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Cash Equivalent of Company Cars Explained | New BIK Rules 2023

cash equivalent of company cars

Where an employee is provided with a company car by their employer, a value, called the cash equivalent, is put on the benefit, and the employee is taxed on it via payroll.

Many employees got an unwelcome shock when they received their first payslip of 2023, as the tax on their company vehicles had increased significantly.

As part of measures to assist families dealing with the cost of living challenges, the Government yesterday announced a temporary relief on how the benefit of having a company car is calculated. This relief is included in Finance Bill 2023, which will be published in the coming days.

This change will see some welcome, albeit temporary, reductions in the tax employees pay on their company cars.

Q: How do I calculate the Cash Equivalent of my Company Car?

A: You need to know the original market value of the car i.e. the list price of the car on the date of first registration. This applies even if your employer bought the car second-hand or is leasing it. If your car is in vehicle CO2 categories A – D, you can now reduce this value by €10,000, thanks to the Finance Bill 2023 changes.

You also need to know the annual business mileage you drive and from 2023 onwards, you need to know the vehicle’s CO2 emissions. These determine the cash equivalent percentage for your car.

The annual Cash Equivalent of your car = Original Market value – €10,000 (if your car is in categories A – D) x Cash Equivalent Percentage.

Q: What qualifies as Business Mileage?

A: Business mileage means the total number of kilometres you are necessarily obliged to travel in the vehicle in the performance of your employment duties. Travel to and from work is generally regarded as private travel rather than business travel.

Q: What vehicle CO2 category applies to my car?

Vehicle Category CO2 Emissions (CO2 g/km)
A 0g/km up to and including 59g/km
B More than 59g/km up to and including 99g/km
C More than 99g/km up to and including 139g/km
D More than 139g/km up to and including 179g/km
E More than 179g/km

Q: What cash equivalent percentage is applicable to me?

A: The cash equivalent percentage depends on your Vehicle C02 Category and the amount of Business mileage you have during the year. This table has also been updated by Finance Bill 2023 to reduce the upper limit in the highest mileage band to 48,001 (previously 52,001):

Lower  Limit Upper Limit A B C D E
Km Km % % % % %
— 26,000 22.50 26.25 30 33.75 37.5
26,001 39,000 18 21 24 27 30
39,001 48,000 13.50 15.75 18 20.25 22.50
48,001 — 9 10.50 12 13.5 15

Q: What has changed to the BIK rules in 2023?

A: Previously, the benefit of having a company car was calculated by taking the annual cash equivalent of the company car at 30% of its original market value. Where business mileage exceeded 24,000km, the cash equivalent was reduced by a percentage which ranged from 6% to 24% based on the number of business kilometres travelled.

From 2023 onwards, the cash equivalent of a company car depends on both the business mileage and the vehicle’s CO2 emissions.

 Example:

Pre 2023:

An employee drives a Category B car (CO2 Emissions More than 59g/km up to and including 99g/km) with an original market value of €35,000. The employee drove 45,000 business km in the year. The annual benefit on which the employee was taxed was €4,200 (€35,000 x 12%).

If paid monthly, this was additional taxable income of €350 per month (€4,200 / 12 months), on which the employee was taxed.

2023 Onwards:

In 2023 the benefit of having the same car and doing the same mileage is €3,938 (€35,000- €10,000 x 15.75%).

If paid monthly, this is now additional taxable income of €328 per month (€3,938 / 12 months), on which the employee is taxed.

Q: What reliefs if any can I avail of? 

A: If you travel less than 26,000 business km in a year, the cash equivalent of your car may be reduced by 20% if you satisfy all the following conditions:

  1. You work an average of 20 hours per week,
  2. You have business mileage of at least 8,000km per annum,
  3. You spend at least 70% of your working time away from your employer’s premises, and
  4. You retain a log book with details of your business mileage and work purposes.

