Finance Act 2019: Changes impacting transferees of fixed charges over book debts
Changes which impact transferees of fixed charges over book debts were introduced pursuant to Section 72 of the Finance Act 2019 (the “2019 Act”). This section, published this month, amends Section 1001 of the Taxes Consolidation Act 1997 (“TCA”) and came into force on 22 December 2019.
Requirements of Section 1001 of the TCA (“Section 1001”) prior to the 2019 Act
Section 1001 provides that the Revenue Commissioners of Ireland (“Revenue”) can hold a charge-holder liable for the fiduciary taxes of a company over whose book debts* it holds a fixed charge. Where a company fails to pay certain overdue tax liabilities (i.e. its PAYE, PRSI, USC, VAT or Local Property Tax), then the fixed charge-holder is, upon receipt of a notification from Revenue advising the fixed charge-holder of its potential liability under Section 1001 (a “Revenue Notification”), liable for that tax up to the amount it directly or indirectly receives from the company in discharge of the company’s debt.
There is however an option for the fixed charge-holder to limit its potential liability under Section 1001 by notifying Revenue of the existence of the fixed charge within 21 days of its creation (i.e. 21 days from the date of the security document creating the fixed charge) (a “Section 1001 Notification”). Having made a Section 1001 Notification, the fixed charge-holder’s liability is then limited to any relevant tax liabilities incurred by the company after the fixed charge-holder has received the Revenue Notification.
For the purpose of Section 1001, a Section 1001 Notification is only required where (i) security is created by an Irish company, and (ii) the security contains a fixed charge over book debts. Section 1001(3)(c) TCA sets out the information to be furnished by the charge-holder to Revenue which includes the tax registration number of the company which granted the charge.
Rationale for Amendment
Revenue’s interpretation of Section 1001 (prior to the amendment under the 2019 Act)** was that it did not cater for a notification procedure where a fixed charge was transferred to another charge-holder. As such, the transferee of a fixed charge over book debts could not avail of the ability to limit its potential liability under Section 1001. This amounted to differential treatment between an owner of a fixed charge which was never transferred and an owner of a fixed charge which was transferred.
The purpose of Section 72 of the 2019 Act (“Section 72”) is to amend Section 1001 so as to align the treatment of the original charge-holder and any subsequent charge-holder (i.e. an entity to whom a fixed charge over book debts has been transferred) so that the ability to limit potential liability under Section 1001 is now also available to subsequent charge-holders.
Impact of Section 72
Section 72 amends Section 1001 so that transferees of a fixed charge over book debts are now in a position to make a Section 1001 Notification to Revenue allowing them to limit their potential liability to relevant tax liabilities incurred by the company after the charge-holder has received a Revenue Notification. The time frame within which this notification must be made is 21 days from the date of the transfer (or in the case of historic transfers prior to commencement of the 2019 Act, 31 January 2020 (discussed further below)).
Other key features of Section 72 are as follows:
A. Legal Ownership
We understand (and expect this to be made clear by way of Revenue guidance) that the amendments introduced under Section 72 shall only impact on the transfer of legal ownership of a fixed charge over book debts.
B. Retrospective Application
Section 72 applies retrospectively to any fixed charge which has been transferred before the enactment of Section 72. However a very tight deadline has been imposed and transferees of fixed charges over book debts need to act quickly in order to avail of the Section 1001 limitation for historic transfers as the Section 1001 Notification must be received by Revenue before 31 January 2020 (or 21 days from the date of transfer where that date is later).
Whilst not mandatory, standard practice in the Irish market is to make a Section 1001 Notification at the time security comprising of a fixed charge over book debts is created. However, in the absence of previous legislative consideration or Revenue guidance regarding the impact of Section 1001 on transferees of fixed charges, the market view was that a transfer of such security would not result in the loss of priority where a Section 1001 Notification was made by the former charge-holder – hence the practice was not to make a further Section 1001 Notification to Revenue at the point of transfer.
In light of this, the amendment introduced under Section 72 to specifically enable transferees of fixed charges over book debts to limit the scope of their potential tax liability has brought much welcomed clarity and certainty regarding the application of Section 1001.
As a general practice and commercial point, participants in financing transactions (in particular in the context of the acquisition of a loan or portfolio of loans), should assess firstly whether the security interest is a fixed charge over book debts of an Irish company and secondly whether there are any material tax liabilities which are unpaid by the company granting the charge and which have not been factored into the purchase price.
Going forward, a Section 1001 Notification, whilst not mandatory, should be considered at the point in time at which the security is initially created and also where such security is subsequently transferred.
If you have, by way of acquisition or otherwise, taken the transfer of security comprising of fixed charges over book debts and you are concerned that material tax liabilities may arise, action should be taken promptly to make a Section 1001 Notification before the deadline of 31 January 2020 expires.
* Book debts are debts due or to become due at some future time to any company on account of or in connection with any profession, trade or business carried on by such company whether entered in a book or not.
** As per the explanatory guidance published in conjunction with the Finance Bill 2019. Available here.