec 385(2) TCA 1997 CA used in offsetting BC Sec 393(1) TCA 97
  30. Cessation - Intervals Y/E 31st October Ceased 31st March 2011 No revision to penultimate year of asst “Gap” between basis periods 1st Nov - 31st Dec 2010 = interval period Interval period also if penultimate year of asst revised to actual = gap between 2009 and 2010 How are CA/BA/BC in gap period included?
  31. Cessation - Intervals Sec 306 TCA 1997 Interval periods (IP) included as follows
  32. Sample IT Comp - Page 375
  33. Sample IT Comp
  34. Sample IT Comp
  35. Sample IT Comp
  36. Partnership Losses Sec 1008 TCA 97 – apportionment of Partnership profits and losses Overall partnership loss no profit for any partner and no partner can claim loss> partnership loss Overall partnership profit no loss for any partner and no partner assessed on profits> partnership profit Each partner uses losses eg S381, 382 or TLR
  37. Limited Partnerships Sec 1013 TCA 97 Anti Avoidance Perceived abuse of limited partnerships Commercial exposure to debts and liabilities limited Tax losses and capital allowances shared by limited partners
  38. Limited Partner
  39. Limited Partners Sec 1013 TCA defines limited partner Does not define limited partnership Restricts reliefs that can be claimed by LPs Provisions very wide Transitional provisions for seaside resorts; car parks and double rent allowance projects; whitefish fleet and renewable energy projects
  40. Limited Partners MacCarthaigh v Daly case (Hotel partnership) Mr Daly claimed CA against other income Sec 1013(2) restricts reliefs for limited partners on interest, losses and CAs Set off against partnership income only Sec 1013(3) – reliefs restricted to capital contributed Losses and CA can be c/fwd – not interest as charge
  41. Case Law Quigley v Harris -Cooks Island Partnership Claim to set losses/CA against other income Mr Harris able to take part in management of trade while protected from unlimited exposure Definition of limited partner did not extend to Mr Harris Loophole closed to catch p/ships registered outside the State Claims for relief from 2005 – watch transition
  42. Exclusions Sec 1013(2C) TCA 97 Excepted expenditure of general partners who are not active partners €31,750 excess CA Sec 409A TCA 97 Certain 3*+ hotels in border counties Transitional measure excluded Sec 409A and 409B TCA 97 Non trading partnerships not affected by restrictions
  43. General Partners Key part of limited partner definition Is non active partner a general partner? Scope of S1013 very wide General partners who are not “active” can be within restrictions – includes genuine commercial situations Review partnership agreements Could protection from unlimited liability be offered to avoid restrictions?
  44. Companies and Losses Trading Companies Sch D Case I /II Trade and non trade charges reviewed Cessation of trade and losses Group Relief for losses Foreign currency and trading losses Anti Avoidance
  45. Trading Losses Trading loss calculated in same way as trading profit Relief allowed for trade losses of overseas PE/branch (not Sch D Case III) Lidl Belgium case – ECJ held PE losses could be disallowed if c/fwd in other Member State No similar Irish provision – overseas branch losses allowed in Ireland and overseas
  46. Overseas Branches Initial trading losses expected in overseas expansion? P/E may be tax efficient for Irish company Branch losses can be used by Irish Co Review tax legislation in foreign jurisdiction
  47. Overseas Branches Sec 847 TCA 97 – foreign branch profits of certain Irish resident companies exempt Creation of substantial employment in Ireland Relief expired 31st December 2010 Previously disregarded losses can be c/fwd Set off against branch profits arising after 1 January 2011
  48. Relevant Trading Income/Loss Sec 396A TCA 1997
  49. Relevant Trading Loss? Is the loss a Sec 396 TCA trading loss? Relief under Sec 396 for loss other than a relevant trading loss Is the loss a relevant trading loss? Relief under Sec 396A and 396B TCA 97
  50. Non Relevant Trading Losses
  51. Order of Losses Valid loss claims must be made in prescribed order Subsequent disallowance of losses by Revenue due to incorrect order Time limit for claims may have expired
  52. Relevant Trading Losses
  53. Value Based Relief Sec 396A “ring fences” relevant trading losses Sec 396B TCA 97 converts remaining losses after S396A claims Conversion from allowance to a credit Credit used against CT payable in current AP or carried back to prior AP
  54. Value Based Relief Relevant Corporation Tax can be reduced Tax liability before: credits and debits for income tax S239/241 TCA 97 value base group relief S420B TCA 97 close company surcharges S440 and 441 TCA 97
  55. Value Based Relief Value of loss = Loss x CT Rate in year loss arises Sec 396A loss (relevant trading loss) made in priority to S396B claim or it is lost S 396B TCA 97 VB claim carried back to AP of similar length Trade in which loss incurred must have been carried on in prior period Claim within 2 years of end of AP
  56. Loss Relief Memo Prepare loss relief memos S 396B claims converted from tax credit claimed to value of loss used Mixed Trader Loss incurred €170,000 S396A claim (€50,000) S396Bclaim (€80,000)(€10,000/12.5%) Balance fwd €40,000
  57. Trading Losses Forward Losses remaining after claims made under S396(2); S396A; S396B TCA 97 Carry forward against profits of same trade Applies to losses of trades@ 10%,12.5% and 25% No time limit – first available AP Has there been any change in nature or conduct of a trade?
