Summary - steady ship
With the recent announcement by Theresa May that the UK will trigger Article 50 by the end of March 2017 and Eurozone and other world markets experiencing volatility it had been signalled in advance of this Budget that there was limited scope for tax cuts. The budget pot of €1.3 billion of changes has been framed as to three parts towards increases in expenditure and one part a net reduction of €300m in taxes.
At a macro level the aim of budgetary policy is to achieve a balanced budget by 2018 and a long term target debt to GDP ratio of 45% to be achieved within 10 years. The ratio is projected to be 76% this year. A target of 60% was set in accordance with the European Stability and Growth Pact.
The projected employment growth for 2016 is 2.6% (around 52,000 additional jobs) and the forecast for 2017 is an additional 43,000 jobs and for the unemployment rate to average 7.7% compared to 8.3% this year.
At a micro level this budget contains several measures with the goal of absorbing the impact of the more difficult environment that is anticipated post Brexit. The expected growth for the economy this year is 4.2% and the forecast for 2017 is 3.5% reflecting the difficulties that lie ahead.
The Minister confirmed the establishment of a “rainy day” fund. He had signalled in the Summer Economic Statement that should the budget be in surplus after 2018, it is the government’s intention to establish a contingency fund. The government will set aside an amount of up to €1 billion annually to this fund.
The primary budget headline is the introduction of a Help-to-Buy Scheme to increase the demand for newly built houses by assisting first time buyers to put a deposit together. The Help-to-Buy Scheme will provide a rebate of income tax paid over the previous four tax years up to a maximum of 5% of the purchase price of a new home up to a value of €400,000. Pro rata rates will apply to lower priced houses and a full rebate calculated on €400,000 will also apply to houses in excess of €400,000 and up to €600,000. No rebate will be paid on house purchases in excess of €600,000. The scheme is effective for purchases from 19 July 2016 to 31 December 2019.
The Minister for Finance acknowledged the high marginal tax rates and limited scope for tax cuts. €335 million has been allocated by reducing each of the lower three USC rates by 0.5%. The 1% rate will reduce to 0.5%, the 3% rate to 2.5% and the 5.5% rate to 5%.
The ceiling of the band on which the reduced 2.5% rate of USC will be payable increases from €18,668 to €18,772. This increase will ensure that the salary of a full-time worker on the minimum wage will remain outside the higher rates of USC.
The Home Carers’ Credit is increasing by €100 to bring it up to €1,100. In a welcome move, although with interest rates for savers at rock bottom, the tax retained on deposit interest, DIRT, is being reduced by 2% each year for the next four years. This will reduce DIRT from 41% this year to 33% in 2020. Mortgage interest relief, which was due to expire completely on 31 December 2017, is being extended to 2020.
Continuing from a process commenced last year, when an Earned Income Tax Credit of €550 was introduced, it is being increased by €400, bringing it to €950.
The Minister announced his intention to develop a new, SME-focussed, share-based incentive scheme, to be introduced in Budget 2018. Approval of the European Commission will be required.
The home renovation incentive, which was first introduced for homeowners and extended to landlords in 2014, is being extended until 31 December 2018. This is welcome as the incentive has boosted construction activity. The relief is worth a maximum of €4,050.
The Minister has extended the Special Assignee Relief Programme (SARP) until the end of 2020. SARP provides relief for employees who are assigned to work in Ireland having worked for a foreign employer outside Ireland for a minimum period. Where certain conditions are satisfied an employee can make a claim to have 30% of his or her income over €75,000 exempted from Irish income tax.
The Foreign Earnings Deduction (FED) is also being extended to the end of 2020. The FED assists Irish companies to expand into emerging foreign markets by providing for an income tax deduction to a maximum of €35,000 based on a sufficient number of days spent in certain countries. The list of countries is now 30 with Colombia and Pakistan the latest additions. The minimum number of days working abroad has been reduced to 30 from 40.
For landlords full interest deductibility will be restored on a phased basis, commencing with an increase from 75% to 80% in 2017 and further yearly instalments of 5% until 100% is reached.
The income exemption limit for the Rent-a-Room scheme is being increased by €2,000 to €14,000 per annum.
Changes are also being made to The Living City initiative. The initiative was introduced to encourage urban renewal and promote the renovation of city centre properties for residential and commercial use. The relief will now be available to landlords.
The Start Your Own Business scheme which provides for relief from income tax to a maximum of €40,000 per annum for two years is being extended to 31 December 2018. The individual must have been unemployed for at least twelve months and have been in receipt of at least one form of social welfare payment prior to setting up the business.
The scheme of accelerated capital allowances for investment in energy-efficient equipment is being extended to sole traders and non-corporates. This scheme enables the cost of energy efficient equipment to be allowable in full in the first year.
The existing rates for capital gains tax, capital acquisitions tax and stamp duty remain unchanged.
