CT disappoints–but only relative to elevated expectations

When Budget2024 was published back in October 2023, the forecast was for €24.5 billion of Corporation Tax to be collected in 2024.  The recent end-year Exchequer Returns show that receipts came in at €28.1 billion, giving an overperformance of €3.6 billion or 14.7 per cent. 

Note that everything here excludes any receipts linked to the CJEU ruling in the Apple State-Aid case.  The overperformance relative to the Budget2024 forecasts was greater than the total amount collected in 2011. Yet, still, the final outturn was somewhat disappointing.

This was because as 2024 progressed, a strong performance early in the year gave rise to expectations that this would continue into the second half of the year.  This was particularly true of June which serves as a useful bellwether to what might be collected later in the year and June 2024 was 38 per cent higher than the same month in 2023.

By the time of Budget 2025 last October, the expectation was that total CT for the 2024 would be €29.5 billion.  This was not an unreasonable expectation given what was known at the time.  However, the upward trajectory of the 12-month sum as shown above, which was very strong in the first half of 2024, stalled not long after the Budget.

And while the key month of November was strong, it was not by as much as the June figure might have indicated.  On a monthly basis June 2024 was 38 per cent higher than the June of the previous year.  Given the links between payments a similar increase might have been expected in November, but November 2024 was “just” 15 per cent higher than the same month of the previous year.

However, as we recently pointed to, even with this lower growth in November, a key reason for failing to reach the most recent 2024 CT forecast was because of a weak October.

The monthly October receipts are a pin-up to highlight the concentration and volatility of Ireland’s CT revenues, with large, and seemingly unpredictable, swings from year-to-year.  And it is possible, even likely, that a single firm may be responsible for the volatility shown.  If October 2024 had matched 2023, never mind the peak of 2022, then total CT receipts for 2024 year would have fairly close to the most recent Budget forecast. 

As it turned out, both November and December set records for monthly receipts, with December being particularly strong.  Here are the individual monthly receipts for November and December for the past 15 years.

There is really no reason to combine November and December, other than to show that the receipts across the two months reached almost €10 billion in 2024.  We should not become immune to the scale of these numbers.

The strong December receipts may be a pointer to strong receipts next May – these are months six and eleven for companies with a June year-end. The relationship isn’t as strong as that for the June and November receipts but still a record in December 2024 points to next May being strong as well.

To conclude here is the cumulative annual chart for recent years.  It is now up to 11 pretty much non-overlapping lines.  There are so many lines, value labels for all of them can’t be easily accommodated so only those for even-numbered years are shown.

And there is nothing to suggest that 2025 will break the pattern and give a line that drops below the previous year.

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Corporation Tax motors along - even if the state-aid payments muddy the waters

Corporation Tax revenues continue to motor though with some minor bumps in the road.  An issue in recent months is that the underlying changes have been clouded by the transfer of funds linked to the CJEU finding in the Apple State-Aid case.   For example, at first glance October’s receipts appear to have been very strong soaring ahead of the previous peak from 2022.

However, it has been suggested that around €3 billion of October’s CT receipts were transfers from the Apple escrow account and are one-off in nature. Taking these out presents a somewhat different picture:

Now it is clear that the underlying receipts in October this year were well down on their 2022 peak.  In and of itself this is not a major cause for concern.  There is no overall trend in October’s receipts with volatility the main feature. Even if lower than recent years, October 2024 was significantly higher than October 2020.

October would not typically have been considered a key month for CT receipts.  Large companies make the bulk of their payments in month 5 and month 11 of their financial year. October is month 11 for companies with a November year-end.

This is not a common financial year so the changes are linked to a small number of companies, probably one.  A manufacturer of COVID vaccines which has seen its profit drop substantially since 2022 would fit the bill.  This is a useful illustration of the concentration of Ireland’s CT revenues.