  58. Case Law Boland Ltd V Davis Closure of mills and later reopened Held same trade carried on Gordon & Blair Ltd v CIR Brewing company Brewed and sold its own beer Changed to outsource brewing – continued selling beer Held company had ceased trade of brewing
  59. Terminal Loss Relief Sec 397 TCA 97 Loss in AP falling within last 12 mths of trading Loss claim includes charges on income – wholly & exclusively test Claim must be made – after all other claims Loss allowed against profits of same trade 3 year period prior to final 12 months trading
  60. Trade & Non Trade Charges S 237 and 238 TCA 97 Annual sums with legal obligation to pay Payor withholds tax from payments Patent royalties, deed of covenant, interest Interest to Irish bank/building societies can be paid without deduction of withholding tax
  61. Charges Summary
  62. Charges Examples
  63. Relevant Trading Charges Sec 243A TCA 97 Charges paid “wholly & exclusively” for the company’s trade which is not an “excepted trade” Excepted trade: Land dealing Working minerals Petroleum activities
  64. Relevant Trading Charges Sec 243A(3) TCA 97 Relevant charges ring fenced S 396A trading losses claimed first Off set as a deduction on a euro for euro basis against Income from 12.5% trades Sec 21B dividend income @ 12.5% Trading income from reinsurance activities – S21A(4)(b) TCA 97
  65. Relevant Trading Charges S243B TCA 97 Value basis relief for charges not absorbed by relevant trading income Offset against relevant CT on other profits, income and gains
  66. Relevant CT S 243B(1) TCA 97 = CT liability before S 239 and 241 credits/debits deducted from receipts/payments S396B Value based loss relief S420B Value based group relief S440/441 Close company surcharges
  67. Order of Set Off
  68. Non Trade Charges S 243(2) TCA 97 Deductible on a euro for euro basis Against total profits ie income + gains Interest on S247* TCA 1997 loan Deducted from total income after all other reliefs but before group relief Can be set against 25% before 12.5% income Non trade charges** not available for carry fwd * FA 2011 Changes **Exc interest as a charge by investment co
  69. Sec 247 TCA 97 Basic Conditions pre FA 2011 Loan must be used by investing company to acquire ord share capital of Trading or Rental company or Holding company – trading or rental or Loan must be used to lend to trading or rental company and used wholly & exclusively for trade or business of the company or a connected company or Used to pay off another loan qualifying for relief
  70. Sec 247(3) TCA 97 Sec 247(3) TCA 1997 – 3 further conditions Investing company must have material interest – 5% OSC in company or connected company One common director No recovery of capital
  71. Anti Avoidance Sec 247(4) TCA 1997 Proceeds of loan to be applied for qualifying purpose within a reasonable time Sec 247(4A)(a) TCA 1997 No relief for loans made on or after 2nd February 2006 where investing company borrowed funds from a connected company to: Acquire shares in a connected company or Lend to connected co to acquire OSC of a connected co
  72. Anti Avoidance Third party borrowings not affected Restriction relaxed where “matching income” from the loan Income not deductible by investing company or connected company Dividend income (not FII) Sec 247(4A)(d) TCA 1997 Back to back borrowings – no relief
  73. Recovery of Capital Capital recovered from company or connected company must be applied to reduce investor borrowings Interest deductibility restricted if borrowings not reduced Consideration for sale of OSC in company/connected company Loan repaid by company or connected company Consideration received by borrower from assignment of debt due from company/connected company
  74. Trading Losses Fwd & Non Trade Charges S 396B(5)(c) TCA 97 Exercise care where claiming non trade charges – where trading losses fwd Losses treated as used against profits before charges deducted Losses deemed used have impact on trading losses forward Losses fwd must be adjusted to reflect the Non-trade charges claimed
  75. FA 2011 - Interest Applies to loans taken out on or after 21st January 2011 Loan to Trading Company Money on lent must be use wholly & exclusively for purposes of trade Loan to Rental Company Loan used W&E in purchase, improvement or repair of premises Loan to Holding Company Loan used W&E for purpose of holding shares