Example:

Your company car has an original market value of €35,000 and a CO2 emissions of 95g/km. All running costs are paid by your employer. You work full time and travel 15,000 km per year for work related purposes. You spend more than 70% of working time away from your employers premises and keep a log book.

With Relief                                                                                         Without Relief

(€35,000 – €10,000) x 26.25%      €6,563                                     (€35,000 – €10,000) x 26.25% = €6,563

Less reduction of 20%                   (€1,313)

Annual Benefit                                 €5,250

Q: What has changed in relation to my van?

A: From 1st of January 2023, the percentage to calculate the cash equivalent a company van has increased from 5% to 8%. You can reduce the original market value of your van by €10,000 thanks to the Finance Bill 2023 changes. The business mileage driven or the CO2 emissions are not relevant for vans.

Example:

Van with an original market value of €35,000.

Pre 2023: The annual cash equivalent on which you were taxed = €35,000 x 5% = €1,750 (€146 per month if paid monthly)

2023 onwards: The annual cash equivalent on which you are taxed = €35,000 – €10,000 x 8% = €2,000 (€167 per month if paid monthly)

Q: I drive an electric vehicle. Is anything different for me?

A: In 2023 fully electric cars open also benefit from the Finance Bill 2023 temporary changes. Now cars with an original market value of €45,000 or less are not taxed. If your fully electric car has an original market value of greater than €45,000, you will be taxed based on the excess value as shown in the example below:

An employee drives a Category A fully electric car (CO2 Emissions of 0g/km up to and including 59g/km) with an original market value of €80,000. The employee drives 40,000 business km in the year.

Taxable original market value = €80,000 – €45,000 = €35,000

Annual Cash Equivalent of use of Electric car = €35,000 x 13.5% = €4,725.

Q: Will the Finance Bill 2023 temporary changes be backdated?

A: Yes, these changes will be back dated to the 1st of January 2023.

If you have any further questions about these new BIK rules, please contact us.

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Rent Tax Credit

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Rent tax credit

Budget 2023 saw the introduction of a new Rent Tax Credit which is available from 2022 to 2025.

The credit is 20% of the rent paid in a year, up to a maximum credit of either €500 for an individual or €1,000 for a couple, for:

  • A person’s principal private residence (i.e. sole place of residence).
  • A person’s ‘second home’ which they use to facilitate their attendance at their employment, office holding, trade, profession or a Revenue approved college course.
  • A property used by a child to facilitate their attendance at a Revenue approved college course.

Qualifying rents are any amounts paid in return for the use, enjoyment and special possession of the property but does not include payments made for security deposits, repairs or maintenance or any other services such as board, laundry, etc.

The main conditions of the relief are as follows:

  • The property must be a residential property located in Ireland.
  • The payment must have been made under a tenancy. Tenancy for rent tax credit purposes must fall under one of the following categories:
    • An agreement or lease which is required to be registered with the Residential Tenancy Board (RTB).
    • A licence for use of a room(s) in another person’s principal private residence. These arrangements are commonly known as “rent-a-room” or “digs”. (No RTB registration is required under these licences).
    • A tenancy for 50 years or more.
    • Tenancies under “rent to buy” arrangements.
  • The landlord and the individual making the claim cannot be parent and child. If they are otherwise related the credit may be available as long as the RTB registrations have been complied by. Therefore, the credit is NOT available where the tenancy is under different arrangements such as “digs” or “rent-a-room”.
  • The individual must not be a supported tenant (in receipt of any State housing supports such as HAP or RAS).
  • The landlord must not be a Housing Association or Approved Housing Body.

You can claim the Rent Tax Credit for rent paid during 2022 by submitting a 2022 Income Tax Return to Revenue.  For 2023 and subsequent years the claim can also be made in-year using Revenue’s Real-Time Credit Facility.

If you are not registered for self-assessment, you can submit your Income Tax Return via Revenues’ MyAccount. By selecting “Review your Tax 2022” and requesting a “Statement of Liability”, you can input the information under the “Tax Credits & Reliefs” page.

