Round-up of recent Irish legal developments

Following a review of the economic and fiscal situation, the Irish government brought the presentation of Budget 2009 forward by two months, and the Minister for Finance presented it to the Oireachtas on 14 October 2008. In this article we examine the business tax and pensions measures contained in Budget 2009. We also highlight an opportunity for businesses accepting deposits from customers to obtain VAT refunds, and examine a recent decision of the Employment Appeals Tribunal (EAT) on fair procedure in the redundancy process. An outline of the Competition Authority’s (CA) work on retail planning guidelines and on collective action in the pharmacy sector is also provided. Finally, our banking and competition units have prepared summaries of the financial guarantee scheme and the merger control regime set out in the recently enacted Credit Institutions (Financial Support) Act 2008. 

Business Tax Changes in Budget 2009 

Although in the Budget the government showed a firm commitment to retaining the 12.5% corporate tax rate, there were some major tax changes that will affect businesses.  

Research and development credit 

With effect from 1 January 2009 the tax credit for qualifying research and development will be increased from 20% to 25%.  

Capital gains tax 

The capital gains tax rate increased from 20% to 22%. The Minister for Finance also announced changes to the dates on which capital gains tax becomes payable. 

VAT  

The standard rate of VAT on goods and services will be increased to 21.5% from 1 December 2008. As this change happens in the middle of a two-monthly taxable period (November/December), this may prove to be challenging for businesses, which will need to review their IT systems and consider other changes necessary.  

The Irish Revenue (the Revenue) has recently issued guidance on the changes in Revenue eBrief No 54/2008, VAT Rate Change – Budget 2009. Some of the issues covered are the VAT treatment of: 

carried stock; 
businesses operating on an invoice basis (registered and unregistered businesses); and  
businesses operating on a cash basis.

The guidance also deals with the effect of the changes on: 

fixed interval payments; 
contracts existing on 1 December 2008; and  
continuous supplies of utilities.

Businesses that typically cannot reclaim VAT should request that invoices are issued before 1 December 2008.  

Recent regulations reduce the administrative burden associated with landlords issuing VAT invoices to tenants each time rent becomes payable and where the option to tax the rent has been exercised. The regulations allow the landlord to issue a document containing a schedule of dates on which rent subject to VAT is due. This document will need to be reissued to reflect the new rate. 

Deposit interest retention tax (DIRT) 

The rate of DIRT will be increased from 20% to 23% on 1 January 2009. 

Stamp duty 

Stamp duty on commercial property was reduced from 9% to 6%.  

Start-up companies 

Where a new start-up company commences trading in 2009 and its tax liability does not exceed €40,000 in each tax year for the first three years of trading, it will be exempt from corporation tax (including capital gains tax). However, this measure is being examined to ensure it complies with EU rules on state aid. 

Preliminary tax payment dates for large companies 

Companies with a corporation tax liability over €200,000 must pay preliminary tax in two instalments. The first falls within the sixth month of the current accounting period. The second falls within the eleventh month of the accounting period. The total preliminary tax payable must equal 90% of the corporation tax liability for the current period. This will apply to accounting periods beginning on or after 14 October 2008. 

Budget 2009 and Pensions 

The Budget introduced a number of measures affecting pensions. 

Annual earnings limit 

The annual earnings limit for determining maximum tax-relievable contributions for pensions purposes was reduced. This allows employees to claim tax relief on contributions to a pension fund from their salary, subject to an earnings limit. In 2008, this limit was increased to €275,239. It has now been reduced to €150,000 for 2009. 

Pension threshold limits 

The Minister for Finance also announced that there would be no adjustment to the maximum tax-allowable pension fund at retirement. This limit on the total amount of pension funding on which an individual can claim tax relief is known as the standard fund threshold (SFT). Any pension fund in excess of the SFT becomes subject to an income tax charge of 42%. A higher limit, known as the personal fund threshold, can apply when certain reporting requirements have been met.  

In recent years, the SFT has been adjusted annually in line with an earnings index, which was 1.049 in 2008. The SFT in 2008 was €5,418,085, and because no adjustment is to be made, this will not change for 2009. The table, opposite, shows the annual SFTs since 2006:  

Furthermore, in 2008 the maximum tax-free lump sum that an individual could take from all pension arrangements was €1,354,521. Again, no change has been made to this for 2009. Any lump sum retirement benefits paid in excess of this will be taxed at the individual’s marginal income tax rate. 

State pension 

The full personal rate of the state pension is to be increased by €7 per week for all pensioners. 

Retail Planning Rules: Stifling Competition? 

The retail planning system and its implementation stifles competition and limits consumer choice, according to the CA.  

The final instalment of the Grocery Monitor Project, undertaken by the CA after the removal of the Restrictive Practices (Groceries) Order 1987 in 2006 (repealed by s4 of the Competition (Amendment) Act 2006), examined competition issues relating to the planning system. It considered the experiences of Ireland’s seven largest retailers from 2001 to 2007 and reviewed the effects of the general planning system, the Retail Planning: Guidelines for Planning Authorities (the Guidelines), and local authority development plans on the retail sector.  

The CA found that, despite increases in the number and size of outlets since 2001, the planning system acts as a barrier to competition in grocery retailing, by:  

restricting the size and location of outlets; and 
contributing to increased costs and delays in the arrival of new outlets due to uncertainty surrounding planning permissions.