  76. FA 2011 - Interest Sec 247(2)(A) – W&E test – trading, rental or holding Sec 247(3) – Investing company must have material interest* and common director in company using borrowed money *5%
  77. FA 2011 - Restrictions Money borrowed from a connected company Lends to another company to acquire an asset from the connected company No interest deduction allowed Exceptions
  78. FA 2011 - Exceptions Acquisition of share capital, specified intangible assets or trading stock Where money used to acquire a trade previously carried on by company not within charge to Irish CT – interest limited to profits of acquired trade Acquisition of trade – treated as separate trade
  79. FA 2011 - Exceptions Money used W&E for acquisition of asset leased in course of a trade not previously within Irish CT – relief limited to profit of trade of acquired asset Note: Common AP’s impact on calculation of restriction
  80. FA 2011 - Exceptions Money borrowed from a third party & used to fund acquisition of an asset/trade from either a third party/connected party Money borrowed from connected party to acquire asset/trade from third party Loan deemed to be by connected party where back to back arrangements in place via third party
  81. FA 2011 - Restriction Company using borrowed money not within charge to Irish CT and Is in receipt of interest on that money
  82. FA 2011 - Restriction Restriction where Investing co borrows and lends to co for purposes of trade of connected co not within charge to Irish CT when: Restriction where amount of interest paid by investing company > interest arising to it on the loan Relief for the excess shall not exceed amount by which interest paid by investing co exceeds the interest arising to connected co on use of funds
  83. Interest – FA 2011 Interest relating to monies used for purposes of trade – relief @ 12.5% Sec 249 TCA 1997 amended Recovery of capital not to apply to share exchange reorganisations – Sec 584 Election by investing company in CT Return New shares treated as the old shares
  84. Order of Losses and Charges
  85. Group Loss Relief EU influence EU Law and ECJ decisions Article 43 EU Treaty ICI v Colmer 1996 Non resident companies and group relief Sec 411(1)(c) TCA 97 amended to include EU/EEA resident companies
  86. Group Loss Relief Definition of group enlarged but losses surrendered only between companies within charge to Irish CT Marks & Spencer case – UK denied claim for group loss relief from EU subs ECJ held that losses can be surrendered where foreign sub losses not available for set off in foreign country Surrender up to 75% parent – Sec 411(2A) TCA 97
  87. Group Definition Sec 411 TCA 1997 75% direct or indirect ord share capital Subsidiary – Sec 9(5)-(10) TCA 97 Calculate indirect shareholdings on proportionate basis Sec 412 TCA – 75% profits on distribution and assets on winding up
  88. Group Definition A HC B C E D F
  89. Consortium Relief S 411(3) TCA 97 Surrender of group relief by trading co to consortium members Relief can only be surrendered upwards S 411(3)(a) TCA 97: 75% or more of share capital Directly owned by 5 or fewer companies Resident in EU State(s)
  90. Consortium Relief S 411(3) TCA 97 Relief can be claimed where: Surrendering co is a trading co owned by a consortium and not a 75% sub of any co Surrendering co is a trading co that is a 90% sub of a HoldCo owned by a consortium & not a 75% sub of any other co Surrendering is a holding co owned by a consortium & not a 75% of any co
  91. Group Relief Losses
  92. Payments for Group Relief Tax efficient way of moving cash around a group to support a loss-making subsidiary Claimant co can make payment up to value of losses surrendered without tax consequences
  93. Payments for Group Relief Payment by sub to parent > value of losses Sec 130(2)(d) distribution? Payment by parent to sub > value of losses Sec 243(4) charge? Sec 621 depreciatory transaction? Also relevant where minority shareholdings
  94. Order of Offset Only current year losses and charges can be Offset against current year profits as Group Relief claim Claim Loss relief forward (S 396(1)) before Group Relief Claim Group Relief before: Relief carried back (S396) Excess CA S308(4) TLR (S 397)
  95. Order of Loss Reliefs