The Real Time Credit Facility for 2023 and subsequent years enables you to claim the Rent tax credits in during the year. To claim the credit you must select “Manage your Tax 2023” and “Add new credits”, there it will give you the option to add the “Rent tax credit” and input the relevant information. Once the claim has been processed by Revenue, an amended Tax Credit Certificate is issued, and an amended Revenue Payroll Notification will be made to your employer.

For further information about the Rent Tax Credit, please contact us.

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Research & Development (R&D) Tax Credit – What is it and how can it be claimed?

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The R&D tax credit was introduced to incentivise large multinationals to locate an R&D unit here and to encourage Irish companies to invest in R&D activities.

Where a company meets the criteria to qualify for the R&D credit, it will be entitled to claim a tax credit equivalent to 25% of eligible expenditure incurred by it on qualifying R&D activities. As the claimant should also be entitled to claim a tax deduction at the standard rate of corporation of 12.5% on the same expenditure, it should result in an effective corporation tax benefit of 37.5%.

Is my company eligible to claim the R&D credit?

In order to qualify for the R&D tax credit the following must apply:

  • The applicant must be a company
  • The company must be within the charge to Irish tax
  • The company must undertake qualifying R&D activities either within Ireland or the EEA

The expenditure on which the company is making the claim must be wholly and exclusively incurred in the carrying on by it of qualifying R&D activities. As per Revenue guidance, it is crucial that claimants distinguish the term “carrying on” from “for the purposes of” or “in connection with”. Indirect costs such as recruitment fees, insurance and travel costs, which are not wholly and exclusively incurred in the carrying on of the R&D activity do not qualify as relevant expenditure.

Typically, expenses which qualify for the R&D credit include, materials, salary costs, subcontracted R&D and plant and machinery.

What are qualifying activities for the purposes of the R&D credit?

Qualifying activities must:

  1. Be systematic, investigative or experimental activities;
  2. Be in a field of science or technology;
  3. Involve one or more of the following categories of R&D:
      • Basic research
      • Applied research
      • Experimental development
  4. Seek to achieve scientific or technological advancement; and
  5. Involve the resolution of scientific or technological uncertainty.

Essentially, the R&D activities being carried out must address an area of technological or scientific uncertainty where the outcome is unclear from the outset.

Claiming the R&D Tax Credit

Following recent changes introduced by budget 2023, there are a number of changes being made to how the credit is claimed, with the changes being more favourable to the claimant. These changes take effect for accounting periods beginning on or after 1 Jan 2023. Transitional measures will be in place for a period of 1 year to smooth out the transitionary period.

Accounting periods ending on or before 31 December 2022

The R&D tax credit is first set off against the corporation tax liability of the accounting period in which the credit is being claimed. A claim may be made to have any unused credit set off against the corporation tax liability of the preceding period. If an excess still remains, a claim can be made to have it repaid to the company in three instalments over a 33-month period.

Accounting periods beginning on or after 1 January 2023

Under the new system, a company will have an option to request either payment of their R&D tax credit or for it to be offset against other tax liabilities which will provide greater flexibility to the claimant.

Where a company opts to have the credit refunded, it will be refunded as follows:

  • The first €25,000 of an R&D claim will now be payable in full in year 1.
  • In year 2, the second instalment will equal three-fifths of the remaining balance.
  • The third and final instalment in year 3 will in effect be the remaining balance.

In addition to the above, the current limits on the payable element of the credit will be removed as part of the new system.

It is important that companies review their activities to determine if they qualify for the tax credit as the credit can prove to be a very valuable source of funding.

If you have any queries about the R&D tax credit, please contact us.

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Guide to Global Mobility – Managing Tax Obligations of Inbound Workers

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As remote working becomes more popular, employees are no longer obliged to work at their employer’s premises or indeed in the same country as the employer’s premises. This presents a number of opportunities and challenges for employers.

