Charges are categories of expenditure that are treated differently (and often more favourably) than other expenditure that qualifies for allowances and deductions. They are treated in the nature of the first call and are taken off the top of income. Charges relate principally to interest on certain types of bank loans.
From a computational perspective, charges must be adjusted in the accounts so that they are not treated as expenses for the purpose of calculation of trading profits. They are then deducted at a later point in the tax calculation.
The obligations to withhold the following are not reduced by charges:
- Withholding tax on payments;
- Close company surcharges.
Charges are allowed only on a paid basis. Therefore unlike other expenses is not enough simply to incur them. As with income tax, charges are only allowed as a deduction only if and when they have been paid.
Charges include certain pension contributions, bank interest and other annual payments. The must be paid from income subject to corporation tax. They must not be deemed dividend or distribution. The must not be otherwise allowed as a deduction in the corporation tax liability of the company. .
Annual payments are those which are capable of continuing and repeating annually. The frequency of payment is not the key factor. Payment must be pursuant to a legal obligation.It must be an interest ,not a capital payment. It must be paid out of income.
The liability must be incurred for value save certain sums which are covenanted to be paid. Payment must be by an Irish resident company or a non-resident company for the purpose of the trade carried on in Ireland through a branch or agency. The cost of the payment must be borne by the company and not another.
Bank interest must generally be paid to a bank established in Ireland or elsewhere and European Union. (Or the United Kingdom?)
Where the payment is made to an entity resident abroad, standard rate tax must be deducted unless there is an exemption under a double taxation treaty or under the EU interest and royalties directive. There is also an exemption for certain bank interest.
The Tax Acts distinguish trading charges and non-trading charges. The latter is one incurred wholly or exclusively for the purpose of the trade. A non-trading charge covers certain types of expenditure, such as interest on money borrowed for non-trade purposes, for example, to invest in a subsidiary for example.
A relevant trading charge is further defined as one incurred wholly and exclusively for the purpose of a trade subject to the 12 ½% rate. Relevant trading charges are set off against trading income tax but at half the rate including foreign dividends taxed at this rate less losses. Any excess can be set off against other incomes and profits in the same period on a value basis (12.5/25% -half). Any further unused excess can be carried forward in the same way as trade losses.
Non-relevant trade charges are offset against all profits reduced by other reliefs. However, they cannot be carried forward
Charges on income are offset against all the profits and chargeable gains of the company and not just the particular class of income to which they directly relate. They are allowed after other reliefs save group relief.
The interest must not be otherwise allowable as a deduction. Interest on loans for trading activities including overdrafts are allowed as a trading expense and are not treated as charges.
A charge includes interest on loans to invest in ordinary shares in:
- a trading company;
- a company whose income consists wholly or mainly from Irish rental profits;
- a holding company whose business consists wholly or mainly of the holding of stocks, shares or securities directly in such trading or rental companies; or
- a holding company whose business consists wholly or mainly of the holding of stocks, shares or securities in a trading company indirectly through one or more intermediate holding companies
A charge also includes lending to the above type of company where the monies are used wholly and exclusively:
- in the case of a trading company, for the purposes of its trade;
- in the case of a company whose income consists wholly or mainly of Irish rental profits, in the purchase, improvement or repair to premises to which the profits relate; or
- in the case of a holding company whose business consists wholly or mainly of the holding of stocks, shares or securities directly in such trading or rental companies, as the case may be, for the purposes of holding such stock, shares or securities directly in such trading or rental companies; or
- in the case of a holding company whose business consists wholly or mainly of the holding of stocks, shares or securities in a trading company indirectly through one or more intermediate holding companies, for the purposes of acquiring and holding such stock, shares or securities in a trading company or trading companies indirectly through one or more intermediate holding companies
A charge also includes lending to the above type of company where the monies are used wholly and exclusively in lending to a company referred to above and the monies on-lent are used wholly and exclusively by a company connected with that company.
Where that connected company is a trading company, rental company or a holding company that directly holds stocks, shares or securities in a trading company or rental company, as the case may be, the monies must be used by it wholly and exclusively for a relevant purpose as set out above or in lending to a company whose business consists wholly or mainly of holding stocks, shares or securities in a trading company indirectly through one or more intermediate holding companies and the monies are on-lent to, and used by, a company connected with that company.
Trading charges (and losses they create or increase), are treated in much the same way as other expenses incurred wholly for the purpose of the trade. Such unused trading charges may be carried forward in the same way as trading losses. Excess non-trading charges (which are not wholly and exclusively for the purpose of the trade) are not relieved if they exceed profits.
The terms on which loans for investment in trading companies and properties are allowed are complex and have been the subject of anti-avoidance legislation. There are significant ongoing conditions. The loan must be for the purpose of acquiring shares in the company or making loan capital investments. There are conditions in relation to the use of the money.
The company in which the shares are taken or a loan is advanced must comply with certain conditions including in particular that it is a trading or rental company or part of such group. The monies advanced or invested must be used for certain purposes such for the purpose of the particular trade, improvement or repair of premises or the same activity through subsidiaries as the case may be. It generally may be lent onwards.
The company must have a material interest (at least 5% stake in the company in which the investments has been made. The must be at least one common director.
The relationship between the company and the company in which the investment is made must be maintained.
The must not be any recovery or refund of capital. There may be a deemed recovery of capital in certain circumstances which is equivalent to a reduction in the loan or investment. There are wide anti-avoidance provisions to ensure that the company and entities connect but it do not receive value for or repayment of the loan directly or indirectly while it is outstanding.