  96. Corresponding APs S 420(1) TCA 97 Trading Loss against profits of corresponding AP >75% shareholding – full loss relieved Apportion profits and losses to common period in AP Claim = lower of the time apportioned profit or loss
  97. Joining or Leaving Group Sec 423 TCA 97 Group Relief affected by companies joining or leaving group Losses and profits time apportioned to actual period of membership of group
  98. Compliance Sec 429(1) TCA 97 Consent of surrendering company Within 2 years of end of surrendering companies AP in which loss arises S 1085 TCA 97 – late submission of CT Return 25% restriction if filed within 2 months 50% if later than 2 months Max €31,740/€158,715
  99. Foreign Currency & Losses S 79 TCA 97 Tax treatment of FX gains and losses FX gains/losses on converting trading assets to € follows accounting treatment Sec 79(2) FX gains and losses on monetary item movements credited/debited to P&L are treated as trading profits/losses Charged to CT
  100. Foreign Currency & Losses “Relevant monetary item” Money held or payable for purposes of trade Foreign currency and monetary amounts due – creditors and long term loans Trading companies only for trading purposes S 79(2) provides tax relief for FX losses on capital borrowings and taxes FX gains
  101. Foreign Currency & Losses FX gains/losses on “relevant contracts” “Relevant Contract” = any contract entered into to reduce/eliminate risk of loss from FX on monetary items e.g. Hedging contracts Treated as relevant monetary items Trading profits/losses for CT S 79(3) – contracts are outside CGT
  102. FX Hedge for Tax Liability S 79(4) TCA 1997 Hedge entered into to purchase €s to pay tax liability Gain/Loss on hedge matched by movement in tax liability no taxable gain or loss arises Applies to trading companies only Non-trading companies first principles
  103. Functional Currency Euro Accounts prepared in functional currency Sec 402(2) TCA 97 CT comps and CA in Functional Currency Sec 402(3) – losses under S 396/396A/397 computed in functional currency Prepare loss memo in functional currency and translate @average rate for year of claim CT liability translated into Euro @ average rate for period of account
  104. Anti Avoidance Sec 401 TCA 1997 “Loss buying” provisions No S 396 loss relief Sec 401(2) Within a period of 3 years there is a change of ownership and a major change in trade activities At any time activities become small/negligible and there is a change of ownership
  105. Anti Avoidance “Major change in the nature or conduct of the trade” S 401(1) TCA 1997 A major change in: Type of property dealt with/services provided Customers, outlets or markets Sch 9 TCA 1997 >50% of OSC acquired by a single person or >50% of OSC acquired by 2 or more persons where each acquires 5%+ OSC
  106. Case Law
  107. Co Reconstructions & Losses S 400(6) TCA 1997 – common ownership 75% or more of trade owned by same person within 1 year before and at any time within 2 years after change Trading losses can be transferred Succession planning – separation of trades S 401 TCA anti avoidance Bona fide test and Revenue pre approval
  108. Sch D Case III Losses Sec 71(1) TCA 1997 Income not subject to Irish tax at source from: Interest, annuities and other annual payments - Government Securities Foreign securities Foreign possessions – rental, employment and trading income
  109. Sch D Case III Losses Sec 70(1) TCA 1997 Single source Revenue view – loss from one Case III source cannot be set against another Case III source Form 11 and Form CT1 – no provision for offset of losses
  110. Sch D Case III Losses Foreign trade carried on wholly outside the State Trade carried on partly in the State is taxable under Sch D Case I Case Law – a trade is not foreign if controlled and managed by persons resident in Ireland
  111. Sch D Case III Losses
  112. Foreign Trades Sch D Case III trade v Case I Impact on loss relief claims Companies – 25% v 12.5% Advise client to manage foreign trade from Ireland Case III Trade – Sec 71(1) and (4) Foreign income and rents calculated in same manner as Irish source income
  113. Foreign Income Losses Trading losses – by concession losses forward allowed for individuals/corporates under Case III Sch D for offset against future profits from same foreign trade TLR Relief allowed for foreign trades No Group Relief for foreign trading losses Foreign Rental losses allowed by concession – carry forward Revenue: Irish tax implications of Foreign Property Ownership
