Lessons to Learn from a Recent Tax Appeal Determination

Cover Image for Lessons to Learn from a Recent Tax Appeal Determination

| John Murphy

This Case resolved around the incorporation of a farm business to a company. It is case number 39TACD2023. This article reviews the facts of the case at high level and provides some learning points for advisors that have arisen from this case.

Key points from the case for accountants involved in advising farmers considering incorporating in our opinion in summary form:

  • In any revenue intervention, take time to consider any response to revenue. A quick response could come back to haunt.
  • Ensure the Company arranges for a herd number at the time of incorporation.
  • Have paperwork in place to prove there is a lease or a form of rental other than a lease (where the entitlements are not sold) in relation to the entitlements. In 79TACD2021, the AC noted there was no need for a formal lease as long as there was some evidence to show one existed and the rental payments were filed in the form 11 of the taxpayer and the financial statement noted that a lease/licence existed and there was a regular yearly payment.
  • Have the entitlements transferred by filing out the required forms to affect the transfer to the Company e.g. Transfer of Entitlement application form.
  • Review the DAFM application form to ensure the Company is down as the transferee in the relevant period when the Company begins farming.
  • Ensure all company law requirements and minutes are complied with in relation to the acquisition.
  • Have an action plan and REVIEW the action plan to ensure everything has been ticked off.

Action points for persons who may have an issue here or for anyone that incorporated their farming business

  • Review how the entitlements were dealt with.
  • If a problem is identified, try to rectify it now so as to reduce the exposure.
  • Can anything be done to correct this?

The Detail

Revenue raised an income tax assessment on the taxpayer (being a shareholder of the farming company) under Case IV Schedule D for the tax on the single farm payment/BPS entitlements for two years selected for audit on the basis that

  • The farm payment/BPS (Basic Farm Scheme) entitlements were not transferred to the Company. The farm payment/BPS entitlements were claimed each year in the name of the individuals, not the company. Therefore the income is assessable to the individual, not the company even though the company received the money into its bank account and paid tax on it.
  • There was no evidence that the company had a registered herd number which was a requirement for to be paid the BPS entitlement payment.
  • There was no formal transfer of the entitlements to the Company – a Transfer of Entitlement application form was not submitted to the DAFM.
  • The licence agreement in place was only signed by the shareholder and there was no signature for and on behalf of the Company so therefore the Company was not signed into it.

The taxpayer stated that:

  • This case was to be contrasted by the taxpayer with Case79TACD2021 as in that case, the money was lodged to the shareholders bank account and then paid over to the Company – this is not the case here. In addition, that company did not hold a registered herd number – the taxpayer contended that the Company did.
  • The Company received the BPS entitlements each year and complied with all taxes in respect of same in that company.
  • There was a formal licencing agreement in place with the Company in relation to the land that was drafted by a solicitor and that licence agreement specifically stated that the licence gave the Company entitlement to use the BPS entitlements.
  • The taxpayer engaged a reputable agricultural advisor to fill in the paperwork each year in relation to the entitlements. The taxpayer had not reviewed what was sent in at all as they trusted the advisor. Therefore the tax payment contended that the agricultural advisor had made an error when filing in those applications as they had incorrectly put the taxpayer's name on the application as opposed to the Company. The taxpayer did not review the applications each year as he trusted the advisor.
  • The Company had a herd number as the herd numbers of the taxpayer and his brother were amalgamated shortly after the Company was established (the company was established 18 years ago so paperwork was not available to prove this).
  • The BPS could not be paid to the taxpayer as they were not farmers carrying out agricultural activities – therefore the Company was only entitled to the BPS entitlements.
  • The licence agreement provided the Company with the right to legally utilise the BEPS entitlements.

The Appeal Commissioner (“AC”) reviewed the facts and the rules of the schemes. The AC made the following findings:

  • The rules on the transfer of entitlements were very specific – they required a transfer of the entitlements to the Company under EU law. However, transfers can be done by way of a lease, sale or of a form of rental other than a lease of the entitlements. The AC held a licence will meet the ‘form of rental other than a lease‘ requirement.
  • While legally under the licencing agreement, the Company had the right to be registered as the transferee AS steps were not completed to register the Company as a transferee then the entitlements did not transfer.
  • The mode of application of profits does not affect the liability to pay tax i.e. just because the funds were lodged to the Company bank account does not mean that it is its income (J D Dolan (Inspector of Taxes) v “K” National School Teacher).
  • No evidence was given to prove the herd number given was that of the Company (which could easily have been obtained from the DAFM if the taxpayer so wished) – if there was no herd number then there may not have been an entitlement for the Company to even receive the funds (the AC did not opine on that matter).
  • Although the agricultural advisor prepared the application forms, it was the taxpayer's/company’s responsibility to ensure that they were correct.
  • Reviewed correspondence from the taxpayer’s agent at the time of the audit, where a letter confirmed that the entitlements were not transferred as there was no requirement to, because legally the licence gave the Company the right to use the entitlements. The taxpayer now making the argument that this was an error does not now hold up with what was stated at the time of the audit.
  • The AC found in favour of Revenue – BPS entitlements subject to income tax on the taxpayer under Case IV schedule D.

As an aside, but relevant for young farmers who are considering incorporating, only last week Revenue has thankfully confirmed in its updated Part 7 Section 81AA – Transfers to young trained farmers stamp duty manual, that Revenue accepts the requirement that the transferee spends at least 50% of his or her normal working time farming the transferred land, may be satisfied where he or she carries out the farming activities through a company or a partnership in which that person is the main shareholder and working director of the company and must farm the land on behalf of the company.

OmniPro Tax and Legal Limited act as advisors to accountants and their clients in the provision of tax and company law advice, for any queries you may have contact John Murphy ([email protected]) or call the office on 053 910 0000.

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About the Author

As a Director of OmniPro Tax and Legal Limited, John relishes problem-solving to help accountants develop innovative client solutions and sharing his technical knowledge on tax, company law, financial reporting and auditing. A Chartered Tax Adviser, he advises clients in practice on a range of issues from income tax, tax planning, restructuring to exit planning as well as advising on company law in relation to these and many other matters. In addition, he provides support on financial reporting, auditing and company law; conducts company valuations and advises on pre-sale restructuring. He is also an insolvency practitioner who acts as liquidator in members voluntary liquidations and is a Registered Auditor. Prior to this, John played a key role as a researcher and subject-matter expert in developing OmniPro information products such as the CompaniesAct2014.com and FRS102.com. As a speaker at OmniPro CPD events, he brings these industry-leading insights to accountants participating in our training programmes. As a Chartered Accountant, John has over a decade’s Big 4 experience with EY and PwC, providing tax and audit services for a portfolio of clients, ranging in scale from SMEs to multinationals.


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