Finance Act 2011

The long awaited Finance Act 2011 was finally enacted giving effect to the provisions announced in the Budget on 7th December 2010, along with some additional measures. We have highlighted a selection of the key changes.

Universal Social Charge increases to 10%

The Income Levies and health levies have now been consolidated into one Universal Social Charge (“USC”) from 1 January 2011. The Universal Social Charge is a tax payable on gross income from all sources, including notional pay, after any relief for certain capital allowances, but before pension contributions.

 The rates of Universal Social Charge are:

• 2% on the first €10,036
• 4% on the next €5,980
• 7% on the balance.

However, these standard rates are modified in certain circumstances. In the case of individuals aged 70 or over, and individuals who hold full medical cards, the 4% rate applies to all income over €10,036.

There is a surcharge of 3% on individuals who have income from self-employment that exceeds €100,000 in a year, regardless of age. Thus, where such individuals are under 70 years and do not hold a full medical card, a rate of 10% applies to such income and where such individuals are aged over 70 years or hold a full medical card, a rate of 7% applies.

Exempt Categories:

• Where an individual's total income for a year does not exceed €4,004
• All Dept of Social Protection payments
• Income already subjected to DIRT

Relief for Loans Applied in Acquiring Interest in Companies

There will be no income tax relief for individuals on loans applied in acquiring interest in companies taken out on or after 7th December 2011. From 1st January 2011, relief for those with existing qualifying loans will be restricted: 75% in 2011, 50% in 2012, 25% in 2013 until completely abolished in 2014.

Exemption For Start Up Companies

The Act states that the existing corporation tax relief for certain start-up companies, which commenced to trade in 2009 and 2010, will be extended to include companies commencing to trade in 2011. The section has affect for accounting periods beginning on or after 1 January 2011. The current relief exempts from corporation tax both trading income and capital gains on the disposal of trade-related assets by certain new or “start-up” companies in each of the first three years for which the trade is carried on. The exemption applies to the extent that a company’s corporation tax liability for that year does not exceed €40,000, with marginal relief available for companies with tax liabilities of between €40,000 and €60,000.

The relief does not extend to all trades. Trades which are subject to corporation tax at 25%, e.g. land dealing and exploration-related trades and companies carrying on certain professional services trades are excluded. The existing legislation also excludes new companies which take over pre-existing trades. The Act extends this further by ensuring that activities that would form part of a trade of an associated company cannot be commenced by new companies. There are also special rules which apply to companies engaged in the transport of passengers and goods to comply with the EU de minimis aid regulation.

However the value of the relief will now be based on the amount of employers’ PRSI paid by a company in an accounting period, subject to a maximum of €5,000 per employee and an overall limit of €40,000. If the amount of qualifying Employers PRSI paid by a company in an accounting period is lower than the reduction in the corporation tax liability, the relief will be based on the lower amount.

Employment and Investment Incentive and Seed Capital Scheme

The Act introduces a new Employment and Investment Incentive and Seed Capital Scheme to replace the existing Business Expansion Scheme (BES) and Seed Capital Scheme. The new schemes will only come into operation after the necessary approval from the European Commission has been received and will be subject to Commencement Order from the Minister of Finance. The current BES and SCS provisions will remain in place until such time as the Commencement Order gives effect to the new provisions.

The principal changes announced are as follows:

• The qualifying trade limitations are largely removed and therefore the majority of small and medium sized trading companies should be able to avail of the schemes.
• The certification requirements for the majority of qualifying companies will be simplified.
• The annual and lifetime fundraising limits for companies will be increased as outlined in the table below:

• The minimum investment holding period for investors will be reduced from 5 years to 3 years.
• Tax relief at an effective rate of 30% will be allowed in the year the investment is made and this amount will be subject to the high earners restriction.
• Tax relief at a further effective rate of 11% of the amount subscribed for shares will be deferred until the tax year following the third anniversary of the investment. This however is subject to the investee company being able to demonstrate that it has increased employment or expenditure on research and development over the term of the investment.
• The new schemes are scheduled to expire on 31 December 2013.

Benefit-In-Kind Changes

The Finance Act 2011 abolishes the Benefit-in-kind exemption whereby professional fees and subscriptions were paid by employers on behalf of employees. Employees will now be assessed to income tax, universal social charge and PRSI on the amount paid on their behalf and employers will also have to pay employers’ PRSI at a rate of 10.75%.

Similarly, the provision of childcare facilities by an employer on behalf of employees no longer qualifies for the Benefit In Kind exemption and will be assessed to tax as above.

The amount of Benefit-in-kind in relation to preferential loans to employees will only be reduced by taking into account the interest actually paid by employees and not the interest payable by way of a loan arrangement. The balance will be the amount assessed to income tax, universal social charge and PRSI while the employer will pay Employers PRSI.

Property Relief Restrictions

The Finance Act further amends the restrictions announced in the Budget in relation to property based tax incentives. More importantly, the Act provides that the restrictions will be subject to a commencement order. The earliest that the measures may come into effect is 60 days following the publication of an economic impact assessment of the measures.

For further information please contact OSK Tax.