Size restrictions discourage both the entry of low-cost retailers into the Irish market and expansion by existing retailers. Thus Ireland has no large-scale low-cost retailers. Discount retailers face stricter size limitations than other retailers, the resulting reduced shelf-space stifles inter-brand competition, and prolonged planning processes deny consumers the benefits of locally competing retailers.  

To reduce these effects the CA recommends six changes to the Guidelines: 

remove caps on retail space; 
end discrimination against discount retailers; 
remove the emphasis on past projections of floorspace requirements; 
include an assessment of competition in health checks of local development plans; 
recognise that competition from new retail centres benefits local consumers; and 
require local authorities to survey consumers.

It also recommends that research be undertaken on ways to limit competitor planning appeals.  

The CA recognises the difficulty faced by planning authorities in balancing competing objectives. However, it believes that the operation of the current system presumes that the entry of new and large retailers cannot positively benefit consumers and that existing retailer welfare is paramount. Following publication of the report, Minister John Gormley announced that he intends to initiate a review of the Guidelines in 2009.  

Redundancy Process: Important Considerations for Employers 

In the current economic climate, it is no surprise that a significant number of claims are being brought under the redundancy and unfair dismissals legislation. Recent EAT decisions (cases UD 787/2008 and UD 788/2008, 15 October 2008) illustrate that, even in the event of a genuine redundancy, employers must follow correct procedure and act reasonably. 

Two men were employed as regional representatives with the Vintners’ Federation of Ireland (VFI). Their chief responsibilities were to recruit new members, organise local meetings and assist in the provision of seminars. Owing to a reported decrease in membership, a review group recommended that the grade of regional representative should no longer exist. Accordingly, the two employees were made redundant. Both men challenged the decision before the EAT. 

The EAT was satisfied that these were genuine redundancies but was critical of how the employer had dealt with the situation and made a substantial award of €43,000 in favour of each of the employees. The EAT criticised the fact that the VFI did not give genuine consideration to proposals put forward by one of the employees to resolve the difficulties, as these proposals could have realised significant savings. In addition, the EAT considered it ‘unreasonable’ that the VFI did not consider the employees for a new role of organisational development officer, even though the employees were not suitably qualified for the role. 

Even in the event of a genuine redundancy, employers must be seen to be acting reasonably.  

VAT Refunds now Due 

VAT-registered entities that receive deposits from customers for goods or services supplied can now apply for VAT repayments on forfeited deposits from previous years. The Revenue has recently issued guidance on its policy on the VAT treatment of forfeited deposits and cancellation charges. This follows the enactment of the Finance Act 2008, s102. 

The new rules provide that where a deposit has been paid and is forfeited, the supplier can reclaim any VAT already accounted for in its VAT returns. The following conditions must apply:  

a supply should not subsequently take place; 
the cancellation should be recorded as such in the books and records of the supplier; 
the deposit should not be refunded to the customer; and 
no other consideration, benefit or supply should be provided to the customer by any person in lieu of that amount.

The Revenue has applied a four-year time limit on claims.  

Competition and Collective Action in the Pharmacy Sector 

Since 2007, the CA has been investigating allegations of anti-competitive conduct in the community pharmacy sector. This investigation has taken place against the background of the pharmacists’ dispute with the Health Service Executive (HSE).  

The CA examined allegations that the HSE was engaged in anti-competitive conduct and had abused its dominant position. However, it concluded that the HSE does not constitute an undertaking under Irish or EC competition law. Consequently, the HSE is not subject to competition law rules when it negotiates the price of certain drugs with bodies such as the Irish Pharmacy Union or when it purchases pharmacy services under Community Drugs Schemes. 

This contrasts with the position of independent (not employee) pharmacists, who are subject to competition law rules.  

The CA is seeking to identify ways in which pharmacy contractors can legally have some input into the setting of terms and conditions, including fees, for the provision of community pharmacy services under Community Drugs Schemes. In a consultation paper (Consultation on Collective Action in the Community Pharmacy Sector) published on 10 October 2008, the CA invited views on the issue.  

The CA wants responses to seven questions, including views on: 

the suitability of the messenger model (ie where an independent third party – the messenger – liaises individually and in confidence with each pharmacist on the level of fees they will accept and provides this information to the HSE); 
safeguards required to prevent anti-competitive conduct by pharmacists through the use of the messenger model; and  
other terms and conditions about which pharmacists may wish to engage in collective negotiation.

The CA is examining the possibility of issuing a guidance note or a declaration to provide practical guidance to pharmacy contractors, the government and the HSE in future negotiations. 

Irish Guarantee Scheme and Merger Control Regime for Credit Institutions 

The response of the Irish government to the recent financial crisis has provoked a considerable amount of press commentary both at home and abroad. In contrast to the approach of certain other jurisdictions, the Irish government decided to safeguard all deposits and to guarantee certain other obligations of Irish credit institutions for a two-year period rather than injecting additional capital into these institutions. The Credit Institutions (Financial Support) Act 2008 also introduces a new merger control regime enabling mergers that substantially lessen competition to be eared on financial stability grounds. See below for links to further information.

REFERENCE MATERIALS

Revenue eBrief No 54/2008, VAT Rate Change – Budget 2009 is available at: www.revenue.ie/leaflets/ vat_ratechange_budget2009.htm

The Retail Planning: Guidelines for Planning Authorities, January 2005, is online at: www.environ.ie/en/Publications/ DevelopmentandHousing/Planning/ FileDownLoad,1613,en.pdf

The Consultation on Collective Action in the Community Pharmacy Sector, published on 10 October 2008, can be found at: www.tca.ie/controls/getimage.ashx? image_id=2154

The In-House Lawyer