Posts

Non-resident landlords may have received a letter from Revenue advising of upcoming changes to the administration of withholding tax for non-resident landlords. Up to now, non-resident landlords had two options to report rental profits to Revenue:

  1. Non-resident landlords asked their tenant to withhold 20% of the rent and to pay this to Revenue on their tenant’s personal income tax return. The tenant should have given the non-resident landlord a Form R185 (certificate of income tax deducted) so that a credit could be claimed for the tax deducted when submitting a personal income tax return.
  2. Non-resident landlords appointed a Collection Agent, who registered for Income Tax on their behalf using a Collection Agent Income Tax Registration Form. Their Collection Agent was responsible for reporting the non-resident landlord’s rental profit for the year by filing an income tax return and paying any liability to Revenue on behalf of the non-resident landlord.

What are the upcoming changes?

A new Non-Resident Landlord Withholding Tax system is expected to go live from 1 July 2023 which will see changes to the obligations of tenants, collection agents and non-resident landlords.

  1. Tenants will be required to withhold and pay to Revenue 20% of the rent by making a rental notification through the new withholding tax platform. They will not be responsible for paying the 20% tax deducted on their personal income tax return.
  2. Collection Agents will no longer be responsible for filing an income tax return. A Collection Agent will be required to withhold and pay to Revenue 20% of the rent by making a rental notification through the new withholding tax platform.
  3. Non-Resident Landlords will be responsible for filing their personal income tax returns. A credit will be allowed for the tax withheld in the new system.

What actions are required by non-resident landlords?

If you are a non-resident landlord whose tenants already withhold 20% of the rent or if you have appointed a Collection Agent, there are no actions required by you at this time.  Further information will be released by Revenue shortly and a new Tax and Duty Manual will be published in due course.

All other non-resident landlords must now decide whether they want their tenants or a collection agent to withhold and pay to Revenue 20% of the rent under the new Non-Resident Landlord Withholding Tax system and take action accordingly.

Please contact us if you have further queries on this.

Vacant Homes Tax

A new Vacant Homes Tax (VHT) was introduced in Budget 2023. The primary objective of this is to increase the availability of housing, but landlords need to be aware of the restrictions on allowable pre-letting expenses when calculating their rental profits.

Vacant Homes Tax (VHT)

VHT applies to residential properties which have been occupied for less than 30 days in a chargeable period.

VHT is calculated at three times the residential property’s local property tax (LPT) liability.

The following will be exempt from the VHT:

  • Properties recently sold or listed for sale or rent.
  • Properties vacant due to illness or long-term care of the occupier.
  • Properties which were the principal residence of a deceased chargeable person in either the chargeable period or in the 12-month period prior to the commencement of the chargeable period.
  • Properties which were the principal residence of a deceased chargeable person where a grant to administer the estate issues in the chargeable period and for any chargeable period following such a grant, where the administration of the estate has not yet completed.
  • Properties which are vacant due to significant refurbishment work.

The first chargeable period runs from 1 November 2022 to 31 October 2023.

A VHT return will be due by 7 November 2023, with the tax payable by 1 January 2024.

Pre-Letting Expenses

In determining the taxable rental profits from the letting of residential property, a landlord may claim a deduction for the following expenses:

  • Private Residential Tenancies Board (PRTB) registration.
  • Insurance premiums.
  • Maintenance & repairs – e.g., cleaning, painting and decorating, general property maintenance.
  • Property fees – e.g., management fees, letting advertising, legal or accountancy fees.
  • Costs not repaid by tenant – e.g., light & heat costs.
  • Capital allowances on qualifying capital items – e.g., furniture, white goods.

However, with the exception of property-related fees such as letting or legal fees incurred on the first letting, a deduction is not permitted for expenses incurred prior to the first letting of the property.

The Finance Act 2017 sought to address the above and introduced an allowable deduction of up to €5,000 for certain pre-letting expenses incurred on vacant residential properties. From 1 January 2023, this cap on the authorised deduction has been increased to €10,000 and the specified period for which the property was vacant has been reduced from twelve to six months. The landlord must incur the expenditure during the twelve months prior to first letting the property.

If the landlord ceases to let the property within four years, the deduction for the pre-letting expenses will be clawed back in the year in which the property ceases to be let as a residential property. Importantly, a clawback will be triggered if there is a change of use from residential or if the property is sold.

If you need any assistance with VHT or Pre-Letting Expenses, please contact Niall Grant, Partner in our Tax Services’ Department.

Do you have property in the UK, or are you about to acquire or have you recently sold property there? If so, you must comply with new anti-money laundering legislation for UK properties.

On 1 August 2022, the new Register of Overseas Entities, came into effect through the Economic Crime (Transparency and Enforcement) Act 2022.