November is a key month for CT – being month 11 for companies with the much more typical December year-end.  We previously looked at what might be expected in November with the June receipts (month 5) and by and large receipts were broadly in line with the expectations set out there.

Again, though, there is the muddying of the underlying picture due to the Apple transfers. In total, November’s CT receipts were an incredible €13.7 billion.  Of those, it has been suggested that around €6 billion is due to the state-aid case. It would be helpful if more precise figures were provided but this does not seem to be case.

Anyway, here are the monthly receipts for November (less the state-aid money in 2024).

The picture is pretty clear: onward ever upward.  Back in July, we projected that €8.2 billion would be collected in November and, though we don’t have the precise figure, it looks like the outturn was maybe €0.5 billion or so below that.  Incredibly, we are at the stage where that would be considered a “small” error.

Even with the softening of October’s receipts and November seemingly coming in a little below what might have been expected, 2024 is on track to be another record year for CT.  With a month to go, the €26 billion collected so far (excluding the money linked to the Apple case), is already well up on what was seen in last couple of years.

Indeed, the near €8 billion collected in November alone is almost double the €4.2 billion that was collected in the entire year in 2013. 

A few months ago, it seemed 2024 was on track to get close to €30 billion.  This won’t be achieved. December is not typically a major month for CT, but the monthly receipts in recent years have been not far off €2 billion.

If December 2024, brings in €2 billion then 2024 will see CT revenues of €28 billion or thereabouts.  The amounts are enormous.

Perhaps we will get away without having to extend the scale of the vertical axis on the chart of the rolling 12-month sum of CT receipts. 

We might get away with it in December, but if the trends are anything to go by another revision to the scale will be necessary sometime in 2025.

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Continued elevation (with more to come) but also volatility in recent Corporation Tax revenues

The elevated levels of Corporation Tax became even more elevated in the recently-published Exchequer returns for August.  On a rolling 12-month basis, the amount of Corporation Tax collected is now touching €28 billion – with the chart showing the 12-month sum needing the vertical axis to extended yet again (and probably not for the last time). 

Incredibly, this means that the chart showing the cumulative totals by calendar year still works.

A chart showing 11 separate series should not work but, almost without exception since 2014, the cumulative year-to-date total for any given month has exceeded the equivalent amount for all earlier years. And when it briefly didn’t in October last year it was noted here that it was due to volatility and the pattern quickly resumed.

We can see the 2024 line scorching ahead of 2023 with record annual receipts again likely to be collected.  The biggest month for CT is yet to come in (November) but the €16.3 billion already collected in 2024 is ahead of the full year total for every year up to 2021.

We will come to some of the reasons shortly but initially we can note that the annual growth in the 12-month sum is potentially beginning to spike again. 

The last decade has seen three periods of significant growth (2015, 2018/19 and 2021/22). Whether 2024/25 joins them remains to be seen – and it will be from a much higher base. Growth in 2026 is almost fully baked in at this stage (Pillar 2 etc.)

Although other taxes are performing strongly, they are not growing as rapidly as CT, thus the share of Exchequer Tax revenue due to CT has also reached new heights.  CT contributed just under 30 per cent of total Exchequer Tax in the 12 months to the end of August.

Volatility

We can see the impact of volatility if we just look at the monthly receipts for August.  Up to 2020, August was not a significant month for CT revenues but this has changed in recent years.

August 2024 was up over 100 per cent on August 2023 but it’s actually not that much higher than August 2022 - if we have now reached the stage where €1 billion of additional tax in one month is not that much. It is a 20-foot container full of €50 notes!

As we have frequently pointed out, companies pay the bulk of their Corporation Tax in two installments, during their financial year (month six and month 11), with a final balancing payment due nine months after their year end. It can be instructive to combine the payments from months 6 and 11 for various different year ends.

Companies with a September year-end, will pay most of their Corporation Tax in March and August (months 6 and 11 of their financial year).  Combining these months shows that timing, AKA volatility, may be, in part, responsible for the surge seen when August is looked at in isolation.

