Basis of Charge
As with income tax, corporation tax, taxes, profits and earnings in accordance with rules which apply to each of a number of types of income. Corporation tax is charged on total income and capital gains. Broadly speaking, the rules applicable to trading income, professional services income, investment income, rental income and capital gains are identical to those applying to income tax and capital gains tax respectively for individuals but with
There are no credits or allowances of a personal or other nature equivalent to those for individuals. Certain types of credit including in particular double taxation credits and credits for withholding tax may be available.
The broad classifications of income for corporation tax purposes are
- Irish trading income
- income from professional services
- interest received without deduction of tax from abroad
- interest received net of deposit interest, retention and similar taxes
- income from letting property
Dividend income from an Irish resident company is franked investment income and is deemed exempt in the hands of an Irish company.
Many Income and CGT Rules Apply
As with income tax corporation tax applies differing rules to differing sources of income. Many of the rules are the same as those applicable to the category of income in the case of income tax. In this context, the various chapters on income tax issues are directly relevant.
Although capital gains tax is taxed as a single tax with corporation tax, it is still necessary to divide out a company’s income and capital gains and then further divide its income in accordance with the various rules that apply to different types of income.
The same principles that apply to the calculation of capital gains apply to companies with a number of adjustments. Most of the principles applicable to capital gains tax for individuals also apply to the capital gains elements of corporation tax in the case of companies. However corporation tax applies to total profits which covers income and almost all capital gains excluding those on development land.
The assessment is made with reference to an accounting period which is usually 12 months. It determines the cycle of payments of preliminary tax final tax and the date for making tax returns. It is not linked to the annual tax year in the same manner as applies to income tax. The relevant date can be changed subject to provisions which require adjustments.
The maximum accounting period is 12 months. Companies commonly adopt accounting periods that end on half yearly or quarterly dates such as 31st March 30th June 30th September or 31st December. An accounting period ceases for the purpose of measurement of profits, one year after commencement or upon its accounting date if earlier. A new accounting period begins.
Therefore if the accounting period is more than 12 months, the profits and losses must be apportioned into two accounting periods.
The starting point for corporation tax computation is the company’s financial accounts. Corporation tax is based on the company’s profits in the accounting period.
It is based on the profits the financial year and the rates of tax then in force. In the case of changes to the tax rate, apportionment may be required
Under company law and for tax purposes, company accounts are prepared in accordance with GAAP or IFRS standards of accounting practice. Listed companies in the EU prepare accounts in accordance with the International Financial Reporting Standards. GAAP represents generally accepted accounting practice.
A company can choose to change its accounting period. Revenue must be notified. It will affect the date on which preliminary tax obligations, corporation tax filing and final payment obligations arise.
The accounting period is deemed to end and a new one commences
- one year after commencement
- when a resolution to wind up a company is passed
- when a petition for winding up is presented (unless already on voluntary liquidation)
- any other formal act commencing winding up
The maximum period is one year.
Exclusions from Income Computation
In order to identify trading income and expenditure allowed against it, those elements of the account providing for other income and expenditure including profits from sale of assets must be excluded.
Statutory incentives provide that certain income is exempt. This includes certain employment grants and income from woodlands. Incentives also allow for deduction in excess of actual expenditure in some cases, such for example is the case in employing a person who has been unemployed for three years. Each require adjustments to the accounting profit.
Capital gains and expenditure of the capital nature must be removed. Nontrading income must be removed by excluding investment income. The concept of the trade is the same as that applicable in the context of income tax. In some cases, difficult issues of interpretation arise in considering whether there is or is not a trade.
Expenditure Not Allowed
Expenditure may be deducted if it is income in nature and it is wholly and exclusively referable to the trade. As in the context of income tax, this may raise difficult issues of interpretation some cases.
It must be incurred wholly or exclusively for the purpose of the trade. It must be revenue as opposed to capital expenditure. Certain categories of expenditure are specifically disallowed and may not be deducted in the calculation of trading income.
Accounts are almost always made up on a accruals basis. This is usually required by accounting standards. Income is calculated on the basis of income earned and expenses, incurred notwithstanding that the timing of the cash receipt and payment may differ. Bad debt relief may be claimed if income is not ultimately received.
Companies are permitted to prepare their accounts in accordance with one of a number of accounting standards. The purpose of the accounting standards is to ensure that the accounts give a true and fair view of the trading and financial position of the company.See the sections on company law in relation to the accounting standards recognised in Ireland.
Traditionally, Irish companies have used standards promoted by the Accounting Standards Board and later the Financial Reporting Council. These have been promoted by UK and Irish bodies, the Financial Reporting Council. These are the financial reporting standards and in some cases, older Statements of Standard Accounting Practices, where they had not been supervened by later financial reporting standards.
Since the start of the millennium the International Accounting Standards Board has issued International Financial Reporting Standards and International Accounting Standards on a worldwide basis. They have the attraction of worldwide recognition and are more commonly used by larger organisations.
A significant difference with the international standards, is that the latter uses fair values rather than historical costs in the balance sheet with differences been credited or debited to the profit and loss account/income statement. In contrast, the FRS standards use historical costs unless the actual value has fallen below them, in which event depreciation or another charge must be made against the profit and loss account.
The International Financial Reporting Standards apply to listed companies in the EU since 2005. In 2013 the Financial Reporting Council issued FRS standards 102 which is compliant with IFRS standards. It is to be used after 2015 for non-listed companies. See the sections of company law and the amendments made to accounting standards in that regard.
The Change over to FRS 102 necessitated adjustments and transitional measures. The standard requires that income should be recognised at the point when it is probable that future economic benefits will flow to the company that can be reliably measured. Under traditional practice, income received in advance was commonly recognised upfront.
Under earlier provisions, companies may have bad debt provisions which are both specific and general. Specific provisions relate to identifiable debts which may be impaired. General provisions relate to a sample or percentage which may be expected to be impaired. Accordingly, changes in the general provisions in accordance with the standard were not permissible for tax purposes.
Under the FRS bad debt provision is permissible where there is evidence that the amount involved will not be collectable. This is accordingly includes many general provisions.
The treatment of fixed assets and depreciation does not significantly change under the newer system. There is a certain freedom to choose the depreciation model.
Companies may to continue to use historical costs less accumulated depreciation Alternatively, they may use the fair value model. With the fair value model the value is stated in the accounts at the revalued amount provided this can be relied upon measured after putative depreciation. If an asset is revalued the profit must be shown in the accounts and recognised.
IFRS provides for the amortisation of goodwill over a 5 to 10 year period. It is not deductible for corporation tax purposes and there are no capital allowance in respect of goodwill. There is specific statutory allowance for goodwill in relation to certain specified intangible assets.
Provisions are permissible under IFRS for expected actual costs. They are permissible deductions for liabilities other than depreciation and bad debts.
The Finance Act 2017 updates the legislation to deal with the transition from current Irish GAAP to IFRS or from IFRS to current Irish GAAP. This may require some companies to calculate a transitional adjustment upon a change in the accounting framework used for the calculation of taxable profits. This may lead to a further taxation or deduction called a transitional adjustment.
This is tax or deducted over a five-year period following the transition. Provision is made for further rolling forward of adjustments deriving from adoption of new standards under the accounting framework.