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ICAI Budget Bulletin

Income Tax
Business Tax
Indirect Taxes
Farm Tax
Summary of Tax Measures
Economic Overview
Press Release
Budget 07 ICAI Representations Outcome

A. Income Tax
Budget 07 Income Tax

Credits, bands and rate

Key changes:

With the fiscal elbow room afforded by the cascade of revenue and with inflation running in the 4–5% region, the increase in credits and bands is appropriate to prevent real income being eroded by inflation. In particular, this should help alleviate wage increase pressures, as people will see a noticeable change in their take home pay.

Given that real incomes are rising with economic growth, it is a good idea to prevent increases in the effective tax rate on the lowest paid. We expect our income tax to be at least somewhat redistributive and it is administratively efficient to remove those at the lower end from the tax net whenever feasible. The Minster has done this in the most effective way by increasing personal credits.

Top rates of tax are coming down everywhere in the world and issues of economic incentives arise if the effective and marginal rates on above-average incomes are higher than necessary. This has been handled well by increasing the level at which people start paying the top rate with the added bonus of a 1% reduction in the top marginal rate. However, this has been partially clawed back by increasing the medical levy from 2% to 2.5% for income over €100,100. The Minister's promise of a further 1% cut next year would be very difficult for any government to renege on. A 40% headline rate in a year's time will no doubt be used in promoting Ireland as an internationally competitive economy for foreign direct investment.

The following table shows the increase in monthly take home pay tax which will be experienced by a single PAYE-payer with no other credits or allowances

Gross income (€p.a.

Net monthly increase

30,000

33

40,000

75

60,000

85

80,000

102

100,000

118

200,000

160

It is worth noting that the standard VAT rate of 21% is now higher than the 20% effective rate of income tax applicable to 80% of individuals. Are we intentionally moving to an indirect tax model? Also, with the 20% income tax band widening and the top rate coming down, it makes taxes such as the 35% Relevant Contracts Tax look penal.

Other changes

The Minister has also responded to two major pressures -first-time buyers (FTBs) of houses; and child care. Having set his face against raising the price limit for the FTB's exemption from stamp duty, he has doubled the maximum mortgage interest attracting relief. He has also increased the child-minder's tax exemption to €15,000. Although the effects on the ability of FTBs to enter the market are uncertain (tax breaks of this kind drive up demand), both of these increases are politically attractive.

B. Business Tax

Positive Measures for Small Business

A stream of official reports and representations from ICAI and others in recent years have all stressed the importance to the economy of the SME sector and indigenous business generally. This point has been recognised by the Minister this afternoon in his announcements on three key measures:

Preliminary CT

Chartered accountants know better than anyone else the difficulties of estimating final liabilities in advance of the accounts period end date. Under the new rules, more companies will be able to base their preliminary corporation tax on the outturn for the previous year. Up to now, if a company's liability was in excess of €50,000 in the previous year, an estimate of the current year had to be made. As these estimates have, in effect, to be made after 10 months’ activity and without foreknowledge of year end adjustments such as exchange adjustments, it is all too easy to make a mistake. Now preliminary CT liabilities may be settled, based on a previous year's tax liability of up to €150,000. Ideally, and as we requested in a series of submissions which commenced in January 2006, we would have liked to see the previous year rule extended to all companies without limit, but this is a move in the right direction. The change is effective for preliminary tax payment dates arising after today, 6 December 2006.

According to the Minister, the revised rule will apply for more than 90% of companies. Equally important (though applying to far fewer companies) is the new arrangement for companies in their first period of operation. New or start-up companies with a CT liability of less than €150,000 may disregard the preliminary tax obligation and instead pay their full liability at the filing date. This is a fair arrangement, reducing greatly the risk of interest charges. It should avoid the kind of confusion which arose this year which led to the publication of Revenue's eBrief Issue 43 last month. Here, the Revenue Commissioners recognised that mistakes could easily have been made under the existing rules, and permitted settlements of preliminary CT to be made without penalty. Startup companies would need to be aware of the cash flow implications – in month nine of their second year of operation, they will have to fund the CT liability for the first year of operation. In month 11 of their second year of operation, they will have to fund preliminary CT for that year.

BES

A very recent study by ForFas among SMEs, referred to by the Minister, confirmed that the Business Expansion Scheme is a key supplier of finance to emerging Irish industries. One in five of the small companies surveyed used the Business Expansion Scheme to raise capital in their start-up or development phase. Most of these firms employ fewer than ten people.

The least that could have been done was to extend the scheme beyond its scheduled termination date of 31 December 2006. The Minister has chosen to do so, and more. Many of the types of business which can benefit from BES involve the use of expensive equipment, for example industries such as wind generation, biofuel processing, pharmaceutical manufacturing, printing and provision of broadband. The ForFas study also highlighted that BES funds were used predominantly to fund employment growth and R&D expenditure.

The upper limit, €31,750, which may be subscribed by individual investors to avail of the tax relief was perhaps low in the context of the current economic environment. In this context, we are pleased that the Minister proposes to raise the subscription limit to €150,000 for BES subscribers, and €100,000 in the context of the Seed Capital Scheme.

It seems that BES will continue to be a specified relief for the purposes of the overall cap on reliefs availed of by individuals in any one tax year.

Any changes to the BES remain subject to EU scrutiny under the State Aid rules. This will inevitably delay the effective date of the changes even though they will be provided for in the Finance Bill. On past experience, it could take six months or longer to obtain EU approval; we can expect BES activity to pick up later rather than sooner.

