1. Introduction
The Department of Finance and Revenue Commissioners recently published a Consultation Document which sets out their responses to public consultation on the “Tax Implications of Appointing Receivers” initiated by the Minister for Finance in July 2012.

In essence, the document sets out a possible way forward in relation to the direct tax aspects of receiverships, having regard to the feedback received from respondents to the original consultation of July 2012.

Draft legislation reflecting the approach and explanatory notes is also contained in the Consultation Document. It is intended that the final proposal will be included in Finance (No.2) Bill 2013 (which is due for publication shortly after Budget Day 15 October 2013). We understand that it is envisaged that the relevant legislation will be passed by 31 December 2013.

The VAT related aspects of the original consultation were legislated for in
Finance Act 2013.

2. Background
Following the dramatic recent increase in the number of corporate and other receiverships, difficulties have emerged for receivers in complying with their tax obligations. The main difficulties are linked to:

• The inability of the lender/receiver to obtain all of the information necessary to compute the various tax liabilities in the manner required by the existing legislation
• Uncertainties surrounding the interpretation of that legislation, particularly in the area of clawbacks of tax incentives, and
• Administrative/procedural problems in filing and accounting for tax liabilities arising.

In that regard, Finance/Revenue have recognised that the existing law is inadequate in certain respects and that there is a need for greater clarity.

3. Proposals
The main features of the proposed approach (subject to enactment of Finance Act (No. 2) 2013) are set out below. A standard approach is being advocated to apply irrespective of the income type or the type of borrower.

Income arising to a Receiver (whether rents, trading or non-trading)

• Ring-fence the receivership period and compute the “net income” of the receivership period solely on the basis of the cash receipts and cash outgoings, of that period, received or expended by the receiver, without regard to:
• The borrower’s capital allowances and losses (either for current or earlier years or accounting periods)
• Section 23 clawbacks or balancing events
• the borrower’s other income, tax credits or other deductions etc.

The proposed treatment of Section 23 clawbacks and balancing events is a major change in the case of rental properties where the current Revenue view is that such liabilities attach to the lender.

Clarification has been sought from Revenue in relation to the treatment of interest costs in a property rental situation, in particular what is meant by “cash outgoings” and “expended by the receiver”. It would appear that in order for such interest costs to be deductible they must still be on borrowed money employed in the purchase, improvement or repair of  the relevant premises, and the restriction (75%) on interest on residential mortgages will still apply.

• The receiver to deduct an amount representing tax from the “net income” of the receivership period at a flat rate of 20% where the receivership relates to borrowers who are non-corporates, and 10% in the case of corporate receiverships and account to Revenue for that tax as a “payment on account” of the borrower’s income tax, USC or corporation tax liability, as appropriate.

As the tax payable by the receiver is a ‘payment on account’ in respect of “net income” of the receivership period that does not take account of losses, allowances and other deductions available to the borrower, the
rates of tax proposed are lower than those at which the borrower may be chargeable (41% marginal rate income tax plus PRSI/USC for individuals and 12.5% or 25% in the case of companies, depending on whether the income is trading or non-trading).

• Statements to be filed and tax to be paid by the receiver to the Collector General within specified time limits.
• Net income will be computed for each chargeable period or part of a chargeable period falling within the receivership period.
• The receiver to have an option, subject to conditions, not to deduct and remit tax to the Collector General where the receiver is satisfied based on evidence available that no tax would be due.
• The receiver to make all relevant information in relation to the receivership period available to the borrower in good time to allow the borrower to meet tax filing and payment obligations.
• The borrower to continue to be assessable on income arising in  a year of assessment or an accounting period in the normal way,
  including that arising during the receivership period. This “income” to include clawbacks and balancing events where property is sold by the receiver within the holding period or tax life.
• The borrower to be liable for the resulting tax in the normal manner on the rental (and other) income of the receivership period.
• Any tax deducted by the receiver to be available as a credit to the borrower in computing the income tax or corporation tax liability referable to the property in receivership for the relevant year of assessment or accounting period in question.
• Provision to be made for a refund of overpaid “flat-rate” tax to be made to the receiver in certain circumstances.

Capital Gains arising to a Receiver
The general consensus is that the existing Capital Gains Tax provisions affecting receivers (as set out in Section 571 TCA 1997) remain generally fit for purpose and that what is required from an operational perspective is administrative support to ensure that the provisions are workable in practice.

Section 571 provides that capital gains tax (or, where appropriate, corporation tax) on chargeable gains is computed in the normal way having regard to losses/reliefs etc. as appropriate. Any capital gains tax arising is recoverable by assessment to income tax on the receiver under Case IV of Schedule D for the year of assessment in which the disposal occurs. The section also makes provision for the refund of tax to the receiver in the event of tax being overpaid.

The major difficulties receivers experience at present with capital gains tax reflect gaps in the historical information, particularly where the borrower is not co-operating.

Revenue are of the view that, where a receiver requests taxpayer information for the purposes of determining any tax, interest, penalty, or any refund or tax credit to which the receiver is or may become entitled, by reference to the circumstances of the particular taxpayer, Revenue may share that information with receivers for those specific purposes without the need for further legislative change.

The Revenue are also prepared to accept that, where complete information is not available, a receiver who uses their “best endeavours” to calculate the tax due will be deemed to have met their obligations under Section 571.
 
4. Summary
The Consultation Document expresses the view that the above approach takes on board the primary concerns expressed by respondents to the consultation, and has the following potential benefits:

• It will simplify the information and tax computation requirements  in receiverships generally and provide greater certainty in relation to the tax obligations of receivers.
• It will help ensure that lenders’ decisions to enforce their security through the receivership route will be based on commercial considerations and not be influenced by potential exposure to tax liabilities arising from claw-backs or balancing charges.
• It will mitigate the risk of potential dysfunctional behaviour on the part of borrowers e.g. a borrower “forcing” the issue to bring
  about a receivership on the basis that the lender/receiver would be responsible for tax arising on claw-backs in the event of the sale of a property.
• It will maintain equality of tax treatment for borrowers who sell Section 23 property or other tax relieved property inside or outside of a receivership. In both situations the responsibility for discharging tax arising on claw-backs or balancing allowances will rest with the borrower.
• It provides some prospect of tax being secured for the Exchequer in receiverships.

BDO are of the view that, in principle, the new proposals represent a significant improvement on the existing legislative and practice framework for receivers, mortgagees-in-possession and lenders, although there are a number of detailed and practical matters which needed to be addressed.

This note is for general guidance only. It cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice.

For Further Advice please contact:

Eddie Doyle
Tax Partner
BDO
Beaux Lane House
Mercer Street Lower
Dublin 2
d: 01 4700271
e: edoyle@bdo.ie
t: 01 4700000
www.bdo.ie