On a combined basis, we can see that the combined receipts for March and August are up on last year – but that this increase is close to 25 per cent rather than exceeding 100 per cent in the case of August alone.

The is likely to be some firm-specific circumstances that has seen the spread of payments between March and August vary in recent years – but as can be seen their combined sum is not as volatile.  In 2023, a greater share of the payments seemed to be made in March whereas this year a greater share of the payments were made in August.  For the year as a whole it largely washes out – that container of €50 notes excepted.

Therefore, we cannot read too much for the rest of the year into the 100 per cent growth seen in August.  But we already have a pointer to what will happen in November, the most important month for CT – it will go gangbusters -again.

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CT receipts go gangbusters - again

Can we really keep saying that? We might have expected an increase in June but the outturn was exceptionally strong.  For a single month, the €5.9 billion collected in June is second only to the €6.3 billion collected last November.  

As shown below, June 2024 was by far the largest June on record.

Of course, as we discussed earlier, the June receipts are also a pointer to what might happen in November.  Here’s what happens if we extend the June/November relationship for the outturn we have just seen for June 2024: a fitted value for November 2024 of €8.2 billion – which alone would be equivalent to the entire amount of CT collected in 2017.

The strong June means that 2024 is now considerably higher than 2023.  In the first six months of 2024 €12.2 billion of CT has been collected.  On its own this would be the fourth-highest full year ever – and there are still six months to go.

It is pretty likely now that the sequence of calendar year CT receipts exceeding the previous year will be extended to 13 years (back to 2012).

The June outturn was enough to push the rolling 12-month sum up to a new high of €25.5 billion.

The next month of interest will be August when we will see how much the fruit harvest brings in.

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Ireland’s largest taxpayer motors along

OK, we can’t be 100 per cent sure that Microsoft Ireland Research is Ireland’s largest taxpayer but it certainly is a likely candidate for being so.  The 2023 accounts are now available and like last year continue to paint a strong picture.  Let’s start with the income statement:

From 2019 to 2023, turnover pretty much doubled (after previously doubling from 2017 to 2019).  Operating costs haven’t increased as rapidly with operating profits increasing by around two and a half times since 2019, to reach $23.3 billion.

In recent years, the tax charged in the income statement has been around 12 per cent of operating profit plus net interest income. This continued to be case in 2023.

At $2.9 billion, Microsoft Ireland Research (MIR) is likely responsible for around ten per cent of Ireland’s Corporation Tax revenues and something a little north of two per cent of general government revenue.  MIR has also seen its non-financial footprint increase here in recent years.

In 2023, Microsoft Ireland Research had an average of 1,242 employees and incurred an aggregate of $157.7 million of expenses on wages and salaries.  This gives an implied average of $127,000 per person employed.  In total aggregate staff costs were $234.7 million once PRSI, pension costs and share-based remuneration are factored in.

We are primarily interested in Microsoft Ireland Research because of the size of its tax charge. It does not have the highest amount of Microsoft’s employees in Ireland.  That impact belongs to Microsoft Operations Ireland Limited which had an average of 2,779 persons employed in 2023 (2022: 2,386). 

In 2023, MIOL incurred wages and salaries costs of $340 million at an average of $122,400 per person employed.  On top of that MIOL had a tax charge of $652 million, up from $476 million in 2022.

Combined MIR and MIOL, had a tax charge of $3.5 billion in the twelve months to the year ended June 30th 2023.  Add in $700 million of total staff costs and we’re at $4.2 billion.

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No Surprise in November CT Receipts

When the June figures were published the €4.2 billion of Corporation Tax collected in the month pointed to receipts of around €6 billion in November.  The year-on-year declines for August, September and October were attributed to largely idiosyncratic volatility in such a concentrated source of tax revenue. 