The Principal Budget features document highlights a transitional measure. Investors in BES designated funds can opt to claim the relief in respect of 2006 or 2007, provided the investment is made by 31 January 2007, and the designated fund invests in qualifying companies before 31 December 2007. Direct investors can opt for similar treatment, as long as the shares are issued by 31 January 2007.

The document also comments that “further technical amendments will be brought forward in the Finance Bill”.

Research & Development

Corporation Tax relief for expenditure on R&D was introduced in Finance Act 2004 – a predecessor relief had not met with great success. The current rules allow a tax credit of 20% of the qualifying incremental expenditure against the company's corporation tax liability in the period in which the expenditure is incurred.

The key word here is “incremental” – it's not the amount you spend; it's the amount you spend over and above what was spent previously. By fixing the base year at 2003 for a further period of three years, the Minister is improving the incentive to increase R&D expenditure. It is a de facto change to an “actual” spend basis, where 2003 is the comparison year. In many instances, the base expenditure will be nil. The Minister has recognised that the Irish R&D incentive, though useful, did not compare well with R&D incentive regimes in other territories – Puerto Rico and Singapore come to mind. Modifying the R&D regime may also provide fewer challenges from Europe under the State Aid rules than extensions to the BES. At last count, some 15 EU members had some form of tax-based incentive for R&D activity.

As recently as last month, the EU Commission offered its blessing for R&D tax incentives, provided that they are not confined to domestic activities, are easily accessible to a wide range of companies and are simple, measurable and transparent. The proposed revisions will surely meet these criteria, and it is notable that the Budget documentation talks about informing the European Commission of the changes, rather than seeking approval.

Taken together, these measures recognise that there is more to business life than paying corporation tax at 12.5%. They have the common theme of assisting business in startup and development phases, and while companies generally will be able to avail of the changes, they are clearly of most relevance to the indigenous Small and Medium Enterprise sector. Such businesses are (rightly) more focused on how profits may be earned, than on the tax they might ultimately pay on them.

Our headline Corporation Tax rate, however, remains crucial to Ireland's attractiveness as a location for Foreign Direct Investment. Critics of the 12.5% regime either overlook, or are not aware, that it applies only to trading profits, and that it is supported by one of the broadest tax bases operating in any country anywhere. We know through our discussions with our European counterparts at FEE that our stringent capital allowances regime, the impact of taxes on payroll, the absence of special arrangements for small companies, the restrictions on offset of losses and the unyielding withholding taxes on dividends are matters of considerable surprise to them.

There is much work to be done to illustrate that 12.5% is but one element of a much larger corporate tax picture, and in this way to deflect the unfair criticisms levelled at Ireland as being some form of opportunistic tax haven. ICAI, as an all-island organisation with strong international links, is ideally positioned to help in this process, and we do so. If Ireland was in fact the haven it is perceived sometimes to be, the pro-business measures announced by the Minister today would not have been necessary. They address, in part at least, real needs for tax based assistance in the raising of capital, the development of technology through research, and making more simple the business of tax collection. They also recognise that tax incentives influence commercial behaviour.

C. Indirect Taxes

There were a number of VAT measures announced to assist small businesses, together with some measures to assist farmers.

A reduction of VAT rates would have been welcome as a means of reducing the tax burden on all taxpayers. Based on the exchequer figures to the end of November 2006, taxpayers pay more VAT than income tax. While there was a suggestion that such a measure could ignite inflation, it has been shown that a reduction of 1% in the standard rate reduces the CPI by approximately 0.5%.

The key announcement in the excise area was an increase of 50 cents in the price of a packet of 20 cigarettes.

Highlights

  1. VAT measures for small business
  2. VAT changes for farmers
  3. Changes to rules in relation to VAT on property
  4. Other VAT announcements
  5. Excise Duty changes

I. VAT measures for Small Business

The Minister announced a number of welcome measures in relation to small business, as follows:

  1. an increase in the VAT registration thresholds
  2. a substantial increase in the VAT cash accounting threshold, and
  3. the reduction in the frequency of VAT returns for small businesses

(a) Increase in VAT Registration Thresholds

The Minister has announced increases in the VAT registration thresholds.

This budgetary measure has been warmly received by our members in the small business sector. Prior to the announcement, the thresholds were so small that almost any person carrying on a business in Ireland was obliged to register for VAT. This resulted in increased administrative and compliance burdens on small businesses, with registering for VAT; accounting for VAT on sales and submission of bimonthly (and annual) VAT returns. In addition, as the person had to register for VAT within 30 days of the date it was “likely to exceed” the threshold, this increased the compliance burden on the smaller business.

The ICAI canvassed on behalf of our members to have the onerous burden of tax compliance reduced, so we welcome the increase in the VAT registration thresholds.

Prior to the announcement in the Budget, a person had to register for VAT if their annual turnover from the supplies of taxable goods and services exceeded or was likely to exceed the following annual limits:

  1. €27,500 in the case of persons supplying services,
  2. €27,500 for persons supplying goods liable at the 13.5% or 21% rates which they have manufactured or produced from zero rated materials
  3. €35,000 for persons making mail-order or distance sales into the State
  4. €41,000 for persons making intra-Community acquisitions
  5. €55,000 for persons supplying goods
  6. €55,000 for persons supplying both goods and services where 90% or more of the turnover is derived from supplies of goods (other than of the kind referred to at (b) above), and
  7. A non-established person supplying taxable goods or services in the State is obliged to register and account for VAT irrespective of the level of turnover

A taxable person established in the State is not required to register for VAT if his or her turnover does not reach the appropriate threshold above.