  114. Sch D Case IV Losses Sec 18(2) TCA 1997 Sec 74(1) TCA 1997 Examples of Sch D Case IV: DIRT Interest Post Cessation Receipts Patent Right capital sums Certain capital gains from land Partnership income not allocated Certain Profits from leasing plant and machinery
  115. Sch D Case IV Losses Sec 383(1) TCA 1997 Offset against Case IV profits of same year Sec 383(3) - carry forward unused losses for set off against first available Case IV income Sec 305(1) – excess Sch D Case IV CA claim against total income in same year CA for patent rights/ IBA lessor No claim for leased P&M Time limit to claim – 2 years
  116. Sch D Case IV Losses Sec 814 TCA 1997 Loss arising from transaction in certs of deposit and assignable deposits Can be set against other Sch D Case IV profits and Against interest arising on the money, (the right to receive which has been disposed of)
  117. Companies S 399(1)(a) TCA 97 Sch D Case IV loss set against Case IV income for same AP Unused balance c/fwd against Case IV and offset against earliest possible AP Loss on S 814 transaction allowed for company as for individuals S 308(4) excess Case IV CA- same and P/Y Sec 402 – Cos leasing P&M can use functional currency
  118. Individual v Company
  119. Sch D Case V Losses Rental Losses Individuals and companies CA on furnished lettings Industrial Buildings Capital allowance claims Offset rules for companies, individuals and spouses
  120. Rental Losses Sec 75(1) TCA 97 – Case V charging section Sec 97(1) TCA 97 – rental profit/loss calculated separately for each property Total rental profit/loss calculated by adding all profits and deducting losses
  121. Individuals Sec 384(2) TCA 97 – c/fwd of losses Sec 384 (3) TCA 97 – against earliest year first Can be carried forward indefinitely No set off against other sources of income Revenue Tax and Duty Manual (part 4.18.3) Spouse cannot use unused CV losses to reduce income of the other spouse
  122. Rental Capital Allowances Sec 284(7) TCA 1997 CA on P&M Wholly & Exclusively on furnished dwelling House rented on commercial terms Sec 300 TCA 97 – CA deducted from Case V rental – no excess CA claim Sec 304 TCA 97 – excess CA offset against Case V of same year and balance c/fwd
  123. Rental Capital Allowances Sec 287 TCA 1997 Lessors of industrial buildings Sec 305(1) – CA deducted in priority to Case V losses Sec 305(1)(b)(i) – excess CA can be offset against own and spouse’s other income Sec 409A restrictions apply - €31,750 Claim within 2 years of end of tax year in which loss arose
  124. Rental Capital Allowances IB > €31,750 and each spouse liable @ 41% Purchase property in joint names to utilise allowances asap Balance forward against rental income only TB 39 – rental income first reduced by CA fwd and then by CA of current year
  125. Order for Claiming Relief Sec 384(4) TCA 97 Introduced by FA 2010 CA first set against Case V income Case V losses claimed after CA claim Effect is that a reduced CA claim for set off against total income
  126. Companies – Case V Losses Sec 399(2)(a) TCA 1997 Case V Loss set against Case V income of previous AP (equal length) Balance carried forward Losses forward used before losses back Sec 399(4) -Claim for carry back of losses within 2 years of end of AP in which loss arises
  127. Companies – Case V Losses Restriction of relief – late filing of Tax Return 25% restriction if delay <2 months €31,740 max 50% restriction if delay >2 months €158,715 max
  128. Companies: Capital Allowances Companies entitled to W&T claim on furnished lettings Sec 406 TCA 97 disapplies Sec 308(4) No claim for excess CA on F&F against other income
  129. Companies Case V - IBA Sec 278 TCA 97 – CA by lessors of IB Sec 308(1) TCA 97 – Case V CA must be claimed first against rental income of period Sec 308(4) – Excess non-trade CA offset against total profits of current AP and carried back to prior AP
  130. Case V Companies Excess first claimed against total profits of period in which it arises – balance against prior AP Relief for earlier CA/Losses in prior AP allowed before excess CA carried back Sec 308(6) – claim for excess CA must be made within 2 years of AP in which CA arose Sec 308(3) – carry fwd unused excess against C V Excess CA can be group relieved
