For businesses in Ireland, Finance Bill 2020's least publicised but perhaps most important change will be the tightening of the capital allowance rules for intangible assets.
What is a Capital Allowance?
Capital allowances enable companies to reduce their corporate tax bill by claiming a multi-year deduction for spending on certain business assets. Under Irish rules, a company can claim capital allowances for plant and machinery, motor vehicles, industrial buildings, transmission capacity rights, computer software and intangible assets.
The Revenue treats intangible assets as plant and machinery for the purposes of claiming capital allowances. This means that such allowances can be claimed at rates of 12.5% over eight years or at a fixed 7% per year over 14 years and at 2% in the 15th and final year.
Companies can claim capital allowances for expenditure on "specified intangible assets" against income from "relevant activities" of the company.
Among others, specified intangible assets include copyrights, patents, trademarks and know-how. The Revenue provides a full list of specified intangible assets in its Corporation Tax Manual.
"Relevant activities" include the managing, developing and exploiting specified intangible assets, and sales deriving most of their value from the use of specified intangible assets.
Following changes brought about by Finance Act 2017, deductions for expenditure on specified intangible assets are capped at 80% of trading income in the relevant accounting period.
Balancing charges (also referred to as "clawbacks") apply when an asset for which capital allowances have been claimed is sold for more than its "tax written down value." Where this is the case, previously claimed capital allowances must be surrendered on a pro-rata basis, with reference to the difference between the selling price and the tax written down value.
Such rules exist to prevent taxpayers from overclaiming tax relief on purchases of depreciable assets. However, under Irish tax rules, in the case of intangible assets, a balancing charge does not apply where an asset is disposed of or ceases to be used in trade more than five years after its acquisition. It is this part of the intangible asset capital allowance rules that is set to change.
Finance Bill 2020
On October 22, 2020, the Irish Government published Finance Bill 2020. This included an amendment to Section 288 of the Taxes Consolidation Act 1997. Under this measure, balancing charges may apply regardless of when intangible assets are disposed of, meaning that the five-year holding rule has effectively been removed. This applies to specified intangible assets acquired on or after October 14, 2020.
According to the Government, the change brings Ireland's rules in line with those of other jurisdictions.
The existing, more favourable clawback rules continue to apply to specified intangible assets acquired prior to October 14, 2020.