And so it proved, with the monthly receipts for November coming in broadly in line with expectations at €6.3 billion or five percent above the crude projection based on the June figure.  With November being the most important month of the year for Corporation Tax, November 2023 was a record month, surpassing the €5.0 billion collected in the same month last year.

In year-to-date terms, November was enough to push 2023 back up above the equivalent total for 2022.  The difference looks small on the chart but the €22 billion collected so far in 2023 is almost €1 billion higher than what was collected in the same period last year.  The difference to 2014 is staggering.

The recent volatility in the receipts can be seen with the 12-month sum.  If December 2023 just matches what was collected last December then the total for the year will be €23.5 billion, up on the €22.6 billion from last year.

The volatility is highlighted in the annual changes from the above chart.  This shows some extraordinary changes. 

Towards the end of 2022, CT was growing at an annual rate of over 60 per cent – exhilarating but unsustainable. This growth plummeted during 2023 and approached zero in October. The November numbers mean that the annual change in the 12-month sum rebounded a little and rose to 2.8 per cent – and such is the scale of these receipts now that even such a small relative increase is a pretty significant sum.

It is hard to say if the December returns will garner much attention, and as a standalone month there is no discernible pattern.  2022 was a boom year for CT but December 2022 was actually lower than December 2021 – that volatility thing again.

Corporation Tax is a highly volatile source of revenue. While there can be some information in the monthly changes there is also an awful lot of noise.  Here the year-on-year comparisons of monthly CT receipts since January 2016 – and note that the chart excludes some of the volatility as the vertical axis is cut off at +100.  The final point shown is November 2023 which was was 27 per higher than November 2022.  Missing values are used when the calculation of the annual change involved a negative number (three instances since 2016: January 2019, April 2019 and April 2021).

Monthly figures that are lower than the same month of the previous year are not uncommon, though some occur in months that are not important from a CT perspective. Around one-third of months in the chart above have negative values – and this was a period when aggregate CT revenues grew at an extraordinary rate.

Four of the six months from December 2022 to May 2023 were negative in year-on-year terms.  The run of three negative figures in a row that was seen from August to October this year was a bit unusual – we have to go back to early 2021 to see such a run, when the pandemic would have had an impact, and the only other instance shown of three negative values in a row was in early 2017. 

The proximity of the recent three-month negative run to the key month of November also likely contributed to the focus. Those negative outturns will also have been seen as an opportunity to try and dampen expectations. Who knows what December will bring. Probably more volatility but structural shifts remain absent for now.

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Volatility to the fore in Corporation Tax revenues

For almost a decade now, the year-to-date revenues from Corporation Tax have exceeded the equivalent amount from the previous year (with early 2021 being the only minor exception).  We can see below that the 2023 year-to-date figure for October has dipped below the 2022 line.  The €15.7 billion collected so far in 2023 is €0.4 billion (3%) below the amount collected to October 2022.

We can also see that this is a reversal of the position seen only a few months ago. By July, 2023 was running nearly €2 billion ahead of 2022 (€10.9 billion versus €9.0 billion).  The reversal since means that this year’s Corporation Tax receipts for August, September and October have been around €2.3 billion lower than the equivalent months from last year.

These three months last year saw €7.2 billion of Corporation Tax collected, this year they brought in €4.8 billion - a fall of one-third, which does appear to be dramatic. 

As seen above, this year was still the second-highest on record for these three months but is the fall just volatility that can be expected in such a concentrated revenue source or a harbinger of a more systematic decline?  For the time being volatility seems the more likely landing spot.

To put the recent declines in context we can look at the 12-month rolling sum of receipts.

The change in direction in the past three months is pretty clear.  November is the most important individual month for Corporation Tax and a one-third drop there relative to November 2022 certainly would be alarming.

The recent falls have put the 12-month sum back close to where it was this time last year, with the annual change in the 12-month sum having plummeted towards zero in recent months. Annual growth rates of 40 per cent plus while exhilarating are not sustainable.

