PRSI and Health Levy on Balancing Charges

Jimmy Bottles

This is a tricky one.

Balancing charges are always hit for both PRSI and Health Levy as capital allowances are deductible for both PRSI and Health Levy when set against Case I Income of the same trade.

However, when Capital Allowances are set aside from one trade to another under S.392, they are not deductible for either PRSI or Health Levy.

If a person has a balancing charge and it turns out that all of the capital allowances upon which this balancing charge is based were wholly ofset under S.392, then should there by PRSI and Health Levy on this balancing charge ?

Mr. Incognito

Okay lets break this down. Your post is not very clear.

Can you give an hypothetical example.

You are saying that were a self employed person has a trade and takes relief under S 392 is the income that is remaining subject to PRSI and levies?

Jimmy Bottles

Ok.


A person has two trades.


In 2009, trade 1 made a loss. The losses were offset against the profits in trade 2 via S.381. In addition, the capital allowances from trade 1 were offset against the profits in trade 2 via S.392.


In 2010, the person sells the asset which he is getting capital allowances on and triggers a balancing charge.


In 2009, if the capital allowances had been used against potential profits in trade 1, then the capital allowances would have been a deduction against both PRSI and Health Levy. However, as the capital allowances were offset against trade 2 via S.392, there was no deduction against either PAYE or Health Levy. In this case, the capital allowances were only offset against tax.


Usually, a balancing charge trigger a tax liability. It also trigger a liability for both PRSI and Health Levy. This is usually because the capital allowances which were claimed in the first place are deductible for PAYE and Health Levy.


However, as I've point out, the capital allowances were not deductible for PAYE or Health Levy.


In this case, is it not unfair that the balancing charge would be liable to PAYE and Health Levy ?


In my mind, the balancing charge should only be chargeable to Income Tax as as the capital allowances in the first place only got the person a deduction against Income Tax.

barneystinson

That's an interesting one alright. And are you sure that it is actually the case, like you've actually seen assessments raised in the type of scenario you outlined?

I haven't gone reading up on the Acts, nor do I intend to right now, but one thing that strikes me is that S.392 / S.381 use of CAs / Losses is an option. A taxpayer doesn't have to set the CAs sideways, they can retain them for use against future income from the trade, in which case (I presume) they will attract relief from PRSI/Health Levy... So the effect you're describing is a consequence / opportunity cost of a choice the taxpayer made for a short-term benefit.

Mr. Incognito

I've never come across this.

I've had a read of S 392 and the Guidance Notes

http://www.accountingnet.ie/taxation_budget/Taxes_Consolidation_Act_1997_Notes_for_Guidance_Finance_No_2_Act_2011_Edition.php

I don't think that you can transfer capital allowances between seperate trades under this Secton.

Losses are generally ringfenced unless provisions are made that allow them to be set off against other income- i.e Case V losses are ringfenced against Case V Income.

My reading would be that the losses in the trade can be off set under S 381- No issue there but Capital Allowances that are generated in the trade cannot be set off as these are not losses but Tax write downs that are ring fenced to the trade.

barneystinson

Mr. Incognito wrote: »

I've never come across this.

I've had a read of S 392 and the Guidance Notes

http://www.accountingnet.ie/taxation_budget/Taxes_Consolidation_Act_1997_Notes_for_Guidance_Finance_No_2_Act_2011_Edition.php

I don't think that you can transfer capital allowances between seperate trades under this Secton.

Losses are generally ringfenced unless provisions are made that allow them to be set off against other income- i.e Case V losses are ringfenced against Case V Income.

My reading would be that the losses in the trade can be off set under S 381- No issue there but Capital Allowances that are generated in the trade cannot be set off as these are not losses but Tax write downs that are ring fenced to the trade.

S.392 allows capital allowances in a trade to be used to create / augment a Case I loss in that trade, for the purpose of a claim under S381 - ie for setting off against other current year income.

So the capital allowances don't get set directly against other trades as capital allowances, they are first used to generate/increase a loss in the relevant trade, and it is this loss that is then set sideways.

Mr. Incognito

Okay, that clears that up.

So the pertinent point is that by utilising the capital allowances to generate losses in a trade it generates a larger balancing charge that would have arisen if you had not set it against the other trade income and this balancing charge is subject to PRSI which you think is unfair.