The VAT registration thresholds have increased from €27,500 to €35,000 in the case of services and from €55,000 to €70,000 in the case of goods.

There are EU rules governing the maximum registration thresholds, approximately €50,000 for supply of services and €100,000 for supply of goods.

There are no indications that there are changes to the following:

(b) Increase in the VAT Cash Accounting Threshold

VAT liability is normally based on invoices issued by the taxable person. However, certain persons may elect to calculate and account for VAT on a cash received basis.

Prior to the Budget, the taxable person had to have a turnover of less than €635,000 before an election could be made. The Minister announced that the annual VAT cash accounting threshold for small firms is being increased from €635,000 to €1,000,000 with effect from 1 March 2007.

(c) Reduction in the frequency of VAT returns

The frequency of VAT returns and payments, currently six per year, for smaller businesses is being reduced with effect from July 2007.

The meaning of “smaller businesses” is determined by the liability ranges included in the Summary of Budget Measures.

II. VAT changes for farmers

(a) Farmers’ VAT Flat-rate Addition

The farmers’ VAT flat-rate addition is being increased from 4.8% to 5.2% with effect from 1 January 2007. The flat-rate is designed to recoup non-VAT registered farmers for the VAT they incur on their inputs.

(b) Livestock VAT Rate

The rate of VAT charged by registered farmers and other businesses on the supply of livestock, live greyhounds and the hire of horses remains unchanged at 4.8%.

III. Changes to Rules on VAT on Property

The Summary of Budget Measures includes an item on the change of the rules in relation to VAT on property. The Revenue Commissioners established a major review of VAT on property transactions in May 2005. The purpose of the review was to examine the current treatment of VAT on property transactions for the purpose of identifying the main difficulties with the current legislation.

Due to the complexity of the area, the Minister has requested wider consultation before deciding on any changes which might then be implemented in the Finance Act 2008.

The consultation process to date has acknowledged that the current system is extremely and unnecessarily complex, with a variety of transactions, including

Any new rules on VAT on property transactions must comply with the EC Sixth Directive, which was recast and adopted by the Commission with effect from 1 January 2007.

As always when a new system is introduced, it will result in three systems running concurrently – the old, the new and the transition. It is crucial that the transitional issues are identified and resolved. ICAI will be representing members in this process through CCAB-I.

IV. Other VAT announcements

(a) VAT Relief for Conferences

A specific measure which will allow deductibility of VAT on conference-related accommodation expenses will be introduced during 2007. Such expenditure will be allowed on a ring-fenced basis.

Full details of the measure will be set out in the Finance Bill 2007.

(b) Reduction of VAT rate on Child Car Seats

The VAT rate on child car seats will be reduced from 21% to 13.5% with effect from 1 May 2007. The option of cutting the rate to zero is not permitted under EU Law.

V. Excise Duty Changes

(a) Tobacco Excise

The Excise Duty on a packet of 20 cigarettes is being increased by 50 cents (including VAT) with a pro-rata increase on the other tobacco products, with effect from midnight tonight (6 December 2006).

(b) Introduction of a VRT Relief for Electric Cars

A VRT relief of 50% for electric cars – cars which can be propelled solely by a rechargeable battery – is being introduced on a pilot one-year basis, with effect from 1 January 2007. In this age of renewable energy, the reduction in VRT for green vehicles is welcome.

Further details will be provided in the Finance Bill 2007.

(c) Reduction in Excise Duty for Home Heating Oils (Kerosene & LPG)

The Excise Duty on Kerosene is being reduced from €16 per 1,000 litres to zero. The Excise Duty on LPG is being reduced from €10 per 1,000 litres to zero. These reductions are effective from 1 January 2007. This follows through on the commitment in last year's Budget when these rates were halved.

(d) Vehicle Registration Tax (VRT) – Public Consultation

In addition to the above measures, the Minister announced that a public consultation will be undertaken in relation to a planned change to the current VRT system to take greater account of environmental issues, in particular Carbon Dioxide (CO2) emissions. The purpose of the consultation is to make the change to the VRT system with effect from 1 January 2008.

Submissions are invited from interested parties by 1 March 2007.

Submissions are also being invited from interested parties, by 1 March 2007, in relation to the rebalancing of annual motor tax to provide an incentive for the motoring public to drive cleaner cars and to impose penalties in respect of cars with higher CO2 emission levels.

D. Farm Tax

The Minister made a number of announcements during the Budget which affect the farming community directly.

Those measures include:

  1. Extension of the Farmer Stock Relief
  2. Increasing the exemption for income derived from leases of farmland
  3. Farming Capital Allowances
    Amendment of the scheme of capital allowances for Milk Quota
  4. Stamp Duty
    Extension of stamp duty relief for Farm Consolidation and Changes to the Stamp Duty Relief for Young Trained Farmers;
  5. Capital Gains Tax
    Increase in Threshold for CGT Retirement Relief and Capital Gains Tax Retirement Relief – Disposals of Leased Land
  6. Capital Acquisitions Tax Agricultural Relief - Off-farm Principal Private Residences
  7. Increase in VAT Flat-rate Addition

I. Farmer Stock Relief

The existing general 25 per cent stock relief for farmers and the special incentive stock relief of 100 per cent for certain young trained farmers are being extended from 1 January 2007 for a further two years, subject to clearance with the European Commission under State aid rules.