In the 12-months to October 2022, €21.9 billion of Corporation Tax was collected. The 12 months to October 2023 have seen revenues of €22.2 billion – an increase of 1.25 per cent.

To assess the concern that could be raised after the falls in recent months we go back to the Revenue Commissioners guidance on when large companies need to pay their Corporation Tax.

Large companies

Large companies can pay their preliminary CT in two instalments when their accounting period is longer than seven months.

The first instalment is due on the 23rd of the sixth month of the accounting period. The amount due is either:

• 50% of the CT liability for the previous accounting period
• 45% of the CT liability for the current accounting period.

The second instalment is due on the 23rd of the eleventh month. This will bring the preliminary tax up to 90% of the final tax due for the current accounting period.

The key months are month six and month 11 of the company’s financial year, by which time 90 per cent of the estimated tax due for the current year must be paid.  Any remaining tax due will be paid when the company files it tax return.

A company must file its return and pay any tax due nine months after the end of the accounting period. The company must make this payment on or before the 23rd of the ninth month.

Clearly any individual month can be any of these deadlines: month six, month 11 or month plus nine.  The likely candidates for the months we are looking at are:

• August: month 11 for companies with a September year-end
• September: month +9 for companies with a December year-end
• October: month 11 for companies with a November year-end

August

Here are the monthly receipts for August since 2009.  There was an exceptional increase in August 2022 which was up 167 per cent on August 2021.  Some of this was reversed in 2023 but August 2023 was still significantly higher than all years prior to 2022.

The impact of payment timings can be seen if we combine the receipts for March and August – month six and month 11 for companies with a September year end.

Across the two months of March and August there was no fall at all in 2023.  This points to a company having a large increase in its tax liability in 2022 and paying most of this in August 2022 (when it needed to have 90 per cent of its preliminary tax paid).  For 2023, the payments were more balanced as the March payment would have been based on 50 per cent of the 2022 liability with a smaller amount due in August this year to bring the payments up to the required 90 per cent.

The fall in August 2023 seems mainly volatility due to concentration and the timing of payments.

September

The fall in September was small which also points to volatility.

September 2022 was pretty much double September 2021 (€2 billion versus €1 billion). Some of this increase was reversed in 2023 but it is hard to point to anything systematic that might be going on. 

It could just be that companies with December year-ends that filed their 2021 tax returns in September 2022 had more of their final tax payment outstanding than when they filed their 2022 tax returns in September 2023. With lots of companies having December year-ends we can’t point to any company-specific factors but it could be just a general timing issue.

October

The monthly figures for October seem particularly volatile and it is hard to discern anything that might be going on. 

There was a local peak in October 2018 of €1.6 billion.  This fell to €1.0 billion in 2019 and pretty much collapsed to just €200 million in 2020.  This put October 2020 as one of the lowest Octobers in the last 15 years. 

There was a strong bounceback in 2021 and a further increase to €2.3 billion in 2022.  Relative to that there was a large fall in 2023, back to €1.3 billion (which was also lower than both 2018 and 2021). 

It is because of this fall in the October receipts that the year-to-date total for 2023 is running behind the 2022 level.  As we have seen, the August fall was offset by a rise in March, and the September fall was pretty modest.  So, the October fall could be significant – if we could link it to something.

We could try to link the October payments to those made the previous May, which are month 11 and month six for companies with November year ends, but that doesn’t reveal a lot.  May is also also month 11 for companies with a June year end.

The monthly receipts for May have actually been pretty stable over the past four years.  This could mean rising payments from companies with June year ends and falling payments from companies with November year ends but there is no way of telling that. 

For companies with November year ends we can see the October (month 11) payments but as noted above, outside of being especially volatile, there is no discernible pattern.  It is possible that a company with a November year end (for the purposes of paying Irish Corporation Tax) has had volatile profits over the last few years and this has likely been driving the volatility in the October Corporation Tax receipts.