Thinking about it- Losses against trade income is a reduction in calculating the assessable amount for PRSI & USC. Thus the Levies would have been payable but for the losses that were utilised by the Capital Allowances and the Balancing Charge just reflects this.

So- No CA - PRSI on the unrelieved income
Utilised CA- PRSI on the balancing charge

smeharg

I've had a quick look at S.392 & S.381 and cannot see any reference to this. A call to Revenue might clear it up.

Edit: what I mean here is no reference to restriction of relief from PRSI and levies under S392, not the ability to increase loss and set it side ways against another trade.

Jimmy Bottles

smeharg wrote: »

I've had a quick look at S.392 & S.381 and cannot see any reference to this. A call to Revenue might clear it up.

The thing is that the legislation in regards to PRSI and Health Levy is not contained in the 1997 Consolidated Tax Acts.

PRSI and Health Levy is contained in various Social Welfare acts and such.


Was just hoping that someone on here might have dealt with this before with the Revenue and got a definitive answer.

I'll have a look at the various legislation tonight, but I have a feeling that it is a very grey area. I suspect that PRSI and Health Levy on Balancing Charges is possibly not specified by word in the legislation but is implied to be liable to both.

barneystinson

Jimmy Bottles wrote: »

The thing is that the legislation in regards to PRSI and Health Levy is not contained in the 1997 Consolidated Tax Acts.

PRSI and Health Levy is contained in various Social Welfare acts and such.


Was just hoping that someone on here might have dealt with this before with the Revenue and got a definitive answer.

I'll have a look at the various legislation tonight, but I have a feeling that it is a very grey area. I suspect that PRSI and Health Levy on Balancing Charges is possibly not specified by word in the legislation but is implied to be liable to both.

OK, here's my take on it, I'll be interested to hear anyone else's views..!

Ordinarily, a capital allowance can only be used to reduce the current year Case I income of the relevant trade to nil, and then any excess is carried forward to be used against income from the same trade in a subsequent period, under S382.

S392 has the effect of allowing the capital allowance to be used to create or augment a Case I loss that is to be set off against other income in the current year.

As the OP pointed out, to the extent that a capital allowance is used "as normal" to reduce Case I income to nil, then it will reduce the amount on which PRSI/levies will be charged.

By opting under S392, a taxpayer is in fact getting relief for these capital allowances as losses, rather than as capital allowances. And losses, whether set sideways under S381 or carried forward under S382, do not attract relief from PRSI / Levies.

Balancing charges will only give rise to a charge to PRSI/levies to the extent that there are not capital allowances (current or carrying forward), available to offset the balancing charge - it is irrelevant at the point when a balancing charge is calculated, whether or not the option under S392 had been exercised in earlier years, as that was the taxpayers choice - for the purpose of the balancing charge the wear & tear already given is calculated the same regardless of any S392 election.

In fact if you think about it, it would be entirely impractical to try to implement what the OP has suggested as the fair way to deal with this issue:
Take a business, with dozens of distinct assets, and say that a particluar asset was bought in 1998 and written off fully through capital allowances by (say) 2005. You sell the asset for 15k in 2010 - obviously giving rise to a balancing charge in this amount.

Now, if you were proposing that the "fair" way as envisaged in the OP is to be applied, you would need to go back and review the capital allowances comps and the tax returns for each of the 8 years of the asset's tax life, and if S392 / 381 treatment was availed of, compute what proportion of the capital allowances claimed in the year stayed against Case I of the relevant trade, and what proportion went sideways against other income... then you'd need to apply that proportion to the individual asset.

Throw in issues like periods where the asset wasn't in use and notional wear & tear was calculated, or an asset partly in use by more than one trade, the whole thing would be an absolute nightmare, the computation would be unfeasible in reality. But that's irrelevant anyway, as there would be no basis for it.

Just my tuppenceworth!

Mr. Incognito

^^^^^^^^Excellent Post. As an aside this is the reason I set this forum up- not one hit wonders looking for advice.

If a person has a balancing charge and it turns out that all of the capital allowances upon which this balancing charge is based were wholly ofset under S.392, then should there by PRSI and Health Levy on this balancing charge ?

Because the CA was used to offset income with would have fallen to PRSI otherwise.

I think that is the succient answer

barneystinson

Mr. Incognito wrote: »

Because the CA was used to offset income with would have fallen to PRSI otherwise.