In the second of this global mobility series, we focus on the payroll tax compliance obligations for foreign employers with employees working in Ireland under a foreign contract of employment (inbound workers).

This can occur where:

  1. an employee relocates to Ireland, or
  2. an employer sends an employee to Ireland for a short period to fulfil part of a contract e.g. as part of a construction or installation project.

The basic rule is that all foreign employers must register as an employer in Ireland and operate Irish payroll taxes on any salary attributable to employment duties carried out in Ireland by their employee. This applies even if the employer has no business premises in Ireland or the employee is working from home in Ireland. It applies irrespective of the tax residence status of the employee.

There are a number of exceptions to this rule, which come as a welcome release for foreign employers:

  1. Business visits of up to 30 workdays in a year

    A foreign employer need not operate Irish payroll taxes on the salary of an employee who is employed under a foreign contract of employment and carries out the duties of that employment in Ireland for no more than 30 workdays in aggregate in any year.If the employee exceeds the 30 workday threshold and an obligation to operate Irish payroll taxes exists, the employer must operate Irish payroll taxes from the employee’s first workday in Ireland.

  1. Business visits greater than 30 workdays and not more than 60 workdays per year

    A foreign employer can rely on this exception where an employee who is employed under a foreign contract of employment visits Ireland and is a resident of a country with which Ireland has a Double Taxation Agreement. In addition, the Double Taxation Agreement between Ireland and the employee’s country of residence must relieve the employment income from the charge to Irish tax. Not all Double Taxation Agreements are the same and foreign employers wishing to rely on this exception should examine the wording of the relevant Agreement carefully to establish if their employee’s employment income is relieved from the charge to Irish tax.Where the employment income of the employee is not relieved from the charge to Irish tax under the Double Taxation Agreement or where the workdays in Ireland exceed 60 and there is no PAYE dispensation in place, the employer must operate Irish payroll taxes from the employee’s first workday in Ireland.

  1. Business visits greater than 60 workdays and not more than 183 days per year

    The conditions for this exception are the same as those for business visits between 30 and 60 workdays. However in addition, a foreign employer must apply to the Irish Revenue authorities for a dispensation from the requirement to operate Irish payroll taxes on the employee’s salary. There are a number of conditions to be satisfied before the Revenue authorities will grant a foreign employer the dispensation:

    (i) The foreign employer must register as an employer in Ireland;

    (ii) The foreign employer must apply in writing to Irish Revenue for the dispensation giving the employer’s full name, its address, its Irish employer’s registration number and confirmation that the relevant Double Taxation Agreement relieves the employment income from the charge to Irish tax.

    The application for a dispensation must be made within 30 days of the foreign employee starting to carry out their employment duties in Ireland. An application can cover more than one employee but a new application must be made each year.

    Where an application for a dispensation is not sought within 30 days of the employee taking up duties in Ireland, Irish payroll taxes must be operated on any salary paid to the foreign employee from the date the employee takes up duties in Ireland.

    If Revenue refuse to grant a dispensation, Irish payroll taxes should be operated on salary in respect of all workdays spent in Ireland in the year.

This article has dealt with the Irish payroll tax compliance obligations for foreign employers with an employee who is engaged under a foreign contract of employment working in Ireland. Where a foreign employer must operate Irish payroll taxes on an employee’s salary, Irish social security contributions (PRSI) are also due unless there is a valid certificate of coverage or exemption in place.

In addition, depending on the number of employees that the employer has in Ireland and the type of duties they carry out, the presence of an employee in Ireland may create a “permanent establishment” of the employer in Ireland. If an employer has a branch or permanent establishment in Ireland, it may be obliged to pay Irish corporation tax on the profits of that branch. For employers in the construction sector, there could be a requirement to register for Value-Added Tax and or relevant contracts tax (RCT).

For more information, please contact Siobhán O’Hea, Partner in our Tax Services’ Department.