The gift/inheritance tax Group A tax-free threshold, which broadly relates to transfers from parents to their children, is being increased from €280,000 to €310,000. The Group B (generally lineal ascendants and descendants) and Group C (all others) will be increased by 8% to €32,500 and €16,250 respectively. While welcome, the increases are not enough to keep pace with the growth in property prices.
The lower rate of capital gains tax of 20% for lifetime gains of up to €1m, which was introduced in last year’s budget, for the sale of whole or part of a business has been reduced to 10%. While this measure is also welcome it doesn’t go far enough to compete with similar reliefs in the UK. It is hoped that there will be enhancements in the coming years.
The Minister announced that there will be a review of the 1% stamp duty charge on the transfer of shares, the UK rate is 0.5%.
As with previous years and as expected, the Minister reaffirmed Ireland’s 12.5% rate of corporation tax. The Minister stated that the rate is an important part of the reason why Ireland is an attractive destination for foreign direct investment (FDI) and the UK’s exit from the EU may present opportunities to attract businesses that may move out of the UK or are considering locating there in the coming years.
As announced in September, the Minister stated that in line with our established practice of carrying out periodic reviews of key areas of tax policy, a review of the corporation tax code would be carried out. He is appointing an independent expert, to undertake the review and its terms of reference will be published. Three publications were released with the Budget, an update on Ireland’s International Tax Strategy, a document in relation to Brexit and an evaluation of the R&D tax credit.
Ireland’s securitisation regime, commonly referred to as the section 110 regime, has recently attracted media attention in relation to the use of section 110 companies for property investments. The regime was originally established to benefit the financial services sector. Following his 6 September announcement to curtail the benefit of the regime to property investments, the Minister stated that measures will be introduced. As a first step, financial assets including loans deriving their value or the greater part of their value (directly or indirectly) from Irish land and buildings will only be permitted interest deductions in respect of profit-participating loans up to the amount of interest that would have been payable had it been a non-profit participating loan entered into by way of a bargain made at arm’s length. Tax at 25% may now apply to gains realised on those financial assets.
The following changes are to be introduced:
- Farmers with an exceptionally poor year can step out from five year averaging and calculation of liability on a current year basis for 2016, deferral of liability to subsequent years
- Extension of farm restructuring relief to 2019
- New affordable loan scheme
- €1,270 annual tax credit for fishermen subject to conditions
- Extension of scheme of accelerated capital allowances for investment in energy-efficient equipment to sole traders and non-corporates.
VAT and indirect taxes
The decision to retain the 9% VAT rate is most welcome particularly in the hospitality sector and will ensure that the recovery being experienced will continue. The other existing rates of VAT also remain unchanged. The construction sector had called for some VAT measures to reduce the costs of construction, however no reductions were provided.
The flat-rate addition for farmers not registered for VAT is being increased from 5.2 per cent to 5.4 per cent with effect from 1 January 2017.
The Government has released the VAT on Charities Working Group report, which has proposed several options to reduce the VAT burden on Charities. It is to be hoped that measures will be included in next year’s budget.
Indirect tax measures include:
- The excise duty on a pack of 20 cigarettes is being increased by 50cents including VAT.
- The relief from vehicle registration tax (VRT) on electric vehicles is being extended for a period of 5 years
- VRT relief for hybrid vehicles extended for 2 years;
- New measure to help reduce the dependence of larger vehicles on diesel introduced to provide that natural gas used as a vehicle fuel will be taxed at the EU minimum rate of excise for a period of 8 years;
- New relief from carbon tax for solid fuels that include a biomass element introduced to incentivise the development of these greener fuels;
- Relief for fuel inputs to combined heat and power plants from carbon tax; and
- The special relief reducing the standard rate of Alcohol Products Tax by 50% on beer produced in microbreweries extended to microbreweries that produce no more than 40,000 hectolitres, previously 30,000 hectolitres.
- A ‘sugar tax’ on sugar-sweetened drinks is to be introduced probably in 2018 at the same time as the UK introduces a similar tax, subject to any legal obstacles.
There is to be a restriction to the opportunity for offshore defaulters to use the voluntary disclosure regime with effect from May 2017 and the introduction of a new strict liability criminal offence (that is, with no need to prove intent) to facilitate the prosecution of serious cases of offshore tax evasion. Revenue resources are to be increased by an additional 50 personnel on audit and investigation activities.
The budget introduced tax measures offering a little for most, recognition that personal tax rates are too high for many and that more needs to be done for our SMEs and entrepreneurs.
It is disappointing that more has not been done; the effects of Brexit coupled with the strengthening of the Euro against Sterling have seen many SMEs come under financial pressure and post Brexit is not the time to introduce support measures, the time is now.
It is widely recognised that SMEs are the life blood of the economy and also that personal taxes need to decrease to attract employees for the FDI sector who have to pay high rents. Share schemes are a valuable remuneration tool for start-ups to reward employees in a non cash manner. A fit for purpose tax relief is required to enable employees to retain their shares and continue to invest in their companies.
Please contact John Fisher if you would like to discuss how any of the measures announced in Budget 2017 might affect you.