Ah but why use one sentence when 25 will do! :pac:

barneystinson

Mr. Incognito wrote: »

Because the CA was used to offset income with would have fallen to PRSI otherwise.

Actually, wait, that's not right. If you just had a trade loss (ignoring CAs completely) and set these against other income (under S381), they don't reduce the income for PRSI/Levy.

Mr. Incognito

barneystinson wrote: »

Actually, wait, that's not right. If you just had a trade loss (ignoring CAs completely) and set these against other income (under S381), they don't reduce the income for PRSI/Levy.

]

why wouldn't they?

PRSI is calculated on trade income less allowable losses.

barneystinson

Mr. Incognito wrote: »

]

why wouldn't they?

PRSI is calculated on trade income less allowable losses.

I've been messing with figures on ROS Form 11 and its calculating PRSI on the figure before S381 losses are deducted...

I know there were bugs in the PRSI calc in the ROS form 11 a few years ago but I thought they were sorted now - all I can say is that it doesn't allow losses from another trade, or losses carrying forward from an earlier period, as deductions for PRSI / health levy purposes... And I haven't been able to find the legislation / Regs that prescribe the mechanics of the PRSI charge, which is very frustrating!

Mr. Incognito

http://www.welfare.ie/EN/OperationalGuidelines/Pages/prsi_selfemp.aspx

9) What is excluded from reckonable income?

The following types of income are excluded from reckonable income and do not have to be taken into account when calculating the PRSI contribution:

capital allowances
any sums received by way of benefit, pensions, allowance or supplement from the Department of Social Protection
Infectious Diseases Maintenance Allowances or Mobility Allowances paid by the Health Service Executive
occupational pensions
any payment received by Office holders. These payments are subject to Class K.
income continuance payments received by a person forced to leave employment due to illness as long as Revenue has approved the scheme.
Redundancy payments, golden handshake payments and early retirement bonus.

http://www.commissionontaxation.ie/downloads/Annexes.pdf

Self employed contributor
Reckonable income for social insurance purposes is income chargeable to income tax under
Schedule D (income from a trade or profession and investment and rental income) and Schedule
F (dividends and distributions received from Irish resident companies). It includes certain income
which is exempt from income tax such as the artist’s exemption, profits from woodlands and income
from the provision of childcare services in a qualifying premises. Legally enforceable maintenance
payments are deductible for PRSI purposes. Trading losses, retirement annuities and payments
made under deeds of covenant (which would normally be deductible for income tax purposes) are
not deductible in the case of self-employed contributors.

Seems I am wrong.

namenotavailablE

http://www.commissionontaxation.ie/downloads/Annexes.pdf

Great find, Mr. I.
Muchos kudos and appreciation from moi. It's this sort of clear definition that my own reference book sorely lacks.

smeharg

barneystinson wrote: »

I've been messing with figures on ROS Form 11 and its calculating PRSI on the figure before S381 losses are deducted...

I know there were bugs in the PRSI calc in the ROS form 11 a few years ago but I thought they were sorted now - all I can say is that it doesn't allow losses from another trade, or losses carrying forward from an earlier period, as deductions for PRSI / health levy purposes... And I haven't been able to find the legislation / Regs that prescribe the mechanics of the PRSI charge, which is very frustrating!

Did you try Social Welfare Consolidation Act, 2005? I'm not familiar with it but would imagine that's the place to start.

barneystinson

smeharg wrote: »

Did you try Social Welfare Consolidation Act, 2005? I'm not familiar with it but would imagine that's the place to start.

Yeah I spent a fruitless 15minutes with it last night if/when anyone does come across the relevant Act/Regs they might post a linky...

smeharg

ITI income tax book sheds some light on it under the health levy section. Commenting on the definition of the 'reckonable income' per Health Contribution Act, 1979:

"The taxing authorities interpret this definition in a significantly different way to that in which the phrase 'total income' has been traditionally construed for the purposes of income tax."

It goes on to say that for IT total income is generally accepted as being after losses and charges, but for the health levy the definition is interpreted by the tax authorities as being much more restrictive.

Unfortunately, the book doesn't give the same analysis for PRSI. But if you compare the definition of reckonable income per SWCA 2005 and the definition per HCA, 1979 they are very similar.

Any thoughts?