II. Leased Land Exemption

Certain tax exemptions apply for income derived from certain leases of farmland.

From 1 January 2007, a new exemption of €20,000 per annum will be introduced for leases of 10 years or more duration. This measure is subject to clearance with the European Commission under State aid rules.

III. Farming Capital Allowances


(i) Scheme of Capital Allowances for Milk Quota

The scheme of capital allowances for milk quota is being amended to ensure this relief is available for quota purchased under the new Milk Quota Trading System.

IV. Stamp duty


(i) Extension of Stamp Duty Relief for Farm Consolidation

Stamp duty relief for exchanges of farmland between two farmers for the purposes of consolidating each farmer's holdings was introduced on 1 July 2005 for a period of two years. The relief is being extended for a further two years to 30 June 2009.

The relief will also be extended to qualifying exchanges of land where only one farmer is consolidating his/her holding. In such cases both farmers can qualify for relief, provided both farmers meet all other conditions of the relief.

These changes will be included in the 2007 Finance Bill. However, commencement of these changes will be dependent on State Aid approval from the European Commission.

(ii) Changes to the Stamp Duty Relief for Young Trained Farmers

Stamp duty relief is available for farmers acquiring land, who are aged under 35 years and have specific agricultural training. Amendments are now being made to the education criteria and refunds procedure in this relief. Firstly, the FETAC Level 6 Advanced Certificate in Agriculture will become the new minimum education requirement from 31 March 2008; secondly, the qualifying third-level course titles are being updated; and, finally, the refunds procedure is being simplified. The changes being made to the refunds procedure are as follows:

These changes will be included in the 2007 Finance Bill.

Capital Gains Tax V.


(i) Increase in Threshold for CGT Retirement Relief

An exemption from CGT applies in the case of individuals aged 55 and over who dispose of qualifying business or farming assets subject to certain conditions. Disposals made to a child or favourite niece/nephew are relieved in full. All other disposals are relieved up to the threshold of €500,000. This threshold is being increased from €500,000 to €750,000 from 1 January 2007.

(ii) Capital Gains Tax Retirement Relief – Disposals of Leased Land

An exemption from CGT applies in the case of individuals aged 55 and over who dispose of qualifying business or farming assets. In order for a farming asset to qualify under the relief it must have been owned and used for farming purposes for at least ten years prior to disposal.

The relief is now being extended, in certain circumstances, to disposals of land where the land had been leased prior to disposal. In order for such disposals to qualify under the relief, the following three conditions must be met:

  1. the land in question must have been leased for no longer than five years prior to disposal
  2. the land must have been owned and used by the farmer for 10 years prior to the initial letting of the land, and
  3. the land must be disposed of to the person who was leasing the land

These changes will be included in the 2007 Finance Bill.

VI. Capital Acquisitions Tax Agricultural Relief – Off-Farm Principal Private Residences

CAT agricultural relief provides relief from CAT on 90% of the value of a gift or inheritance.

In order to qualify for the relief, 80% of a farmer's total assets (after receipt of the gift/inheritance) must consist of qualifying agricultural assets. Off-farm principal private residences are not considered such assets for the purposes of this relief.

This provision is now being amended so that an individual may off-set borrowings on an off-farm principal private residence against the property's value, for the purpose of the 80% test.

These changes will be included in the 2007 Finance Bill.

VII. Farmers’ VAT Flat-Rate Addition

The farmers’ VAT flat-rate addition is being increased from 4.8% to 5.2% with effect from 1 January 2007. The flat-rate is designed to recoup non-VAT registered farmers for the VAT they incur on their inputs.

The rate of VAT charged by registered farmers and other businesses on the supply of livestock, live greyhounds and the hire of horses remains unchanged at 4.8%.

E. Summary of Tax Measures

Budget 07 Summary of Tax Measures
Income Tax measures

The following points are derived from the documentation supporting the Budget speech of the Minister for Finance on 6 December 2006.

Mortgage Interest Relief

The current annual ceiling on the amount of allowable mortgage interest is being doubled for first-time buyers from €4,000/€8,000 single/married to €8,000/€16,000 single/married.

The increase in relief will also be available to first-time buyers who are in the first seven years of their mortgage.

The ceiling for non-first-time buyers is increased from €2,540/€5,080 single/married to €3,000/€6,000 single/married.

Business Expansion Scheme (BES)

The Business Expansion Scheme is being renewed from 1 January 2007 for a seven year period to 31 December 2013.

The BES company limit is increased from €1 million to €2 million, subject to a maximum of €1.5 million to be raised in a 12-month period.

The limit for an investor is increased from €31,750 to €150,000.

In addition, it is intended to provide that, where any amount raised by a Designated Fund up to 31 January 2007 is invested in qualifying companies before 31 December 2007, the individual investors who subscribed to the funds will have the option of claiming tax relief on their investment in either the 2006 or 2007 tax years.

Similarly, in the case of direct investment by investors in qualifying BES companies, the investor will have the option of claiming tax relief on the investment in either 2006 or 2007 where eligible shares are issued before 31 January 2007.

Seed Capital Scheme

The Seed Capital Scheme is renewed from 1 January 2007 for a seven year period to 31 December 2013. It permits employees who leave employment to invest in certain new businesses and who take up a job in the relevant business to claim a refund of tax for up to the previous six years.

