Losses, other than those arising from the carrying on of a trade or profession, are not deductible before USC is charged. Trading losses arising in a tax year cannot reduce other non-trading income in that year for the purposes of USC. Where unused trading losses are carried forward, only that part of the losses that is actually used to reduce taxable income from the same trade in the tax year to which they have been
carried forward, is deductible.
Normal business expenses incurred in carrying on a trade are deductible before USCis calculated. This includes allowances for capital expenditure incurred on providing certain items for the purposes of the trade, such as
- plant and machinery,
- vehicles used for business purposes, and
- certain types of buildings, such as factories or farm buildings.
Capital allowances (other than those used to create or increase a loss must actually be used in a tax year to be deductible.
Only standard rate capital allowances are deductible. Apart from farm buildings, capital allowances that are written off over accelerated 7-year periods are not allowed.
Any capital allowances due to persons that do not actively carry on a trade are not deductible. Therefore, lessors and other passive investors, such as non-active partners in a partnership trade, must pay USC on gross income before the deduction of capital allowances.
Balancing Allowances and Charges
In calculating liability to USC, certain capital allowances in respect of an individual carrying on a trade or profession are deductible in arriving at the figure for relevant income (see Capital Allowances above).
Where a balancing charge arises in these circumstances, it should be included as relevant income for USC purposes. Likewise, a balancing allowance can be allowed as a deduction from relevant income for USC purposes. Unused allowances coming forward from previous years can also be allowed against balancing charges in calculating relevant income for USC purposes.
Where capital allowances are not deductible (for example in Case V situations or in respect of property incentives, balancing charges which might arise following the disposal of an asset are not to be considered as relevant income for the purposes of USC as the allowances which are being recovered by the balancing charge were not deductible for USC purposes in the first instance. In addition, the clawback of relief
in the form of deemed rent in respect of certain deductions for lessors of residential properties is not to be considered as relevant income for the purposes of USC
How maintenance payments made to a spouse / civil partner are treated for USC purposes will depend on the nature of the maintenance payments arrangements in place, i.e. are they voluntary payments or legally enforceable payments.
Voluntary maintenance payments (payable under an informal arrangement)
The spouse or civil partner making the payments does not receive exemption from USC on the portion of his or her income which he or she pays as maintenance. The spouse or civil partner who receives the payments is not subject to USC on the maintenance payments he or she receives.
Legally enforceable maintenance payments (payable under legal obligation)
The spouse or civil partner making the payments is entitled to receive an exemption from USC on the portion of his or her income which he or she pays as maintenance either directly or indirectly to the other spouse or civil partner. There is no USC exemption due in respect of any portion of the maintenance payments paid towards the maintenance of children.
An employee wishing to claim USC exemption in respect of legally enforceable maintenance payments throughout the year may either give the information required to their payroll office or, alternatively, he or she can apply to Revenue at the end of the year to claim any refund of USC that may be due in respect of maintenance paid.
The spouse or civil partner who receives the payments is subject to USC on the portion of the maintenance payments he or she receives in respect of him/herself. Any portion of the maintenance payments paid towards the maintenance of children is not subject to USC.
In the case of a legally enforceable maintenance arrangement, where a separated couple has jointly elected to be treated as a couple in a marriage or in a civil partnership, for income tax purposes, the spouse or civil partner making the payments does not receive a deduction from USC on the portion of his or her income which he or she pays as maintenance. The spouse or civil partner who receives the payments is not subject to USC on the maintenance payments he or she receives.
Separation of Carried-Forward Losses and Reliefs
On a year-on-year basis, it will be necessary for any individual who may e affected by this property surcharge to be able to separate losses and reliefs being carried forward so that the correct amount of surcharge is paid, if and when it is due. In the case of certain residential landlords, there may be ordinary rental losses, losses arising from certain specified reliefs in investment in residential properties, as well as wear and tear allowances in respect of plant and machinery, all of which are carried forward from one tax year into the next.
Depending on the order in which these losses and allowances are set against income in the current year, a greater or lesser amount of the specified reliefs that are available for investment in residential properties will have been used. The High Earners’ Restriction, specifies the order in which various reliefs are to be used. From 2007, regardless of whether an individual is subject to the restriction or not, a non-specified relief must be deducted in priority to a specified relief as follows:
- in relation to Case V, capital allowances carried forward are deducted in priority to capital allowances arising in the current year. Where the amount carried forward includes both capital allowances that are specified reliefs and ordinary capital allowances such as those for plan and machinery, the ordinary capital allowances are deducted from the net rent in priority to the capital allowances that are specified reliefs,
- normal rental deductions, such as insurance and management expenses etc., are deducted from gross rent in priority to a specified relief for investment in residential property,
- non-specified reliefs are deducted from total income in priority to specified reliefs,
- loss relief is given for a normal loss in priority to a loss that is referable to the use of specified reliefs,
- normal business expenses, allowed in computing assessable Case I/II income, are deducted in priority to double rent allowance due
This is the legislative basis for the order of set-off of various deductions and reliefs against income on a year to year basis. These rules apply to all taxpayers and not just to those to whom the High Earners Restriction applies. The individual may not be subject to the property surcharge in every tax year, there may be gaps.
Initial Segregation of Carried Forward Losses and Reliefs 2012
When the High Earners Restriction legislation was introduced with effect from the tax year 2007, it was necessary to provide for a methodology to separate cumulative losses and reliefs, which were to be carried-forward into that tax year, into the various categories for the purposes of the restriction.
Prior to that time there was no need to separately track these losses and reliefs from one year to the next. That same methodology is now imported into the property relief surcharge for the purposes of the application of the property surcharge in 2012. The references to 2006 and 2007 are changed to 2011 and 2012, respectively, for this purpose.