Any overseas entity that wants to buy, sell, or transfer property or land in the UK, must register with the UK Companies House and declare the identity of their beneficial owners or managing officers before 31 January 2023.

Overseas entities that disposed of property or land since 28 February 2022 (when legislation for the register was first announced) are required to provide a statement to Companies House.

The register applies to property acquired in:

  • England and Wales since 1 January 1999;
  • Scotland since 8 December 2014; and
  • Northern Ireland since 1 August 2022.

Failure to comply with these new obligations is a criminal offence and will lead to fines of up to £2,500 per day or a prison sentence of up to 5 years.

For further information, please Emma Dunne, Assistant Manager of Corporate Compliance.

Our previous article on RCT and VAT pitfalls for non-resident contractors provided a general overview of the RCT regime in Ireland. We will now look at a case study analysis of RCT and VAT treatment and explore scenarios in which we have observed mistakes commonly being made among taxpayers.

1. Supply of Labour for Relevant Operations

We have observed cases whereby contractors in the construction industry, particularly non-resident contractors, engage recruitment firms to supply labour to carry out construction operations on a site in Ireland.

While it is commonly interpreted that RCT only applies to construction operations, in fact the definition of “relevant operations” extends to both the carrying out of and the supply of labour for the performance of, relevant operations in the construction industry.

Case Study – Example 1

Company A (based in Spain) is engaged by Company B (based in Ireland) to carry out demolition works on a number of properties in Ireland. Company A, in turn, engages Company C (a recruitment firm based in the UK) to provide the personnel required to complete the demolition works in Ireland.

RCT Obligations

Company B is a Principal Contractor in respect of these works and is required to operate RCT on the payments made to Company A. This brings Company A within the scope of RCT as it is regarded as a Subcontractor carrying out construction operations in Ireland.

Whilst Company A is a subcontractor in respect of its engagement with Company B, Company A is also a Principal Contractor in respect of its engagement with Company C. Company A will be required to operate RCT on the payments made to Company C because Company C has arranged the supply of labour for the performance of the demolition works on the sites in Ireland.

This brings Company C, the non-resident recruitment firm, within the scope of RCT, as it is regarded as a Subcontractor carrying out construction operations in Ireland.

In this example, Company B must register for RCT as a Principal Contractor, Company A must register for RCT as both a Principal Contractor and a Subcontractor, and Company C must register for RCT as Subcontractor.

VAT Obligations

The provision of the services by Company C to Company A and Company A to Company B falls within a reverse charge provision for the supply of labour and construction services, which is subject to RCT.

Company C, as a Subcontractor, does not have an output VAT liability in respect of the provision of services provided to Company A. As such, Company C will issue its invoices to Company A with no VAT charge.

Company A, as a Principal Contractor, must self-account for VAT on a reverse charge basis (typically at 13.5%) on receipt of the invoices from Company C. Company A should have an entitlement to a simultaneous VAT input credit as it has used the services to make taxable supplies to Company B.

Company A, as a Subcontractor, does not have an output VAT liability in respect of the provision of the services provided to Company B. As such, Company A will issue its invoices to Company B with no VAT charge.

Company B, as a Principal Contractor, must self-account for VAT on a reverse charge basis (typically at 13.5%) on receipt of the invoices from Company A. Company B should have an entitlement to a simultaneous VAT input credit as it has used the services to make taxable supplies to Company B.

In this example, only Company A and Company B are required to register for Irish VAT. Only Principal Contractors are required to account for VAT on the receipt of construction services that fall within the RCT regime.

Company C is not required to register for VAT in respect of its supplies to Company A.

2. Mixed Contracts

A major risk with the definition of a relevant contract arises for contracts that cover both RCT-type and non-RCT-type supplies.

Case Study – Example 2

Company A engages Company B to carry out repair and maintenance works on a number of properties in Ireland.

Is the contract liable to RCT?

The definition of “construction operations” includes contracts for repair work which is interpreted as the replacement of constituent parts i.e., the repair of a broken window by installing a new pane of glass, mending a faulty boiler etc.

However, the definition of “construction operations” specifically excludes maintenance work i.e., cleaning, unblocking of drains etc.

In this example, Company A and Company B have entered into a repair and maintenance contract. This is referred to as a mixed contract. Revenue’s view on mixed contracts is that if any part of a contract includes “relevant operations” then the contract as a whole is considered a relevant contract and all payments under that contract are liable to RCT.

As Company A and Company B have entered into a mixed contract, the contract as a whole, is considered a relevant contract, and all payments made by Company A to Company B are liable to RCT.

This treatment applies even where no repairs are actually carried out by Company B in completing a particular job under the contract.

In this example, Company A must register for RCT as a Principal Contractor and Company B must register for RCT as a Subcontractor.

