Irish tax legislation provides for a surcharge on the undistributed income of certain professional service companies that are ‘close companies’ – that is, a company that is under the control of five or fewer participators.
The recent Tax Appeal Commission Determination (108 TACD 2020) concerns the application of the close service company surcharge to a company ('the firm') carrying on an accountancy practice.
The case centred on whether the principal part of the firm’s income was derived from professional or non-professional services.
Broadly, section 441 Taxes Consolidation Act 1997 (TCA 1997) imposes a surcharge on close companies providing professional services where such income is not distributed within 18 months of the end of the accounting period in which the income arose.
The surcharge applies where the principal part of a close company’s income is derived from surchargeable activities (in this case the provision of professional services).
Where the principal part of the income of a company is not derived from surchargeable activities, the surcharge does not apply. Where the surcharge applies, 50% of the surchargeable income is subject to a surcharge at a rate of 15%.
Companies carrying out a significant amount of audit and financial statement preparation are most likely to be subject to the surcharge
In his determination, the Commissioner provided a table outlining how the services of a company carrying on an accountancy practice should be split between professional and non-professional services (as agreed between the parties at appeal but not especially considered by the Tax Appeals Commission), which provides a useful, but not definitive, guide to what is a complicated area. It is available in full here and is summarised below:
Corporation tax – preparation and submission of returns
Income tax (including CGT)
Financial accounts preparation
Company structure, reports
Misc, haulage, insurance declaration, storage, wine licence
Corporate finance/forensic accounting/due diligence
VAT – preparation and submission of returns
PAYE – preparation and submission of returns
CRO – preparation and submission of returns
Certain provisions of staff
The firm concerned was a close company which commenced trading in 2011 following the incorporation of an existing accountancy practice carried on by the principals involved. As with many accountancy practices, it provided a range of services, including bookkeeping, accountancy, audit, tax compliance, tax advisory and business consultancy.
Arising from an audit in 2015, the Revenue formed the view that the principal part of the firm’s income for 2012 and 2013 was derived from the carrying on of a profession or the provision of professional services, and that the service company surcharge should have applied.
Accordingly, amended assessments were raised. These saw a surcharge liability arising under section 441 TCA 1997 of €28,469 for the period ended 30 April 2012, together with a related 10% late filing surcharge of €2,847, totalling additional tax payable of €31,316.
The Revenue also issued an amended notice of assessment to corporation tax for the year ended 30 April 2013, adding a surcharge liability under section 441 TCA 1997 of €59,943, together with a related 10% late filing surcharge of €5,994, totalling additional tax payable of €65,937.
Appealing the assessments, the firm contended that the principal part of its income was derived from the provision of non-professional services (eg bookkeeping) and from a significant one-off non-professional assignment in 2012 (advice on the valuation of shares in a client’s company).
The firm and Revenue both agreed that the ‘principal part’ of a company’s income is understood to mean greater than 50% of gross fee income, and this view was accepted by the Tax Appeal Commissioner ('the Commissioner').
Both the firm and Revenue cited CIR v Maxse (1919) 12 TC 41, which:
- recognised that a business may comprise both professional and non-professional services, and one could break down the activities of a business proportionally to ascertain the nature of those activities
- gave consideration to the term ‘profession’, stating that ‘a profession involves an occupation requiring either intellectual skill, as in painting, sculpture or surgery or skill controlled by the intellectual ability of the operator, as distinguished from an operation which is substantially the production or sale of commodities’.
Based on this, the firm contended that bookkeeping, VAT, payroll and preparatory work undertaken by junior staff to prepare financial statements and audit files for review by qualified accountants were non-professional services. Work carried out by qualified accountants reviewing financial statements and audit files was regarded by the firm as professional services.
The Commissioner, refusing the appeal, outlined that there is a limit on the application of the Maxse case principle, and that it did not support an attempt by the firm to categorise the work carried out by junior staff on financial statements and audit file preparation as non-professional work.
The Commissioner placed significant weight upon regulatory body guidance on whether the provision of certain services (bookkeeping, for example) would be regarded as the carrying on of an accountancy practice and on the need for practising certificates for accountants in public practice.
Unsurprisingly, the Commissioner also regarded the significant one-off assignment in 2012 (a company valuation) as a professional service.
To surcharge or not?
Incorporated accountancy practices should take the determination in this case into account when deciding whether the company should be subject to the professional services surcharge or not. Companies carrying out a significant amount of audit and financial statement preparation are most likely to be subject to the surcharge.