An unemployed person or a person who was made redundant may also claim the relief. The level of an individual's tax refund depends on the level of the investment and the amount of tax the individual has paid in previous years.

The new BES limit of €2 million will also apply to the Seed Capital Scheme subject to a maximum of €1.5 million which may be raised in a 12-month period. The investor limit is increased from its current level of €31,750 to €100,000.

As the BES and the SCS are State aids, the proposed changes including the extension of the relief will require the approval of the European Commission.

Technical amendments will be introduced in the Finance Bill.

Allowance for Rent Paid by Certain Tenants

The maximum level of rent paid for private rented accommodation on which tax relief can be claimed at the standard rate of tax is being increased for those aged under 55 years of age, from €1,650 to €1,800 per annum for a single person and from €3,300 to €3,600 per annum for widowed and married persons. This equates to a tax credit of €360 per annum for single persons and €720 for widowed and married persons.

For those aged 55 years and over, the maximum level of rent paid on which tax relief can be claimed is being increased from €3,300 to €3,600 per annum for a single person and from €6,600 to €7,200 per annum for widowed and married persons. This equates to a tax credit of €720 per annum for a single person and €1,440 per annum for widowed and married persons.

Child-Minding Relief

Budget 2006 introduced an exemption of up to €10,000 per annum on income from child-minding where an individual minds up to three children, who are not their own, in the minder's own home. If child-minding income exceeds this, the whole amount is taxable. The €10,000 limit is increased to €15,000.

Taxation of Unemployment Benefit – Systematic Short-Time Workers

The special tax exemption for unemployment benefit paid to systematic short-time workers is being extended indefinitely.

Rent-a-Room Scheme

From 1 January 2007, it is proposed to close off use of the Rent-a-Room Scheme where the rent received is from connected persons who in turn are claiming rent relief.

Increase in the Specified Rates for Preferential Home Loans and Other Loans

An employee in receipt of a preferential loan is charged income tax on the difference between the interest actually paid and the amount which would have been payable at the “specified” rates of interest for the loans.

To reflect increases in interest rates, the specified rate in respect of home loans is increased from 3.5% to 4.5% and the specified rate in respect of other loans is increased from 11% to 12%.

DIRT Administration Change

DIRT can currently be refunded to an individual who is exempt from income tax if the person or the person's spouse is over 65 years of age or permanently incapacitated.

The rules relating to such individuals are now being changed so that in future they may notify their financial institution of their status and receive the interest without deduction of DIRT. These changes will be included in the 2007 Finance Bill.

Administrative Changes to help Taxpayers Claim Reliefs

A number of changes in administrative procedures are being introduced which to make it easier for taxpayers to claim reliefs to which they are entitled.

For 2007 all age-related tax credits will, where possible, be credited automatically to the taxpayer where a verified date of birth can be established through Revenue or Social Welfare records.

A system will be implemented to credit tax relief on trade union subscriptions automatically, based on trade union membership lists.

For 2008 it is planned to move, where possible, to automatic repayments in respect of non-reimbursed hospital expenses, prescribed drugs pharmacy costs and certain tuition fees to the extent that this is possible using information from appropriate third parties.

Tax relief due on medical insurance paid by employers that has been subject to benefit-in-kind taxation will be automatically included in the employee tax credit.

Steps will taken to apply similar procedures in due course to nursing home and other allowable medical expenses.

Tax Clearance Certificates – Threshold

The transaction threshold which triggers the requirement for a tax clearance certificate for the award of a public sector contract or grant is increased from the current €6,500 to €10,000.

Department of Finance will issue circulars shortly to set out new procedures for the operation of the system.

PRSI changes

Employee PRSI Annual Ceiling

As from 1 January 2007, the PRSI contribution ceiling will increase from €46,600 to €48,800 and the employee weekly threshold for liability to PRSI will increase from €300 to €339.

EXCISE

Tobacco Excise

The Excise Duty on a packet of 20 cigarettes is being increased by 50 cents (including VAT) with a pro-rata increase on the other tobacco products, with effect from midnight on 6 December 2006.

Reduction in Excise Duty for Home Heating Oils (Kerosene & LPG)

In order to discourage cross-border purchases (the rate in Northern Ireland is zero), the Excise Duty on Kerosene is being reduced from €16 per 1,000 litres to zero, while the Excise Duty on LPG is being reduced from €10 per 1,000 litres to zero.

These reductions are effective from 1 January, 2007 and follow through on the commitment in last year's Budget when the rates were halved.

VRT Relief for Electric Cars

A VRT relief of 50% for electric cars – cars which can be propelled solely by a rechargeable battery – is being introduced on a pilot one year basis, with effect from 1 January, 2007. Further details will be provided in the Finance Bill.

Vehicle Registration Tax (VRT) – Public Consultation

It is planned to change the current VRT system to take greater account of environmental issues, in particular CO2 emissions. A public consultation will be undertaken in this regard with a view to making such a move with effect from a target date of 1 January 2008. Submissions are invited from interested parties by 1 March 2007. Further information is available on the Department of Finance's website, http://www.finance.gov.ie/.

Submissions are also being invited from interested parties, by 1 March 2007, in relation to the rebalancing of annual motor tax to provide an incentive for the motoring public to drive cleaner cars and to impose penalties in respect of cars with higher emission levels. Further information is available on the Department of the Environment, Heritage and Local Government's website, http://www.environ.ie/.