A common pitfall we see in this area is for a company to raise separate invoices for the maintenance work and the repair work. They then only treat the invoice for the repairs as being subject to RCT. This is incorrect as it is the overall contract, not the elements being invoiced, that governs whether RCT should be applied or not.

However, if there are separate contracts, one covering maintenance and one covering repairs, then only the contract covering the repairs is subject to RCT.

3. VAT Reverse Charge

VAT is normally charged by the person supplying the goods or services. However, under the RCT regime, the person receiving the goods or services (i.e., the Principal Contractor) accounts for VAT as if they had supplied the service and pays it directly to Revenue. This is known as the VAT Reverse Charge.

We commonly see the VAT Reverse Charge being applied incorrectly in cases where a subcontractor supplies goods or services, other than construction services, as part of the overall contract.

Contractors must be aware that while the overall contract may fall within the RCT regime, that does not mean that the VAT Reverse Charge applies to all goods or services invoiced under that contract.

Case Study – Example 3

The facts are the same as in Example 2. See below for reference:

Company A engages Company B to carry out repair and maintenance works on a number of properties in Ireland.

In this case the repair and maintenance contract in place between the parties provides that a separate charge will apply where repairs are carried out.

Company B has now completed repair and maintenance works for Company A and is looking to raise a sales invoice to Company A for the following:

  1. Repair Works – €4,500 (exclusive of VAT)
  2. Maintenance Works – €10,000 (exclusive of VAT)
VAT Obligations

Generally, the VAT Reverse Charge only applies to payments that are in respect of construction operations which in this case, are the repair works.

Company B must therefore issue two VAT invoices as follows:

  1. An invoice for the repair works of €4,500 on which the VAT Reverse Charge applies. Company A will be required to self-account for VAT at 13.5% on the receipt of this invoice from Company B.
  2. An invoice for the maintenance works (i.e., not considered a construction service) of €10,000 on which VAT at the 13.5% rate is applied. Company A will be required to pay Company B the total invoice value including VAT amounting to €11,350.
RCT Obligations

As set out in Example 2, where a contract is for repair and maintenance, RCT applies to all payments under the contract.

As such, Company A is required to notify the total payment to Revenue. This should include the VAT exclusive payment for the repair works plus the VAT inclusive payment for the maintenance works. Assuming for the purposes of this example that only one payment is to be made by Company A to Company B for the works, Company A would file a Payment Notification with Revenue as follows:

  1. Repair Works (VAT Exclusive) – €4,500
  2. Maintenance Works (VAT Inclusive) – €11,350
  3. Total Payment Reported to Revenue – €15,850

It is important to note that if a repair and maintenance contract provides for a single consideration for all works completed under the contract, then the VAT Reverse Charge must be applied to the full consideration.

Should you require any assistance in this area, please contact us.

An area that has continued to cause challenges and risks for businesses is the operation of Relevant Contracts Tax (RCT) and VAT.

The most common mistakes we see being made in this sector are by non-resident principal contractors who engage a subcontractor to carry out construction works in Ireland.

This article will focus on the most common pitfalls that we see occurring within this sector by non-resident principal contractors and the steps that can be taken to avoid making costly mistakes.

1. Compliance Obligations for Non-Resident Principal Contractors

When a non-resident principal contractor engages a subcontractor to carry out construction works in Ireland, the RCT system must be applied to payments made to the subcontractor.

The first potential pitfall for a non-resident principal contractor is not taking the reasonable care to familiarise themselves with their tax obligations under the RCT regime. In such a case, the non-resident principal contractor will eventually be contacted by Revenue, informing them of their failure to operate the RCT regime. This usually occurs following the commencement of the works in Ireland, at which point the mistakes have already been made and costly penalties can be imposed by Revenue.

As such, it is very important that a non-resident principal contractor is aware of their tax obligations prior to the commencement of any construction works in Ireland so that the necessary administrative steps can be taken to ensure that they are set up for the RCT system and fully compliant in operating RCT on payments to subcontractors.

The administrative steps to be taken by a non-resident principal contractor include registering for RCT on Revenue’s Online Service (ROS) and operating the RCT regime throughout the duration of the project in Ireland (further detail on this below).