  131. Individual v Company
  132. Capital Losses Scope of CGT charge for individuals and companies and impact of losses Utilisation of Capital Losses Negligible Loss claims Indexation Capital Allowances FX transactions Development Land Connected Party disposals Rollover Relief Capital Losses in Group Case Law and anti avoidance
  133. Charge to CGT Sec 546(2) TCA 97 – loss calculated using same principles as gains Sec 546(1) TCA 97 – a loss is not an allowable loss if a gain would not be chargeable Disposal of chargeable asset and loss generated in order for a loss to be realised Exception for negligible loss claims
  134. Residence and CGT
  135. Losses and Remittance Basis Sec 29(4)(c) TCA 97 Losses on foreign asset disposals are not an allowable loss Individual taxed on remittance basis for CGT cannot use loss on foreign asset disposal against CGT charge on foreign assets Separate (loss) proceeds from foreign property disposals if losses and gains arise
  136. Losses – Non Residents Sec 546(4) TCA 97 Non resident and not ordinary resident person Relief for losses confined to losses on disposal of assets* that would be chargeable under Sec 29(3) TCA 97 Specified Irish assets If charge is on Irish property only losses can only be clamed on Irish asset gains
  137. Irish Companies Sec 78 TCA 97 – Irish resident companies are liable to CT and not CGT on gains Exception for development land gains Computation prepared under CGT rules Notional CGT converted to chargeable gain, liable at standard rate of CT Capital Gain x CGT Rate = Notional Gain Notional Gain x 1000/125 = Chargeable Gain
  138. Irish Companies Sec 78(4) TCA 97 Capital losses not “converted” for CT Anti avoidance FA 2010 – capital losses disallowed if arising from “arrangements” to secure a “tax advantage” Applies where no real monetary loss arises
  139. Utilisation of Losses S.31
  140. CGT Losses Losses cannot be carried back Review timing of disposals Should loss be realised at an earlier date? Is a negligible loss claim possible?
  141. Development Land Losses Sec 653 TCA 97 Development land gain can only be reduced by a development land loss Development land losses can be used against other gains S 649 TCA 97 – company development land gain liable to CGT Trading losses or group relief cannot reduce the development land gain
  142. Indexation and Losses Sec 556 TCA 97 Expenditure after 31st December 2002 – no indexation Sec 556(4) – indexation cannot Increase an actual loss Increase an actual gain Turn an actual gain into a loss - “no gain/no loss” Turn an actual loss into a gain – “no gain/no loss”
  143. Negligible Value Claims Sec 538 TCA 1997 Asset treated as disposed of and reacquired for market value Unrealised loss can be cyrstallised Relief must be claimed – Revenue submission Details of acquisition, valuation, legal documentation, accounts
  144. Negligible Value Claims Williams v Bullivant & Larner v Warrington Loss can only arise in year of claim Revenue allow claim if filed within 12 months of end of relevant tax year or AP Revenue Precedent G35(2)
  145. Connected Parties Sec 547 TCA 97 – MV Rules Restrictions on losses between connected persons – Sec 10 TCA 97 defines “Connected Party” Sec 549(3) TCA 97 – ring fencing of losses to disposals to the same person in same or subsequent tax years
  146. Non € Denominated Transactions Sec 552(1A) TCA 97 Convert costs into € @ date of expenditure Convert Sales Proceeds @ date of transaction
  147. Foreign Currency Bank Accounts Sec 532 TCA 97 – “asset” definition Asset for CGT includes currency other than Irish currency (i.e. other than €) Holding of foreign currency = chargeable asset Buying and selling of foreign currency- CGT issues Sec 79 TCA 97 – FX gains/losses of trading company = income
  148. Debts Sec 532 TCA 97 – a debt is a chargeable asset Sec 541 TCA 97 – no chargeable gain where original creditor disposes of the debt Sec 541(6) – exemption does not apply to foreign currency owed by a bank unless FC acquired for personal expenditure outside State for self/family
  149. Foreign Currency Matching Hedging of FX risk for trading purposes = trading profits/losses Sec 79A TCA 1997 – gains and losses where: Co acquires share capital in FC Company owns 25% or more of shares Investee co is a trading co or HoldCo of trading co