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Tax Relief on Third Level Tuition Fees

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Tax-payers who pay third level fees on their own behalf or on behalf of another person will be happy to know that they can claim tax relief.

Tax relief at the standard rate is available in respect of certain third-level tuition fees paid to approved colleges. Revenue publishes a list each year of both private and public colleges approved for tax relief. The relief is given by way of a tax credit equal to the fees paid multiplied by 20% (the standard rate of tax). A credit for third level fees cannot result in an income tax refund.

What is an Approved College?

Revenue have provided guidance on what constitutes an approved college. This is a college or higher education institute in the state which provides approved courses (definition below) or an institute in the UK or another EU Member state which is maintained by recurrent grants from public funds of any EU Member State. The college in either the Irish State, the UK or in an EU Member State must be a duly accredited university or institution of that country.

What is an Approved Course?

Revenue have also provided guidance on what constitutes an approved college course. A full-time or part-time undergraduate course must be at least two academic years. A postgraduate course leading to a postgraduate award based on a thesis or on the results of an examination or both, which is between one to four years and requires the student to have a prior degree or an equivalent qualification.

Who can claim & how much can be claimed?

An individual can only claim the relief if they themselves incurred the cost of the fees. Relief is calculated on aggregated fees paid subject to a maximum of €7,000 per person, per course, per academic year where the first €3,000 (full-time) or €1,500 (part-time) is deducted.  The general effect of this is that claimants who are claiming for more than one student will get full tax relief for 2nd and subsequent children in their claim.

Relief does not extend to payments such as registration fees, administration fees or student accommodation.

If in receipt of any grant or payment towards the fees, this must be deducted from the claim being made when claiming the relief.

How to claim tuition fees?

There is no specific form required to claim relief for tuition fees paid for third level education courses. An individual can use PAYE services in myAccount to apply for relief for tuition fees by completing the Form 12 or if income tax registered can claim this through their yearly tax return.

Should you require any further information or assistance in claiming the tax relief, please contact us.

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RCT & VAT Pitfalls in the Construction Industry | Case Study Analysis

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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.

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Accelerated Capital Allowances on Energy Efficient Equipment

Are you considering investing in new plant or machinery for your business? It might be worthwhile considering the tax advantages associated with certain energy efficient equipment.

Traditionally the cost of qualifying plant and machinery used in a business is written off against taxable profits in the form of wear and tear capital allowances over an eight-year period. However, in the case of energy-efficient equipment the full capital expenditure cost can be claimed in the year in which the expenditure is incurred.

The scheme, which runs until 31 December 2023, is available to both companies and unincorporated businesses that incur expenditure on eligible energy-efficient equipment for use in their trade.

The energy-efficient equipment must be:

  • New;
  • Designed to achieve high levels of energy efficiency; and
  • Must fall within one of the 10 classes of technology specified in Schedule 4A of the TCA, 1997.

Products eligible under the scheme are included in a list of energy-efficient equipment published and maintained by the SEAI. A full list of qualifying equipment can be viewed on the SEAI.

A minimum amount of expenditure must be incurred on providing the equipment. This varies with the category to which the product belongs. For example, a minimum spend of €1,000 applies to heating an electricity provision, while lighting equipment and systems carry a €3,000 minimum spend.

Electric and Alternative Fuel Vehicles

To promote greater use of low-emissions cars the Finance Act 2008 introduced accelerated allowances for “electric and alternative fuel” cars. The allowance is based on the lower of the actual cost of the vehicle or the specified amount of €24,000. As an alternative to claiming the qualifying cost of a car over the eight-year period, a business can elect to claim accelerated allowances in the year of acquisition.

For more information, please contact Niall Grant, Partner of Tax Services.

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BIK on Employer-Provided Cars & Changes to Exemption for Electric Cars

BIK on Employer-Provided Cars

Where an employer makes a car available to an employee, that employee will be charged on the “cash equivalent” of the private use of the car. This is known as Benefit-in-Kind (BIK). This BIK is then taxed on an employee’s marginal rate for PAYE, PRSI and USC.