2. Operation of the RCT System

Once a principal contractor is registered for RCT with Revenue, there are a number of steps that must be taken each time a principal contractor enters into a relevant contract with a subcontractor and each time a payment is made to the subcontractor. These steps are summarised as follows:

a. Contract Notification

  • The first step is to input a “Contract Notification” through Revenue’s online RCT system. A principal contractor must notify Revenue each time it enters into a new relevant contract with a subcontractor. The Principal will then receive a contract reference number and an indication of the applicable RCT deduction rate for the subcontractor.

b. Payment Notification

  • Before making a payment to a subcontractor, the principal must notify Revenue’s online eRCT system of the intention to make the payment and provide details to Revenue of the gross amount to be paid. This process is known as “Payment Notification”. This must be done for each payment made to the subcontractor.

c. Deduction Authorisation

  • Revenue will issue a deduction authorisation to the principle contractor which will specify the rate and amount of tax to be deducted from the payment to the subcontractor. This process is known as “Deduction Authorisation”. The principle is required to provide a copy of this authorisation to the subcontractor.

d. Deduction Summary (RCT Return)

  • Revenue’s eRCT system prepares a pre-populated period end return known as a “Deduction Summary (i.e. RCT Return)”, which is based on the deduction authorisations issued during the period. The due date for payment of the RCT withheld is the 23rd day after the end of the period covered by the return.

The most common pitfall we see occurring in practice are inconsistencies in notifying Revenue of each and every payment made to a subcontractor by the principal contractor. This can be a costly mistake for the principal contractor as the penalties Revenue can impose for failure to operate the RCT system in this way range between 3% to 35%, depending on the RCT deduction rate applicable to the subcontractor.

To put this into perspective, if a subcontractor has been assigned a 35% RCT deduction rate and the principal contractor makes a payment of €25,000 to the subcontractor without first notifying Revenue of the payment and deducting the appropiate withholding tax, Revenue can impose a penalty of €8,750 (i.e. 35% of the invoice value) on the principal contractor for its failure to operate the RCT system.

These penalties can become very costly for a business where they fail to operate the RCT system on high value invoices.

3. Operation of RCT and Reverse Charge VAT

Typically, VAT is normally charged by the person supplying the goods or services. However, under the RCT regime, the person receiving the goods or services (the principal contractor) calculates the VAT due on the invoice from the subcontractor and pays it directly to Revenue. This is referred to as Reverse Charge VAT and it is common area in which mistakes are made by non-resident principal contractors.

The following should occur when a subcontractor invoices a principal contractor for construction services that are subject to RCT:

  1. The subcontractor raises an VAT invoice with the zero rate of VAT applied;
  2. The invoice should include the VAT registration number of the principal contractor and include the narrative “VAT on this supply to be accounted for by the principal contractor”;
  3. The principal contractor calculates the VAT due on the invoice value and records it as VAT on sales (Box T1) on its VAT return. Where it is entitled to do so, the principal contractor can claim a simultaneous VAT input credit (Box T2) on the VAT return, thus resulting in a VAT neutral position.

Although the RCT system can seem like a heavy administrative burden on a business, it can be managed relatively smoothly with the proper administration. Our tax specialists look after all administrative issues regarding RCT, provide effective advice and answer questions you may have regarding RCT.

Should you require any assistance, please contact us.

A recent High Court decision has a significant bearing on the application of dwelling house exemption to beneficiaries who inherit a mixed asset estate, comprising of a number of residential properties.

The dwelling house exemption allows someone to inherit a property tax-free provided that they have lived in it for three years before the homeowner’s death and that it was the main home of the person who has died. Critically, if a person owns even a share in another property “at the date of inheritance”, they lose their entitlement to the relief. Revenue has always been of the view that if someone who would otherwise qualify for dwelling house relief inherits not just the main home of the disponer but another property, or a share in another property, they no longer meet the eligibility criteria.

A Court ruling on 25th September 2018 has changed the rules on dwelling house exemption. The High Court ruled in the case of a successor, who inherited both the family home where the successor had lived with the disponer and an interest in four other properties, was entitled to the dwelling house exemption. The judge held that the successor did not have a beneficial interest in either of the dwelling houses at the date of the inheritance, as a successor cannot become beneficially entitled to a house which forms part of the residue of an estate until the assets available for distribution have been ascertained.

The impact of the Court case is that you will no longer be disbarred from dwelling house relief if you inherit property other than the family home in the same will. Revenue has now adopted a revised approach in distinguishing between dwelling houses inherited as a specific legacy and those inherited in the residue of an estate.

Accordingly, a dwelling house forming part of the residue of an estate is not to be taken into account in determining whether a successor has an interest in another dwelling house at the date of an inheritance. Ownership of property received as part of the residue of a will would occur at a later date than “at the date of inheritance”.

Anyone receiving a specific legacy of an interest in a property as well as receiving the family home will continue to be excluded. This is because, as a specific legacy, beneficial ownership of the “other” property would transfer at the same time as the family home.

Revenue acknowledged that if any taxpayers find themselves in a similar set of facts as this case then they may be entitled to a refund of the tax paid, bearing in the mind the four year limit that applies to refunds of tax.

Should you require any further details on the dwelling house exemption, please contact us.