  150. Foreign Currency Matching Investor co notifies Revenue within 3 weeks Matching of investment with FX liability Gain on disposal of shares can be matched with FX loss on liability but FX Gain on repayment of liability deemed to be sale proceeds Additional proceeds cannot exceed a capital loss on shares Deemed discharge if liability not discharged
  151. Foreign Currency Matching Sec 79B TCA 1997 Matching of FX assets with redeemable share capital in same currency Companies allowed match unrealised FX movement on share capital with movements on assets/loans – effect of tax neutral hedge Applies to € and non € functional currencies
  152. CAs and Loss Relief Sec 560 TCA 97 – wasting assets Predictable life of < 50 years eg lease Deductible base cost wasted over life Sec 561 TCA 97 – where asset qualifies for CA full base cost deductible Sec 554 and 555 TCA 97 Exclude expenditure deductible for IT/CT from CGT comp Deduction still available where asset qualified for CA
  153. CA and CGT Sec 555(1) TCA 1997 Restriction in computing allowable loss Capital loss ring fenced by reference to CA granted Restriction cannot turn capital loss into a capital gain
  154. CA and CGT
  155. CA and CGT
  156. CA and CGT
  157. Rollover Relief Sec 597 TCA 1997 No Rollover Relief for disposals after 4th December 2002 Transitional rules where “new assets” acquired prior to 4th December 2002 CGT deferral on certain trade assets
  158. Rollover Relief
  159. Deferred Gains Maintain schedule of deferred gains Needed for future disposal Due diligence Risk management – reduction of interest Deferred gain calculated by reference to actual disposal date Rate of CGT is rate on crystallisation date Deferred gains? Use losses if possible as CGT rate increasing
  160. Transfer of Capital Losses No transfer of CGT losses between group companies CGT group defined in Sec 616(1)(b) TCA 97 Principal company and “effective 75% subsidiaries” Transfer of assets between group companies– Sec 617 TCA 97 Realise loss in same company as gain arises
  161. CGT Groups Anti Avoidance Sec 621 and 622 TCA 1997 Depreciatory Transactions Dividend Stripping
  162. CGT Groups Anti Avoidance Sec 621 TCA 97 – depreciatory transactions Value of shares in group co materially reduced due to intra-group transfer Loss on disposal of those shares is disallowed to the extent it is just and reasonable taking into account prior depreciatory transaction Loss can be set against gain on share disposal of any company that benefited 10 year time limit
  163. CGT Groups Anti Avoidance Sec 622 TCA 1997 -Dividend Stripping Capital loss on disposal of “stripped” shares is restricted Distributions that materially reduce value of shares Affects CGT loss and negligible value claims CGT Group not necessary Applies to 10% holdings – connected parties Sec 621 TCA 1997 applies
  164. Loss Buying Sec 626A /Sch 18A TCA 97 Counters buying and selling of companies with aim of using capital losses Group includes co resident in EEA State/ DTA with Ireland Ring fencing of capital losses: Losses prior to becoming a group member Subsequent losses on assets held at time of joining group
  165. Loss Buying Sch 18A Para 2 Pre entry portion of any allowable loss on a future disposal is lower of: Actual loss on disposal of pre-entry asset and Allowable loss that would have accrued on pre-entry asset if sold and reacquired @ mv at time co joined group i.e. Loss relating to period prior to joining group is restricted
  166. Loss Buying Wide application Applies where a company joins a group Applies where company no longer a member of group Documentation of key dates by companies Update records when company joins/leaves group
  167. Use of Pre Entry Losses Pre-entry losses can be set against gains: On assets disposed of by company before it joined group On assets disposed of after entry which were held by company before entry On assets disposed of which were acquired by the company on or after entry from a 3rd party and which have been used for trade purposes engaged in prior to joining group
  168. Pre Entry Losses Two or more companies in a group Join a new group Companies treated as one for purposes of setting pre-entry losses against gains on disposal of assets acquired before entering new group