Cash Equivalent of a Car

The cash equivalent of the use of a car is currently 30% of the original market value (OMV), this being the market value of the car on the date of registration. Where the business kilometres for a tax year exceed 24,000km, the cash equivalent of the use of a car is reduced by a percentage which can range from 6% to 24% based on the number of business kilometres travelled. Business Kilometres are the kilometres an employee is required to travel in the vehicle when performing the duties of his or her employment. It does not include travelling to and from the general place of work. Employers are obliged to keep a record of the business mileage travelled by their employees.

As a result of the Finance Act 2019, from 01 January 2023 the cash equivalent of a car will be determined based on the car’s CO2 emissions. Similarly, the business kilometres percentages will also be dependent on the CO2 emissions.

There are other reductions available when calculating the cash equivalent of a car:

  • Where the car is only available for less than a full year.
  • Where an employee works an average of 20 hours a week.
  • Where an employee travels at least 8,000 kilometres annually on employer’s business.
  • Where due to the nature of the role, the employee spends at least 70% of their time working away from the employer’s premises.

Sample BIK Calculation

A car is provided by the employer with an OMV of €28,000.

The actual business kilometres travelled in the year are 31,630 kilometres, with an employee contribution of €1,000.

As of 2022, the cash equivalent of business kilometres of 31,630 is equal to the OMV x 24% (being the % which applies to mileage between 24,000 and 32,000). The cash equivalent of the use of the car is then reduced by the €1,000.

Cash Equivalent (OMV x 24%)     €28,000 x 24% =             €6,720

Less amount made good                                                             (€1,000)

Amount subject to BIK                                                                 €5,720

Electric Cars

For 2022, there is no BIK on fully electric cars with an OMV of €50,000 or less.

However, the Finance Act 2021 has introduced a tapered reduction in this BIK exemption from 2023 – 2025, at which point the BIK percentage rates will change in accordance with the Finance Act 2019. This will expire from 2026.

The reductions from 2023 – 2026 are as follows:

  • 2023 – fully electric cars with an OMV of €35,000 or less will continue to be BIK exempt
  • 2024 – fully electric cars with an OMV of €20,000 or less will be BIK exempt. The excess will be chargeable to BIK at the relevant rate.
  • 2025 – fully electric cars with an OMV of €10,000 or less will be BIK exempt. The excess will be chargeable to BIK at the relevant rate.
  • 2026 – the exemption will be abolished, and the full market value will be chargeable at the relevant rate*.

*This reduction applies irrespective of the actual OMV of the vehicle or when the vehicle was first provided to the employee.

For more information relating to BIK on employer-provided cars, please contact us.

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Exit Strategy: How to Pass your Business on to the Next Generation

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Exit Strategy

Passing on your business and developing your exit strategy is one of the most important business decisions you will ever have to make.

Many of the tax reliefs one may wish to claim on a transfer of assets can be subject to very stringent conditions, such as minimum periods of ownership or active involvement in the business. Succession planning can often seem like something which should be considered close to retirement. However, the risk of waiting is that many of the key tax reliefs available to business owners are not accessible when the time comes to pass on assets, as the relevant conditions cannot be met.

What can help avoid this problem is advance planning. Through preparation, a business owner can identify some of the key conditions required to avail of certain tax reliefs, allowing them sufficient time to take the necessary steps to qualify for these reliefs. Therefore, it is not unusual to see a succession plan being put in place 5 to 10 years prior to its implementation.

The transfer of a business can trigger several taxes such as:

  • Capital Gains Tax (CGT) which is a tax payable by the person selling or transferring an asset. The current rate of CGT is 33%.
  • Capital Acquisitions Tax (CAT) which is a tax payable by the person in receipt of a gift or inheritance. The current rate of CAT is 33%.

