The Finance Bill 2002 is certainly shorter than in many previous years and contains far fewer surprises.
The reversal of the restriction of interest deductibility on loans taken out to acquire rented residential property was announced by the Minister in his Budget speech. However, the Bill confirms that interest deductibility has been reintroduced for all rented resident properties - both Irish and foreign - and also that interest on existing loans will qualify.
The deductible interest is the interest accruing since January 1st, 2002, on loans taken out to acquire, improve or repair a rented residential property. Property sources are already commenting on the upturn in interest by investors in this market after a sluggish, post-Bacon period.
There is not much else of note for individuals in the Bill unless you are a sports-person planning to retire, in which case you can claim tax relief for the past 10 years (assuming you were tax resident here in each of those year) on 40 per cent of gross earnings from the sport itself (as opposed to sponsorship income etc).
This relief can be claimed against total income and, looking at the types of sports-people who can avail of the relief, it seems most likely to benefit some professional golfers and jockeys.
Not included in the Bill, but mentioned in the accompanying press release, is a measure to be introduced at committee stage to increase tax relief on AVC pension payments in line with Retirement Annuity Contributions. We also await the committee stage to see if the Minister will amend the position on employee share option schemes following repeated lobbying for change.
For corporates, the most significant measure is still the acceleration of the date for payment of preliminary tax. This is being moved from a date six months after the end of the accounting period to a date one month before the end of the accounting period. Thus, a company with an accounting date of say December 31st will have to pay preliminary tax on the preceding November 30th rather than on the following June 28th. Some 90 per cent of the company's final liability will have to be paid one month before the year end to avoid interest charges, so a measure of estimation will be inevitable. However, in the case of a "small" company (defined as a company with corporation tax payable in the previous year of no greater than €50,000), the preliminary tax may be based on 100 per cent of the previous year's liability.
Provision has been made for a transitional period of five years to bring the system fully into operation; the system will be fully operational for periods ending in 2006. All companies should be considering both the cashflow implications of the acceleration of the tax payment date and the logistical exercise needed to be able to estimate as accurately as possible the taxable profit position for the year one month before the year ends.
The system will have immediate effect for all accounting periods ending after December 31st, 2001, although generally for companies with accounting dates ending on or before May 31st, 2002, the first payment date will be June 28th, 2002 rather than one month before the year end.
Another significant measure for corporates is the ability (with effect from March 6th, 2001) to offset trading losses (arising either at the standard rate of corporation tax or at the 10 per cent rate) against "passive" income taxable at 25 per cent. Trading losses may be offset against passive income (such as deposit interest on rental income), but only at the tax rate applicable to the trade giving rise to the losses. For example, if a company with a manufacturing trade qualifying for the 10 per cent rate has trading losses of €1 million (£787,564) and rental income of €1 million, the tax otherwise payable or the rental income - €250,000 - may be reduced by €100,000 (i.e. loss €1 million @ 10 per cent). All of the trading loss will then be exhausted.
The Bill also provides for an alternative method of calculating the tax liability for certain shipping companies (tonnage tax), but this is subject to the approval of the EU Commission and will apply only when the Minister issues a commencement order.
One surprise is the abolition of the restriction on motor expenses deductions where the expenses are incurred in respect of running a car costing in excess of a certain limit. The abolition applies to expenses incurred on or after January 1st, 2002.
The Bill contains some provisions relating broadly to financial institutions. The most publicised of these is the increase of the penalties applicable to negligent or fraudulent DIRT returns by banks; these will increase from a fixed penalty of €635 to 100 per cent of the understated DIRT in the case of neglect or 200 per cent in the case of fraud.
On the other hand, the DIRT declaration system for companies, pension funds and charities is being eased slightly; deposits made after the passing of the Bill will be DIRT free once the bank is provided with an appropriate tax reference number. Up to now a very cumbersome declaration system was in place.
There is also relief from withholding tax on interest paid by companies on loans taken from lenders (carrying on a lending trade) which are not banks. Interest paid on or after the passing of the Bill may be paid without deduction of tax.
This will assist quasi-banks and treasury companies based in the Republic to extend their operations in this State where, until now, the application of withholding tax certainly acted as a disincentive.
For corporate financial traders, the availability of unilateral credit relief in respect of tax withheld by a foreign territory on interest receivable by the trader is being extended beyond its current scope of IFSC corporates and computer services companies.
And finally, for the betting man or woman, the Bill confirms the reduction in betting tax from 5 per cent to 2 per cent - but only with effect from May 1st, 2002. So, the 5 per cent rate will still apply throughout Cheltenham and Aintree (unless you can actually go the meetings . . .).
Enda Faughnan is Head of Tax and Legal Services at PricewaterhouseCoopers