VAT

VAT Registration Thresholds for SMEs

The VAT registration thresholds for small businesses are being increased from €27,500 to €35,000 in the case of services, and from €55,000 to €70,000 in the case of goods. These increases will take effect from 1 March 2007.

VAT Cash Accounting Threshold

The annual VAT cash accounting threshold for small firms is being increased from €635,000 to €1,000,000 with effect from 1 March 2007.

Less Frequent VAT Returns for Small Businesses

The frequency of VAT payments, currently six per year, for smaller businesses is being reduced with effect from July 2007.

For businesses with a yearly liability of €3,000 or less, the option of filing returns on a half-yearly basis will be available. For businesses with a yearly liability between €3,001 and €14,400, the option of filing returns every four months will be available.

VAT Relief for Conferences

A specific measure which will allow deductibility of VAT on conference-related accommodation expenses will be introduced during 2007. Full details of the measure will be set out in the Finance Bill.

Reduction of VAT rate on Child Car Seats

The VAT rate on child car seats will be reduced from 21% to 13.5% with effect from 1 May 2007. The option of cutting the rate to zero is not permitted under EU Law.

Review of VAT on Property Transactions – Public Consultation

The Revenue Commissioners, over the past two years,have carried out a review of the current system of applying VAT on property transactions. The review recommends significant changes to the system.

The complexity of this area of taxation needs to be addressed but, given its importance, it is planned to engage in a wide consultation process with interested parties before deciding on any changes which might appropriately be implemented in the 2008 Finance Act.

Further information, including an invitation for submissions from interested parties, will be made available by mid-December on the Department of Finance's website, www.finance.gov.ie and on the Revenue Commissioner's website,http://www.revenue.ie/.

FARMER TAXATION

Farmers’ VAT Flat-rate Addition

The farmers’ VAT flat-rate addition is being increased from 4.8% to 5.2% with effect from 1 January 2007.

Livestock VAT Rate

The rate of VAT charged by registered farmers and other businesses on the supply of livestock, live greyhounds and the hire of horses remains unchanged at 4.8%.

Farmer Stock Relief

The existing general 25 per cent stock relief for farmers and the special incentive stock relief of 100 per cent for certain young trained farmers are being extended from 1 January 2007 for a further two years subject to clearance with the European Commission under State aid rules.

Leased Land Exemption

Certain tax exemptions apply for income derived from certain leases of farmland.

From 1 January 2007, a new exemption of €20,000 per annum will be introduced for leases of 10 years or more duration. This measure is subject to clearance with the European Commission under State Aid rules.

Scheme of Capital Allowances for Milk Quota

The scheme of capital allowances for milk quota is being amended to ensure this relief is available for quota purchased under the new Milk Quota Trading System.

Extension of Stamp Duty Relief for Farm Consolidation

Stamp duty relief for exchanges of farmland between two farmers for the purposes of consolidating each farmer's holdings was introduced on 1 July 2005 for a period of two years. The relief is being extended for a further two years to 30 June 2009.

The relief will also be extended to qualifying exchanges of land where only one farmer is consolidating his/her holding. In such cases both farmers can qualify for relief, provided both farmers meet all other conditions of the relief. These changes will be included in the 2007 Finance Bill.

However, commencement of these changes will be dependent on State Aid approval from the European Commission.

Changes to the Stamp Duty Relief for Young Trained Farmers

Stamp duty relief is available for farmers acquiring land,who are aged under 35 and have specific agricultural training. Amendments are now being made to the education criteria and refunds procedure in this relief.

Firstly, the FETAC Level 6 Advanced Certificate in Agriculture will become the new minimum education requirement from 31 March 2008; secondly, the qualifying third-level course titles are being updated; and finally, the refunds procedure is being simplified.

With regard to the refunds procedure, the changes being made are as follows:

These changes will be included in the 2007 Finance Bill.

Capital Gains Tax Retirement Relief – Disposals of Leased Land

An exemption from CGT applies in the case of individuals aged 55 and over who dispose of qualifying business or farming assets. In order for a farming asset to qualify under the relief it must have been owned and used for farming purposes for at least 10 years prior to disposal.

The relief is now being extended, in certain circumstances, to disposals of land where the land had been leased prior to disposal. In order for such disposals to qualify under the relief, the following three conditions must be met:

  1. the land in question must have been leased for no longer than five years prior to disposal
  2. the land must have been owned and used by the farmer for 10 years prior to the initial letting of the land and
  3. the land must be disposed of to the person who was leasing the land

These changes will be included in the 2007 Finance Bill.

Capital Acquisitions Tax Agricultural Relief – Off-Farm Principal Private Residences

CAT agricultural relief provides relief from CAT on 90% of the value of a gift or inheritance. In order to qualify for the relief, 80% of a farmer's total assets (after receipt of the gift/inheritance) must consist of qualifying agricultural assets. Off-farm principal private residences are not considered such assets for the purposes of this relief.

This provision is now being amended so that an individual may off-set borrowings on an off-farm principal private residence against the property's value, for the purpose of the 80% test. These changes will be included in the 2007 Finance Bill.

CAPITAL GAINS TAX

Increase in Threshold for CGT Retirement Relief

An exemption from CGT applies in the case of individuals aged 55 and over who dispose of qualifying business or farming assets subject to certain conditions. Disposals made to a child or favourite niece/nephew are relieved in full. All other disposals are relieved up to the threshold of €500,000.