This article will focus on the key tax reliefs available to business owners and their family members on the transfer of their business.

CGT Reliefs

In order to mitigate or eliminate the CGT liability on the transfer, there are two main reliefs which may be availed of provided certain conditions are met. These are:

  • Retirement Relief
  • Entrepreneur Relief

Retirement relief provides for relief from CGT on the disposal of qualifying assets.

To qualify for this relief, the main conditions are that the individual must be aged 55 or over and must be disposing of or transferring qualifying business assets. In addition, the individual must have been a working director of the company for 10 years and a fulltime working director for at least 5 of the years prior to the transfer. The latter condition can be a stumbling block for many individuals seeking to claim this relief. For example, an individual may be a director of more than one company and therefore may not meet the full-time working director requirement. This is why it is so important to prepare a succession plan early in your lifetime.

If retirement relief is not available, the individual may qualify for Revised Entrepreneur Relief which limits the rate of CGT to 10% on the first €1m of gains on the disposal of certain business assets. In contrast to retirement relief, this relief has no age requirement and the individual can qualify for it at any stage provided the relevant criteria is met.  To qualify for the relief, the individual should have owned the shares in the business for a continuous period of 3 of the last 5 years and spent 50% or more of their working time as an employee or director of the company.

CAT Reliefs

An individual can receive gifts/inheritances up to a certain amount tax-free throughout their lifetime. Currently, a child can receive a gift or an inheritance up to €335K from his/her parents.

In the context of a business, a child may, on receipt of a relevant business property, qualify for what’s known as Business Relief. This reduces the value of the gift or inheritance being received to 10% of the market value of the business property, resulting in a significant tax saving. Similar to the reliefs already discussed, there are certain conditions that need to be met around ownership and the level of involvement in the business.

Farmers may qualify for Agricultural Relief on the receipt of a gift or inheritance of agricultural property. Agricultural property includes agricultural land, crops and trees growing thereon and farm buildings appropriate to the property. By qualifying for this relief, the market value of the property being received will be reduced by 90%. This makes it a very valuable relief.

There are two tests that need to be passed before a person can avail of the relief:

  1. The farmer test requires 80% of the beneficiary’s assets to be agricultural property immediately after receipt of the inheritance.
  2. The trading test requires the individual to farm the land themselves for at least 6 years or alternatively lease the land out to a qualifying farmer for 6 years.

If a CAT liability arises with or without claiming any of the CAT reliefs, it may be possible to reduce or eliminate the liability by claiming a credit for the CGT paid by the parent on the transfer of property.

Although there are many commercial considerations to be made when passing on wealth as well as discussions with family members as to suitable successors, tax plays a key role in informing the business owner as to the extent of any tax liability. Knowing this information prior to implementing a succession plan enables the owner to make more informed decisions and allows for maximising the amount of reliefs that may be claimed. This will reduce the overall tax costs of the transfer.

For more information on tax reliefs related to your exit strategy, please contact us.

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Guide to Global Mobility – Managing Tax Obligations of Outbound Workers

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Global Mobility - Tax Obligations of Outbound Workers

As the expansion of remote working continues, more employees are no longer obliged to work at their employer’s premises or, indeed, even in the same country as their employer’s premises. This presents a number of opportunities and challenges for employers. In the first of our global mobility series, we will examine the tax compliance obligations for Irish employers with employees working abroad.

Situation One – an Irish employer hires a new employee based abroad

An Irish employer does not need to operate Irish payroll taxes on the salary of an employee who:

  • is not resident in Ireland for income tax purposes
  • was recruited abroad
  • carries out all the duties of their employment abroad
  • is not a director of your company; and
  • has no Income Tax liability in Ireland.

For any employee in these circumstances, an Irish employer does not have to apply for a PAYE Exclusion Order to Irish Revenue and is not required to include the employee on the employer’s payroll submissions to Revenue. Employers should maintain a record of each such employee with a record of any payments made to them each year.