This again points to the concentrated and volatile nature of these Corporation Tax receipts with a company-specific factor driving changes in the aggregate figures.  It does not point to a structural shift in the overall pattern of receipts.

November

November is a month that could be a bell-weather for such structural changes.  It is the most important month for Corporation Tax.  November is month 11 for the most common year-end: December. Last November saw €5 billion of Corporation Tax collected – the highest monthly total ever, and higher than the annual total for 2014. 

The data back to 2009, show a strong relationship between the June and November receipts.

June 2023 was the highest June ever with receipts of €4.3 billion.  If the above relationship holds, this points to record receipts again in November, this time to the tune of €6 billion.

One aggravating factor could be the rise shown above for receipts in August.  August is month 11 for companies with September year ends.  These companies’ tax returns and their final payments will be due nine months later – the following June.

Up to recently, very little Corporation Tax was collected in August (and also in March).  This would translate into very little final tax due the following June.  Now however, the combined receipts for March and August exceed €4 billion.  This can be expected to lead to additional tax payments the following June when companies with September year ends file their tax return and make their final payments. 

The above relationship between June and November was almost exclusively based on the June payments been the first preliminary payments for companies with December year ends so they were a strong predictor of the second preliminary payment in November.  This relationship may no longer be as clear cut as more of the June receipts could be due to companies with September year ends. 

Even with this we would still expect this November’s receipts to be strong. Talk of structural decline in Ireland’s booming Corporation Tax seems premature – for now. But we can certainly expect them to be volatile.

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The aggregate Corporate Tax calculation enters an unsettled spell

In recent years when looking at the annual update from the Revenue Commissioners of the aggregate corporate tax calculation we noted that things were relatively calm, albeit it with elevated levels of receipts.  These were for tax returns filed for financial years ending during the 2018, 2019 and 2020 calendar years.

We now have the update for tax returns filed filed for financial years ending during 2021 (the last of these returns would have been filed in September 2022).  The 2015 upheaval is a well-worn track so we will just focus on the five most recent years.

The Determination of Taxable Income

We’ll start with the determination of taxable income.

Right from the top we can see big changes for 2021.  There an increase of over €55 billion in gross trading profits recorded on tax returns for the year, reaching €250 billion.  This carries right the way down the table with the end showing that taxable income increased by over €40 billion.

However, there are some significant changes along the way. Early on, we see that after being relatively stable from 2018 to 2020 the amount of capital allowances used jumped again in 2021, coming in at just under €100 billion as a result of a €23 billion increase.

Next we see a large increase in foreign income included in the tax returns of Irish-resident companies.  For 2021, this exceeded €20 billion for the first time and was close to €10 billion more than the next highest year.  The next part of the table will show the impact of this on tax payments (answer: very little). 

Other income also saw a jump in the amount of capital gains included to reach €5 billion in 2021. This is actually a regrossed amount.  The applicable CGT rate is 33% but the gains are included in the tax return to be taxed at 12.5 per cent. Hence, the gains are regrossed and multiplied by 2.64 (= 33/12.5) to get the amount to give the necessary amount of tax.

In charges and deduction we see that trade charges, mainly certain royalty expenses, rose back to levels seen up to 2019.  This was the largest change among these items.

All told, the CT returns filed for years ending during 2021 had just over €150 billion of taxable income with €6 billion of that subject to tax at 25 per cent.  We now turn to the calculation of tax due.

The Determination of Tax Due

The starting point of this part of the calculation, Gross Tax Due is simply the amount of taxable income multiplied by the applicable rates (either 12.5 or 25 per cent).

The relative simplicity of the Irish CT regime means there isn’t a whole lot going on here.  The biggest reason for the reduction of gross tax due is because of tax already paid. 