This threshold will be increased from €500,000 to €750,000 from 1 January 2007.

CORPORATION TAX

Tax Credit Scheme for Research and Development Expenditure

The base year expenditure against which qualifying incremental expenditure on research and development (R&D) is measured under the tax credit scheme is to be fixed at 2003 for a further three years to 2009. This will provide an additional incentive for increased expenditure on R&D in 2007, 2008 and 2009.

The 2003 base year had originally been fixed for the first three years of the scheme (2004 to 2006) and was due to roll forward to 2004 for the purpose of calculating the 20% tax credit for 2007.

From 1 January 2007, expenditure by companies on sub-contracting R&D work to unconnected parties will qualify under the tax credit scheme up to a limit of 10% of qualifying R&D expenditure in any one year. This is in addition to the existing provision in the scheme in relation to subcontracting to universities.

It will be necessary to inform the European Commission about these changes from a State aid perspective.

It is worth noting that in a press release of 22 November 2006, the Commission commented, inter alia:

The Commission therefore clarifies that tax incentives which restrict their benefits to activities performed domestically are incompatible with the EC Treaty. It is also important to realise that R&D tax incentives which target a specific group or sector may constitute State aid and therefore must be made compatible with the Community State Aid rules. It is therefore particularly important for Member States to note that the new State Aid framework for research and innovation, which has been adopted in parallel, may have a direct effect on their tax incentives for R&D.

The release is to be found at; http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/1598&format=HTML&aged=0&language=en&guiLanguage=en.

Preliminary Tax payment arrangements for Corporation Tax

Small companies have the option of paying their preliminary tax at the lower of 90% of the final liability of the current accounting period or 100% of the final liability of the previous accounting period.

The corporation tax liability threshold for treatment as a small company is being increased from €50,000 to €150,000. This will be effective from preliminary tax payment dates arising after 6 December 2006.

New or start-up companies with a corporation tax liability of €150,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period and will instead be required to pay their final corporation tax liability for that accounting period at the same time as they are required to submit their tax returns (nine months after the end of the accounting period).

This measure will come into effect from preliminary tax payment dates arising after 6 December 2006.

STAMP DUTY

Stamp Duty on Mortgage Deeds

Mortgage deeds, as with many legal documents, are liable to stamp duty (this is a separate stamp duty from that which is applied to the conveyance of property).

Primary mortgages are currently exempt up to the value of €254,000, and those at higher values are subject to stamp duty of 0.1% subject to a maximum duty of €630 whether in respect of residential or non-residential property.

The duty currently applied to collateral or additional mortgages is generally a €12.50 fixed duty and in the case of equitable mortgages and transfers of mortgages, generally 0.05%, subject to a maximum of €630.

The stamp duty head of charge for mortgages is being abolished for mortgage deeds executed on or after 7 December 2006.

New Stamp Duty Relief for Stock Exchange Members

It is proposed to consider the introduction, in the context of the Finance Bill 2007, of a new stamp duty relief for members of stock exchanges which would consolidate and replace existing reliefs. The new relief for these stock market intermediaries will better reflect modern share dealing practices. The details of this relief will be outlined in the Finance Bill.

New Stamp Duty Exemption for Sporting Bodies

A new exemption from stamp duty is to be introduced for those sporting bodies covered by Section 235 of the Taxes Consolidation Act 1997, and which are already entitled to relief from income tax and capital gains tax, subject to certain conditions.

The exemption will relate to purchases of land for the purposes of promoting games or sports. The provisions of the exemption will be included in the Finance Bill 2007.

CAPITAL ALLOWANCES AND TAX INCENTIVE SCHEMES

Capital Allowances (and Expenses) for Business Cars

The car value threshold for business cars is being increased from €23,000 to €24,000. The new threshold will apply to capital allowances and leasing charges for new and second-hand cars used in the course of a trade, profession or employment.

In the case of corporation tax, the new threshold will apply for expenditure incurred in an accounting period ending on or after 1 January 2007. In the case of income tax, the new threshold will apply for expenditure incurred in the basis period for the tax year 2007 and subsequent tax years.

Corporate Tax Relief for Investment in Renewable Energy Generation

The qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects is being extended from 31 December 2006 to 31 December 2011.

The extension is subject to clearance by the European Commission from a State Aid perspective, and will come into operation by way of a Commencement Order to be made by the Minister for Finance following such clearance.

F. Economic Overview

Fiscal position so strong that we are paying for our capital expenditure from day to day receipts.

The pre-Budget economic debate centred on the amount of money the Minister would inject into the economy and its impact.

On the face of it, injecting money into the economy was inevitable unless the Minister announced tax increases or spending cuts. Rather, the issue was what would the impact of those extra resources, taken with the maturation of further SSIA moneys in 2007, do to the overall economic picture.

In the end the Minister was able to an overall package of around €3bn while simultaneously improving the overall position of the national finances.

That he was going to be able to do so became clear following publication of the White Paper on Income and Expenditure and the November Exchequer Returns.

In the Pre-Budget Outlook published in October, the Department of Finance estimated that the General Government Balance predicted for 2006 was 1% of GDP (The GGB is a more rounded measure of the traditional exchequer balanced used for EU purposes). This amounted to an increase of 1.4% on the -0.6% published on Budget day last year.

The figure for 2006 contained in the Budget tables today is 2.3% of GDP. The cash difference in a single year is approximately €5bn or €2.25bn since October. The projections for the GGB for 2007 and 2008 show similar lifts.