This is a useful exemption for Irish employers who recruit employees to work abroad as it means the non-resident employee does not need to apply for a PPS number.

Situation Two – an existing employee of an Irish employer moves abroad

An Irish employer may find that an existing employee, who lives and works in Ireland, decides to move abroad indefinitely while retaining their existing employment. In this instance, the tax obligations for the Irish employer depends on the employee’s tax residence in Ireland. This must be reviewed each year.

An individual is tax resident here if they are in Ireland for 183 days or more in the calendar year or for 280 days or more across the current and preceding calendar years. An individual is not tax resident in Ireland if they are here for 30 days or less in any calendar year.

a. The employee is tax-resident in Ireland in the year of departure

An Irish employer can apply to Irish Revenue for a PAYE Exclusion Order where an employee:

  • leaves Ireland during the year
  • becomes tax resident elsewhere
  • will carry out their employment duties wholly outside of Ireland, and
  • will be resident outside Ireland in the following tax year.

Once issued in these circumstances, the PAYE Exclusion Order will relieve the employer from the obligation to deduct Irish income tax and USC from that employee’s salary from the date of departure.

b. The employee is not tax-resident in Ireland

An Irish employer can apply to Irish Revenue for a PAYE Exclusion Order where an employee:

  • is not resident in the State for tax purposes for the relevant tax year, and
  • carries out the duties of the employment wholly outside of Ireland.

Once issued in these circumstances, the PAYE Exclusion Order will relieve the employer from the obligation to deduct Irish income tax and USC from that employee’s salary for the full tax year.

PAYE Exclusion Orders have an expiry date. An employer may apply for another PAYE Exclusion Order if the employee continues to work abroad after that date and continues to be non-resident.

It is important to note that the PAYE Exclusion Order does not cover PRSI. Determining the country in which social insurance is to be paid by and on behalf of the employee is a separate issue.

Situation Three – an existing employee of an Irish employer splits their year between working in Ireland and working abroad

This situation is arguably the most complex for an Irish employer. If the employee remains tax-resident in Ireland, Irish Revenue will not issue a PAYE Exclusion Order. As a result, the employer must continue to apply Irish payroll taxes to the employee’s salary as normal.

However, the country in which the employee is working may require the employer to apply local payroll taxes on that part of the salary that relates to work carried out in that country.

Where there is no relief available, employers may have dual payroll withholding responsibilities in both Ireland and the foreign country. They will often run what is known as a “shadow payroll” in respect of an employee’s salary. Shadow payroll is run to ensure that tax compliance obligations are met in both countries without affecting the employee’s net take-home salary.

Running shadow payroll is an extra compliance burden for the employer. Furthermore, the Irish employer must contribute payroll taxes to the Revenue authorities in both countries. This can come as an unpleasant surprise to both employers and employees.

It is therefore crucial that an Irish employer recognises if they will have to operate shadow payroll before an employee carries out any work abroad.

If shadow payroll is required, an employer must establish what is required in both countries and must agree with their employee how any duplicate deduction of payroll taxes can be reclaimed.

Often, to reclaim some or all of the payroll taxes withheld, the employee will be required to submit an income tax return. In this instance, any refund due will issue from the Revenue authorities to the employee. This can leave the employer out of pocket if a clear agreement is not put in place with the employee at the outset.

Conclusion

We have seen here the Irish tax compliance obligations for employers. An Irish employer with employees working abroad should always check their tax and social security obligations in the country where the employee is working. Often, the employer will be required to register for payroll taxes in the employee’s country and apply local payroll taxes on the employee’s salary.

In addition, depending on the number of employees that the employer has in that country and the type of duties that they carry out, the presence of these employees in that country may create a “permanent establishment” of the employer in that country. If an employer has a branch or permanent establishment in a foreign country, it may be obliged to pay local income or corporation tax on the profits of that branch.

For more information, please contact Siobhán O’Hea, Partner, Tax Services.

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