The largest single item in the above table is double taxation relief and this was almost €3 billion in 2021.  The additional foreign tax credit of nearly €450 million can be added to this.  These reflection the foreign corporate taxes paid on the €23.5 billion of foreign income included in the top half of the table.  Little additional Irish tax is due as the amount already paid, albeit abroad, covers the gross tax due in Ireland.

The item for gross withholding tax on fees is somewhat similar but in this case it is Irish tax that has already been paid.  In some circumstances, when the buyer of services is paying them they will pay 80 per cent of the invoiced amount to the supplier and 20 per cent to the Revenue Commissioners.  The 20 per cent represents a withholding tax at the standard rate of Income Tax.  When filing their tax returns, companies will record any service fees that have been withheld from them and reduce their tax due figure accordingly.  The Revenue Commissioners will already have received the amount.

The most significant item in the table that actually reduces companies’ tax bills is the R&D tac credit.  Between the R&D credit used and the excess R&D credit refunded the total cost was just over €750 million in 2021, a slight increase on the outturn for 2021.

All told, the bottom line is a tax due figure of €15.1 billion for tax returns filed for periods ending during 2021.  There are some timing differences but we can that, in recent years, the tax due figure from the aggregate CT calculation, closely matches the CT receipts collected for the Exchequer.

We will conclude with a look at some of the tumult in the aggregate figures, with most of this seeming to concern capital allowances, in particular those for intangible assets.

Snowballing Claims for Capital Allowances

As before we will look at the total amount of capital allowances claimed, the total amount used (that is, actually offset against gross profit) and the consumption of fixed capital from the National Accounts.

Up to 2019, the most significant feature was the growth in the figures. he ratios shown were relatively stable.  Up to 2019, capital allowances used were just over 90 per cent of the amount claimed, and consumption of fixed capital (depreciation) in the National Accounts was just under 90 per cent of the amount claimed.  This stability did not continued into 2020.

In 2020, we can see that capital allowances used fell to just over 50 per cent of the amount claimed.  We also see a break in the link between capital allowances claimed and consumption for fixed capital in the national accounts.

The break of this link is interesting as it suggests that the increase in capital allowances claimed is not fully linked to assets that would be included in the capital stock for National Accounts purposes.  In the last two years, capital allowances claimed in the aggregate CT calculation have risen by over €80 billion (from €86 billion to €173 billion) while consumption of fixed capital for NFCs in the national accounts has increased by “just” €20 billion (from €78 billion to €98 billion).

A second pointer comes from looking at how the unused capital allowances, which came to almost €75 billion in 2021, show up elsewhere in the CT stats.  Typically, we might expect an increase in unused capital allowances to result in an increase in loss carried forward.  In most situations, unused capital allowances from one period are carried forward as a loss to use against income in a subsequent period.

However, changes in losses carried forward were nowhere near large enough to accommodate the scale of unused capital allowances in the above table.  The are lots of losses forward sloshing around the Irish CT system and lots of them are the result of unused capital allowances but the changes in 2021 (+€7 billion in losses forward) are of little help in explaining what is going on with capital allowances.

Of little help except it tells us where to look.  There is one instance where unused capital allowances are not carried forward as a loss but as capital allowances to be claimed again in subsequent periods (until they are eventually used).  And those are capital allowances for intangible assets.  And perhaps, unsurprisingly, this is where there have been the largest changes in recent years.

Unfortunately, the Revenue do not provide figures for capital allowances for intangible assets used but we do have figures for such capital allowances claimed.  Here they are by sector for recent years with very large growth recorded for a number of sectors notably manufacturing, wholesale and retail, and ICT.

We can see from the total (€131 billion in 2021) that, on their own, capital allowances claimed for intangible assets significantly exceed the total amount of all types of capital allowances used in 2021 (€99 billion).  We can safely conclude that capital allowances for intangible assets are the reason those ratios broke down in the previous table.