Similarly on the same basis the debt/GDP ratio has reduced in 2006 from a projected 28% on Budget day last year to 25.1% today. It is projected to fall to 23% by 2007. GDP in 2006 is estimated at €175bn.

However, while the largesse at the Minister's disposal has allowed him to ‘tighten’ the fiscal position, he has still, in social welfare and taxation spending alone, injected over €2.5bn into the economy. Will this cause inflation?

Not according to the Department of Finance. The headline figure announced by the Minister today for the Harmonised Index of Consumer Prices is 2.6%, down from 2.7%. The HICP is the inflation measure used for European comparative purposes and fortunately for the Minister runs lower than the traditionally used Consumer Price Index which is predicted to come in around 4.1% in 2007. This represents an increase of 0.1% on the 2006 figure. Unexpected ECB rate hikes would push that figure higher.

And while the Minister applied his own health warning to his macro economic figures, one of which (ECB interest rate rises) seems more likely than less likely, the fall in inflation is interesting in light of the amount of money spent by the Minister today. The Minister is also predicting this measure to fall to 2.0% in 2008 and 1.7% in 2009.

Other headline figures include projected economic growth of 5.3% in GDP and GNP terms. (This is marginally higher than the existing projections of other forecasting houses). The Minister indicated that approximately 5% growth was a natural growth rate for the economy though the accompanying tables show growth falling below that rate in 2009 and 2009 although averaging around 5% over the three year period. The Irish growth rate is projected to run at twice the Euro area average in 2007. Employment growth is predicted at 72,000 with unemployment remaining at 4.4%.

The Minister announced an increase in current spending of 11.5% – not a radical hike given growth of over 5% and CPI inflation of over 4%.

Capital spending is set to increase by 13% remaining at just over 5% of GNP. The current budget is in surplus by €8bn and as gross capital spending is at €7.6bn it means we are paying for our investment needs out of day to day income.

Again, this is an indication of the strength of the underlying fiscal position.

G. Press Release


Business gets its share in substantial Budget package – ICAI

(Budget Day) The Institute of Chartered Accountants in Ireland (ICAI) has welcomed the amendment to corporation tax payment rules, the extension of the Business Expansion Scheme and improvements to tax relief for Research & Development activities announced by Minister Cowen in today's Budget.

Commenting ICAI Director of Taxation Brian Keegan said:

“Tax incentives influence commercial behaviour and the Minister has moved wisely today to promote business activity.

The increase to €2m which companies can raise in BES funding is more realistic in the current economic environment and should increase the use of the BES as identified in this week's Forfas report.

Increasing the amount which an individual can invest by a factor of five to €150,000 will make BES investments more attractive, and simplify the administration, and hence the cost, of raising such funds. Most BES funds raised go towards product development and increasing employment levels. The extension of BES should not contribute further to the debate about tax paid by high earning individuals as it seems that BES will remain limited under the overall cap on reliefs availed of by individuals in any one tax year.

The R&D announcement is significant. Ireland operates an incremental R&D system of tax credits – relief is not based on the amount that is spent, but on the amount spent in excess of what was spent over a defined base year. By fixing the base year at 2003 for a further period of three years, the Minister is improving the incentive to increase R&D expenditure. This will make our R&D incentive system more comparable with R&D incentive regimes in other territories. Fifteen EU member states have some form of tax based incentive for R&D activity.

The Minister has also recognized the difficulties encountered by business in meeting their tax obligations by simplifying the rules for company tax payments. The new measures will allow most companies to base their tax payments on the previous year's outcome, as is currently the case for the self employed.

The burden of VAT administration, where traders effectively act as collection agents for Revenue, is also reduced by halving the number of returns to be made. For smaller businesses, the threshold below which they need not account for VAT has been raised up to €70,000, which is approaching the maximum permissible under EU rules, and meets the recommendations of the Small Business Forum.

There is no tax cost to simplifying the system for all compliant taxpayers. We welcome what the Minister has announced, and see it as part of a process of making the tax rules less complicated for individuals and companies alike. It is clear that the Minister has taken into account the work of the Small Business Forum, Forfas and suggestions from representative bodies such as ICAI in formulating his Budget measures.

Taken together, these changes have the common theme of assisting business in start-up and development phases, and while companies generally will be able to avail of the changes, they are clearly of most relevance to the indigenous Small and Medium Enterprise sector.

The benefits of the reductions in income tax and PRSI should not be underestimated in the context of the SME payroll burden.”

H. Budget 07 ICAI Representations Outcome

Promotion of Business


What we sought:

Extend the R&D and BES reliefs to support both the development and exploitation of technology in Ireland.
Outcome:

Both the R&D and BES schemes are being substantially enhanced.

Simplification


What we sought:

Permit companies to base their preliminary tax payments on the tax due for the preceding accounting period.
Outcome:

Companies with a previous year's liability of up to €150,000 may base their preliminary tax on the amount paid in the previous year.
What we sought:

Remove the condition that approved courses be provided by approved colleges for the purposes of granting tax relief on fees.
Outcome:

It is proposed to grant tax relief at source in the future for college fees.

Environment


What we sought:

The expiry date for relief in investing in Renewable Energy should be extended by at least another two years.
Outcome:

The expiry date is being extended to 31 December 2011.
What we sought:

Promote Crops which are only suitable for bio-mass projects.
Outcome:

A programme of grant aid to support cultivation and harvesting of such crops.