Department clarifies Capital Gains Tax exemption criteria
The Department of Agriculture has clarified the details of the agreement reached with the Revenue Commissioners regarding a Capital Gains Tax (CGT) exemption for the new EU CAP payment arrangements.
On 20 March, the Minister for Agriculture, Food and the Marine, Coveney wrote to the Minister for Finance, Michael Noonan seeking a tax exemption for a group of farmers who were required to transfer their farm payment entitlements, and therefore incur a tax liability, as a result of a technical change in EU rules as part of the recent reform of the Common Agriculture Policy (CAP).
Under the new CAP arrangements, the ‘Basic Payment Scheme’ will replace the ‘Single Payment Scheme’ after 31 December 2014. Payments under both schemes are based on entitlements and under the new arrangements entitlements are made up of two elements, an ‘allocation right’ and a value. To qualify for an allocation, the applicant must have received a direct payment in 2013; the value is then determined by the total value of entitlements owned in 2014.
In the case of leased entitlements, the lessor owns the entitlements in 2014 and the lessee will have received the direct payment in 2013. As neither satisfies both the ownership and receipt elements, the entitlements would be lost to both parties unless action was taken. This situation arose because of the new EU CAP regulations and the definition of an ‘active farmer’, for which it has not proven possible to find a solution at EU level.
To avoid permanent losses, the Department wrote to lessors and lessees advising them of the option to enter into a permanent transfer of the entitlements before 15 May this year. Some 6,446 lessors and 6,727 lessees were affected by this situation, with a total annual value of over €43 million in leased entitlements.
This solution, while addressing the entitlement issue, had tax implications for the transferor as a disposal of an asset can lead to a Capital Gains Tax (CGT) liability. CGT is a tax on gains arising on the disposal of assets. A disposal means a transfer of ownership in an asset whether by means of sale, gift, exchange or otherwise and includes a part disposal of an asset.
The Department estimated that there could be a potential CGT liability of some €26million, with 83% of lessors facing an estimated average bill in the order of €1,197 to €7,547 if they followed the Department’s advice to transfer their entitlements. There were also VAT implications and an initial estimate was that the VAT liability could be in the region of €7.5 million.
Case for an exemption
An exemption was requested as a once-off arrangement (transfers would have to be executed before the 15 May 2014) with the following considerations:
- The transfers would not take place were it not for a technical change in the EU regulations and the Department’s advice to remedy the position. These transactions could be classified as ‘forced sales’.
- The tax charge would not have normally have arisen and the tax accruing would not have been a budgeted receipt in the normal course of events.
- If the transfers did not take place, there would be no tax revenue. As the entitlements expire on 31 December 2015, essentially they become worthless after the deadline for receipt of applications under the 2014 SPS Scheme, which was 15 May 2014.
The case was also made that the imposition of these taxes had major policy implications. Encouraging land mobility through long-term leasing has been one of the main drivers in ‘agri-taxation’ policy and income tax relief measures to encourage more long-term land leasing have been enhanced by the Government in recent years. Land mobility has been identified as one of the key policy issues in the ongoing ‘Agritaxation Review’ being conducted by the two Departments. It was considered that failure to provide a once-off exemption could damage confidence in the long-term leasing model.
Following representations by Minister Coveney, Minister Noonan signalled his intention to announce a capital gains tax (CGT) exemption in this year’s Finance Bill. The VAT liability, where applicable, remains unchanged. Under EU law the Minister for Finance has no discretion to provide for a VAT exemption.