The political pressure is mounting, both within the Dáil but aided by a rallying of farm organisations such as the ICMSA and the IFA.
Farmers are left shell- shocked by the letters particularly given the relatively tight timeframe demanded by Revenue by which farmers must make a voluntary disclosure or risk additional penalties, and potential publication — or even prosecution.
At issue is whether the patronage shares received by farmers should have been factored in as part of the trading income for the relevant year of assessment.
It is expected that in an overwhelming majority of cases farmers and their agents did not include the receipt of such shares as trading income. In general, the receipt of “payment” in a form other than money transfer can of course be regarded as trading income — in fact such barter arrangements are older than money.
In that context, a farmer receiving payment under a barter arrangement for say the sale of cattle in exchange for say a quantity of silage bales should properly account for the income derived from the sale of his animals, and associated cost of effectively buying silage.
Presumably — at least from Revenue’s perspective — a farmer who sells milk and receives part payment by way of cheque or bank transfer and a remainder payment by way of share transfers should determine their total trading income by reference to the total value obtained for such milk.
However, the devil is in the detail — from a tax perspective the issuance of bonus shares generally dilutes a shareholders holding and therefore the bonus shares do not of themselves confer any financial advantage on a shareholder.
Let’s look at this in a very simplified example. Take for instance a company having a value of €1,000 and having an issued share capital of 100 shares. Each share is worth €10. The company decides to print one extra share for each existing share — ie, a bonus issue of shares.
In this example the value of the company remains the same at €1,000 albeit there is now 200 shares in issue, each share being worth €5 — the issuance of shares has neither added to the wealth of the company nor the wealth of the shareholder, but simply diluted the shareholder’s value per share held.
Applying this concept then to the Kerry Co-op shareholders, an argument is developing that the farmers in question did not attain any extra value rather the companies value was simply diluted amongst a bigger shareholding.
An added complicating factor is that the share issue effectively conferred shares on milk suppliers disproportionate to their existing shareholding, rather related to their milk production.
However, the concept that each shareholder’s holding was diluted at least to some degree, and that income tax would not be due on the entirety, would not seem unreasonable.
With most Revenue letters having been issued on the 18th, farmers must decide within the next week whether to engage in a voluntary disclosure or alternatively wait for clarity.
The members of the Dáil indicated last week that those affected would not have to shell out settlements within 21 days, however this is not correct.
The code of practice for Revenue audits indicates that settlement must be made with the disclosure or at a minimum the taxpayer enters and agreeable instalment arrangement.
It is expected that the chairman of the Revenue Commissioners will be called before the Dáil’s joint committee on finance, public expenditure and reform with a view to explaining their position on the patronage scheme.
Whether this can happen within such a tight timeframe to still facilitate disclosure remains uncertain, equally whether the political pressure will allow a stay of execution and grant more time for the matter to be teased out also remains uncertain.
As always, of course, each individual should obtain professional advice relevant to their own particular circumstances.