Personal Taxation

Employees and Directors will certainly be faced with higher taxes and reduced take home pay. The measures brought in affecting employees and Directors pay can be summarised as follows:

• Universal Social Charge (USC)
  The Income levy and health levy have been abolished and replaced with the USC. The USC applies to gross income before pension contributions and will lead to higher taxation for most individuals.
• Tax Credits and Bands
  As announced in the budget, tax credits and the single rate bands have been reduced by 10% which will lead to reduced net pay.
• Subscriptions to Professional Bodies/Trade Union subscriptions
  Subscriptions paid by an employer are now to be liable to Benefit-in-Kind in an employee's hands. No relief will be available for trade union subscriptions from 2011 onwards.
• Share Schemes
  Many of the share schemes restricted in the Finance Act will adversely affect the SME sector, certain reliefs such as the income tax deduction which was available for employees for new shares have been abolished (i.e. the life time limit of €6k). Other income tax reliefs for approved share schemes have also been abolished.
• Third level fees
  The income tax relief available for qualifying fees has been reduced with the first €2,000 of fees relating to full time courses and €1,000 relating to part time courses being disregarded.
• Rent Relief
  Rent relief has been phased out with new tenant unable to claim relief post 7 December 2010.
• Pension Reliefs
  Pension relief has been significantly curtailed with the pension ceiling maximum reduced to €115,000 and tax relief available on qualifying contributions limited to relief from income tax (41%). There is also a reduction in the amount that can be held in a pension fund and retirement lump sums are restricted to a tax free amount of €200,000 since 1 January 2011. This will make pensions less attractive for employees and proprietary directors going forward and reliefs are likely to be restricted further including pension relief for employers PRSI contributions.
• Property Reliefs
  Another issue facing many Directors/Shareholders is the proposed restriction on property reliefs, particularly section 23 and capital allowance type schemes. Many Directors/Shareholders purchased commercial property for their businesses personally and used these section 23/capital allowance type arrangements to assist them to reduce the tax on rental income from the property in order to allow them to discharge the borrowings on the property. The proposed charges will result in many individuals unable to afford the properties which their businesses operate from.
  While such reliefs are subject to a review, the proposed changes could have potentially significant consequences for the SME sector.

As highlighted, companies and businesses in all sectors will face the prospect of their employees, Directors and potential customers having reduced spending power post implementation of the Finance Act and this will potentially have an adverse effect on business.

Business Taxation

There were no significant changes to corporation tax in the Finance Act and the main measures can be summarised as follows:

1. 12.5% Corporation tax rate
   The continued commitment to the 12.5% rate of corporation tax in respect of trading income is both a positive and essential measure to ensure the continued success and, in many respects, the survival of the SME sector.
2. Start-up exemption
   The start-up exemption for corporation tax has been extended, albeit in a more restricted format. From 2011 onwards and for new trades commencing from 2011, the relief is limited to the amount of employer's PRSI paid by the company subject to a cap of €5,000 per employee and a maximum of €40,000.
3. Interest Relief
   Interest relief for companies on intra-group loans on the purchase of assets inter-group has been restricted significantly reducing the attractiveness of moving assets and trades.
4. Patent Royalties
   The Finance Act confirms the abolition of the tax free status of patent royalties and patent dividends. This measure could potentially be a disincentive to R&D activities going forward as it was a method of rewarding employees and key individuals in an organisation.
5. Mandatory Disclosure Scheme
   The Mandatory Disclosure scheme regulations which have now come into effect, place an obligation on parties to tax schemes to disclose them to Revenue. This can, in certain circumstances, mean that companies/shareholders would be subject to the disclosure mechanism and they need to be aware of their obligations.
6. RCT (Relevant Contracts Tax)
   The Finance Act confirms the changes made and refinement of the RCT system.
   The existing system has been replaced with a new system with three potential rates of withholding tax depending on the category of subcontractor you fall into:
   1. A zero rate applies to subcontractors who have been tax compliant for the previous three years;
   2. A 20% rate applies to subcontractors who have substantially been compliant.
   3. A 35% rate applies in all other cases.
   Under the new system, the subcontractor will be deemed to have paid the tax to Revenue on the date of withholding the tax. Any RCT paid in excess of preliminary tax obligations can be offset against other taxes due, the balance of the RCT is then refunded to the taxpayer.
   These changes in the RCT system should result in a more cash flow favourable regime than the system it replaces.
7. New BES Scheme (Employment and Investment Incentive Scheme (EIS))
   A new BES scheme is to be introduced. The main features will be as follows:
   • The lifetime company investment limit has been increased to €10 million.
   • The new scheme is available to most SME's provided they are not carrying on certain excluded trades such as operation of a nursing or residential unit, certain financing activities, dealing in or developing land, film production, and dealing in certain shares and financial assets.
   • The annual amount that can be raised by companies has been increased from €1.5 million to €2.5 million
   • The holding period for shares has been reduced from 5 years to 3 years.
   • The tax relief on investment has been restricted to 30% of the subscription amount for eligible shares.
   The introduction of the EIS scheme may assist certain companies in receiving much needed funds. The scheme is subject to a commencement order before coming to law.

Stamp Duty

There was no reduction in stamp duty for commercial property in the Finance Act.

Residential property stamp duty has been reduced to 1% which was a welcome move and may give some momentum to the residential property sector.

VAT

No changes were made to the rates of VAT in the budget and with the UK VAT rates changed to 20% since 4 January 2011 this should be somewhat of assistance to retailers.

Summary

On the positive side the continued commitment to the 12¹/₂% rate of corporation tax was welcomed.

Overall however, the Finance Act will lead to less money in the economy and the SME will still need to compete in a difficult economic environment with little incentives for employee participation in the equity base of the employer companies.

Paul Dillon is a Tax Partner with Duignan Carthy O’ Neill in Dublin.
E-mail pauldillon@dcon.ie
Tele: 01 668 2402