Irish Revenue issued new guidance on 1 July 2019 setting out the rules for companies in calculating their taxable profits, gains or losses for the purposes of Case I or II of Schedule D. Case I or II of Schedule D deals with the profits of the company’s trade or profession which are assessable to tax.

• Requirements in preparing financial statements/ accounts

  The new Tax and Duty manual provides an overview of how Irish incorporated companies are subject to both the requirements of Irish company law and their accounting framework in preparing their financial statements/ accounts. 

• Methodology for computing Case I or II profits or gains or losses

  The new Tax and Duty manual looks at the five subsections in Section 76A of the Taxes Consolidation Act, 1997 (TCA) as amended by Finance Act 2017 which set out the methodology for computing a company’s Case I or II profits or gains or losses. A summary is set out below.

  Subsections 3, 4 and 5 were inserted by the Finance Act 2017 which expanded the section from one to three pages from when first introduced by the Finance Act 2005. Except for the Notes to Guidance released in 2018 this Tax and Duty Manual is the first guidance Irish Revenue have released in relation to the Finance Act 1997 insertions.

Subsection 1

This contains the general rule of following the financial statements as computed under IFRS or GAAP in preparing the company’s taxable profits or gains of a trade unless subject to any adjustment required or by law.  

Subsection 2

This provides for a “spreading” over 5 years of a transitional adjustment on changes from former GAAP to either IFRS or current GAAP as provided under Schedule 17A TCA 1997. 

Subsection 3

This deals with changes in accounting policy from one valid basis to another for good commercial reasons and sets out the tax treatments which provides that there should neither be a tax-free uplift nor a double charge to tax because of such change.

Subsection 4

This applies to the adoption of an accounting standard or an amendment of an accounting standard for the first time and extends the “spreading” provisions as provided for under Subsection 2 for any prior period adjustment.  Companies are also reminded to consider any deferred tax impact of recalculating profits under the new accounting rules, albeit this will not impact the calculation of the taxable Case I/II profits, gains or losses.

Subsection 5

This deals with the correction of an accounting error and looks at the tax implications depending on whether the error is considered “material” or “non-material” with or without a tax impact and the relevant tax periods which should be reopened and adjusted.  The manual also considers the statutory time limits of 4 years when considering amending the returns and the possibility of making a “Qualifying Disclosure” to Revenue for periods which are out of time when the error is discovered.

It is interesting to note that Corporation tax return Form CT1 now provides a section for companies to elect that the treatment of Section 76A (as amended by the Finance Act 2017) applies to an accounting period on or after 25 December 2017 by “ticking” a box. This will ensure the return is considered complete and accurate.

Contributed by Breda Fitzmaurice

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