Is there cause for concern? It is hard to know.  We know that there were significant onshoring of IP assets to Ireland in 2021 and 2022.  This would have increased the amount of capital allowances claimed.  And we know that there are now legislative restrictions on the amount of such capital allowances that can be used.

Since October 2017, new claims for capital allowances for intangible assets have been restricted to offsetting 80 per cent of the profit (before deduction of interest and these capital allowances) by such capital allowances.  Prior to this the cap was 100 per cent.  Any available capital allowances above this amount cannot be used in the current year and are carried forward to be claimed as a capital allowances in subsequent years.

The reason for the cap on capital allowances for intangible assets is to ensure that losses cannot be artificially generated for use elsewhere by a company or group.  Capital allowances for intangible assets are ringfenced for use only against profits generated by the acquired intangible asset.  If unused capital allowances could be carried forward as a loss they could be used against any profits.  All that has changed in recent years is the cut-off for the cap.

The cap will likely result in a “snowball effect”, at least initially, increasing the gap between the capital allowances claimed in any year and the amount used.  In the early years a company will have capital allowances that they can claim each year (following either the accounts or fixed rate approaches).  The cap may mean they cannot use all of these in the current year.

Then they may also have unused capital allowances from previous periods that they will also claim in the current year.  These will also be unused in the current year.  Thus the amount of unused capital allowances to be carried forward grows.  This could continue until they are no new capital allowances to be claimed and the unused capital allowances carried forward will be unwound until they are fully exhausted.

We don’t have precise figures but maybe a bit of guesswork can put us in the ballpark.  Claims for capital allowances for intangible assets have skyrocketed in recent years.  For the sake of exposition, let’s say the cap means that €10 billion of the amount claimed cannot be used.  That would mean that €10 billion would be carried forward to be claimed in the next period.

In the next period let’s assume that the cap again means that €10 billion of the amount claimed for that year cannot be used.  We than also have the €10 billion from the previous period that is brought forward and again claimed.  This means there are now €20 billion of unused capital allowances.

In the next period there’s another €10 billion of that year’s claim that can’t be used and this is added to the €20 billion from previous periods that are brought forward claimed again.  We are now up to €30 billion to be carried forward and so on.

We cannot say that this is the only thing that is going on but it does seem likely to be a large part of the story. And for the IP that was onshored in 2020 and 2021 this will go on for a few years yet. The gap between the amount of capital allowances claimed and the amount used will grow ever larger.  Down the line the full amount of the capital allowances will have been claimed and the amount available in any subsequent year will only be those which have been carried forward and these will eventually be fully exhausted.

The figures are so large that there may be something else going on but it is hard to make out. What we can see are the growing claims for capital allowances for intangible assets.  Due to the snowball effect outlined above this is likely to continue. It could be some time before calm returns to the aggregate CT calculation.

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Corporation Tax motors along

Corporation Tax receipts continue to pour in for the Exchequer. 2023 seems set to extend the decade long run of each year exceeding the previous year – though the gap to last year has narrowed.

In July, CT receipts for 2023 were running about €1.5 billion ahead of those for 2022.  August and September weren’t as strong as last year reducing the gap to €600 million. 

August seems to have been affected by some firm-specific idiosyncrasies that will wash out, while there is little to be taken from the September figure.  September is month T+9 for firms with a December year-end and is when they file their tax return and make their final tax payment for the previous year.

On a 12-month basis, CT receipts seem to have plateaued around €24 billion which is an extraordinary amount.

Which means that the growth of the 12-month sum has also eased considerably.

Optimism for the remainder of 2023 is mainly due to the strength seen in June. Companies with December year ends pay the bulk of the CT in June and November (corresponding to month 6 and month 11 of their financial year).

The €4.2 billion collected in June of this year points to November receipts of around €6 billion, which would be €1 billion more than the same month last year.

And with the rate for large companies set to rise to 15 per cent and the exhaustion of capital allowances for onshored intangible assets the risks to forecasts would seem to be on the upside.

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