  169. Change of Trade Sch 18A para 4 TCA 97 Change in trade can restrict offset of pre-entry losses Within a 3 year period a company enters group Nature of trade alters fundamentally or Reactivates after being dormant Activity prior to entry is disregarded
  170. Change of Trade Pre-entry losses – no offset against gains on assets purchased from 3rd parties after joining group Change of trade outlined in Sch 18A Customers, markets, suppliers,services Willis v Peeters Picture Frame Ltd Pobjoy Mint Ltd v Lane
  171. Changing Groups Sch 18A para 5 – co changes groups due to disposal of shares in that co for no gain/no loss Include period of membership in 1st group Pre-entry losses and assets determined on basis of joining 1st group Revenue Guidance – mergers and group reconstructions Application of provision not clear – Sec 584 and 617
  172. New Principal Company Sch 18A Para 1(6) TCA 97 Change of principal company - new group formed Companies in first group treated as having joined second group at that time Sec 616(3)/(3A) does not apply
  173. New Principal Company (PC) New company inserted into existing group? Is new group formed? “Yes” unless owners of old parent = owners of new parents Sch 18A Para 1(7) exception Owners of second group = owners of first group PC of second group was not PC of any previous group PC of second group holds most of share capital in company which was PC of first group
  174. Time Limits for Loss Relief Claims
  175. Time Limits for Loss Relief Claims
  176. Time Limits for Loss Relief Claims
  177. Time Limits for Loss Relief Claims
  178. Time Limits for Loss Relief Claims
  179. Time Limits for Loss Relief Claims
  180. Time Limits for Loss Relief Claims
  181. Time Limits for Loss Relief Claims
  182. Manner of Claims for Loss Relief Depends on claim Form 11 / CT1 / Letter to Revenue Schedules of claims and manner of claim on pages 510-513
  183. Loss Relief – Risk Areas Failure to make timely claim Failure to claim in correct order Late filing of Tax Return Submission of overstated loss relief claim Can result in significant adverse tax consequences Failure to make Negligible Value claim and/or not to provide documentation
  184. Loss Relief – Risk Areas
  185. Loss Relief – Risk Areas
  186. Loss Relief – Risk Areas
  187. Round Up Sch D Case I/II – Sole Trader and Partnerships Losses and Capital Allowances Time Limits Order of reliefs Commencement and cessation rules Anti avoidance for limited partnerships
  188. Round Up Sch D Case I/II Trading Losses and Charges for Companies Overseas losses Excepted Trades Relevant and non relevant losses and charges and use of excess Terminal Loss Relief Change of ownership Anti avoidance
  189. Round Up Non trade charges – no carry forward FA 2011 restrictions on Sec 247 interest Group Relief EU Influence Foreign subsidiaries Order of claims in single company and group Consortium Relief Companies joining and leaving group
  190. Round Up Sch D Case III Losses Foreign securities and possessions Foreign trades – wholly outside State Case Law Concession for foreign trading losses Terminal Loss Relief
  191. Round Up Sch D Case IV Losses Charge to tax Loss relief for individuals and companies Excess Cas IV Capital Allowances Sec 814 TCA 97 transactions
  192. Round Up Sch D Case V Losses Separate calculations for each property Spouses CA on furnished letting Excess Case V IB Capital Allowances Group relief Rules for set off – CA before Losses
  193. Round Up Capital Losses Territoriality Indexation Foreign Currency Connected persons Negligible Value claims Capital Allowances – loss restriction
  194. Round Up FX Gains and losses – conversion CGT Groups Rollover Relief Claw back of relief on intra-group transfer Claw back – company leaving group Use of CGT losses in groups CGT clearance certs Anti avoidance – artificial creation of capital losses
  195. Round Up Compliance Time Limits for Loss Relief claims Format of making Loss Relief claims Risk Areas if Loss Relief claims not made Adverse consequences for clients for late filing/claims Loss Memos
  196. Learning Outcomes Key sections of tax legislation on losses and charges and apply to specific client situations EU Treaty freedoms impact on Irish legislation and ECJ rulings Maximise claims for loss relief in computations Make timely claims
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