Many of the measures announced by the Minister for Finance on Tuesday 6 December as part of Budget 2012 are unlikely to have come as a surprise for most. The 2% increase in the standard rate of VAT was announced inadvertently in advance of Budget day. Increases to the rate of carbon tax, the introduction of a household charge and amendments to the capital tax rates were already signposted, though the exact detail was unknown. Some unforeseen measures were announced, and among these were: increases to the rate of mortgage interest relief, enhancements to the R&D regime and the proposed introduction of a new special assignee relief programme. As previously promised by the Government, there were no increases to the headline income tax or corporation tax rates.

Business measures

As part of his Budget Statement, the Minister took the opportunity to re-affirm the government's commitment to maintaining our 12.5% corporation tax rate and noted that much of Ireland's growth at present can be attributed to the attractiveness of Ireland as a destination for inward investment. The Minister also announced that a package of measures will be introduced in the Finance Bill to support the international funds industry, the aircraft leasing industry, the corporate treasury sector and the international insurance industry.

As a means of supporting small & medium enterprise to grow and create jobs, positive changes concerning the Research and Development regime and tax relief for start-up companies were also announced as part of the Budget.

Research and Development (R&D) Relief

The first €100,000 of qualifying R&D expenditure will now benefit from the 25% R&D tax credit on a volume basis. Relief for R&D expenditure in excess of €100,000 as compared with such expenditure in the base year 2003 will continue to be available by way of a tax credit equal to 25% of the incremental.

As a targeted benefit to SMEs, who may have more need to outsource R&D work than larger multinationals with greater internal resources, the outsourcing limits for sub-contracted R&D costs are being increased to the greater of 5% or 10% as appropriate or €100k. At present sub-contracted R&D costs are eligible where they do not exceed 10% of total costs or 5% in the case of sub-contracting to third level institutions.

A further change to the regime announced is the introduction of a reward mechanism for key employees who have been involved in the development of R&D. It appears that part of the benefit of the R&D tax credit can be passed on to the employees involved in the R&D development in the first instance – a trickle-down effect which had been advocated for years by Chartered Accountants Ireland. Further details are expected in the Finance Bill.

Tax Relief for Start Up Companies

The scheme which provides relief from corporation tax on the trading income and certain gains of new start-up companies in the first 3 years of trading was first introduced in Finance (No.2) Act 2008 and extended by subsequent Finance Acts. The scheme is now being extended further to include start-up companies which commence a new trade in 2012, 2013 or 2014.

Personal Measures

Following through on the Government's commitment as set out in the Programme for Government to maintain the current rates of income tax together with bands and credits, no changes to these areas were announced. However, the Budget does include a number of amendments to existing measures.

Universal Social Charge (USC)

The lower exemption threshold will increase from €4,004 to €10,036. This means that individuals will only be liable to pay the USC if their gross income exceeds €193 per week/€10,036 per year. The Minister also confirmed that the USC will operate on a cumulative basis from 1 January 2012. As highlighted in the October issue of tax.point, Revenue advised Chartered Accountants Ireland that the basis of deduction for the USC will change from week-one to a cumulative basis for the tax year 2012. As a consequence, for 2012, employers’ copies of the Tax Credit Certificate (P2C) will display USC thresholds as cut-off-points, as well as the applicable rates of USC to be charged. In addition, employees’ Tax Credit Certificates will display USC thresholds in a similar manner to how PAYE cut-off-points are displayed.

Household Charge

The Minister for the Environment, Community and Local Government announced on Budget Day 1 the introduction of a €100 charge for owners of residential property from 1 January 2012. This charge is a temporary measure and is expected to raise €160 million in a full year. Proposals for a full property tax are anticipated in the future, possibly to be effective in time for 2014. At the time of writing it is understood that the household charge will not be an allowable deduction for landlords in computing their taxable rental income under the Case V rules. This follows the treatment for the NPPR charge.

Mortgage Interest Relief

As a way of incentivising first time buyers to purchase their first home in 2012, mortgage interest relief at a rate of 25%, up from 15%, will be available. For non-first time buyers, the rate of relief will increase to 15% from 10%.

To help first time buyers who took out a mortgage during 2004 to 2008 it was announced that the rate of mortgage interest relief is increased to 30% from 1 January 2012 until 2017. If individuals took out a mortgage outside of these dates the existing rules remain unchanged.

According to a guidance note published by Revenue, a first time buyer means an individual who has not previously been entitled to relief in respect of interest paid on loans used for the purchase, repair, development or improvement of an individual's sole or main residence. In the case of joint loans it is possible that one of the parties is a first time buyer and the other is not.

The Minister re-affirmed that loans taken out on or after 31 December 2012 will not qualify for mortgage interest relief and mortgage interest relief will be fully exhausted by 2018.

Tax on Savings

As one of many measures announced by the Minister as a means “to ensuring that people with wealth pay their fair share” the rate of retention tax that applies to deposit interest, and the rates of exit tax that apply to life assurance policies and investment funds, are being increased by 3 percentage points in each case. This means that for payments made on or after 1 January 2012, the rate of tax will be 30% for payments made annually or more frequently and 33% for payments made less frequently than annually.

This will bring the rate of tax on savings in line with the increased rates of Capital Gains Tax and Capital Acquisitions Tax.

Domicile Levy

The domicile levy was first introduced in Finance Act 2010 to ensure that all individuals with “substantial ties” to Ireland make some contribution to the Exchequer. Receipts from the levy, which first applied for the tax year 2010, only became known in recent months and were substantially less than the Government may have estimated at the outset. Therefore as a means of broadening the base for the levy and making it more difficult to avoid, the “citizenship” condition is being removed.

A set of proposed amendments to the current regime applying to non-residents are expected to be published in early 2012 and will be subject to public consultation to inform preparation for further changes in 2013.

Special Assignee Relief Programme

The Minister announced that a Special Assignee Relief Programme will be introduced as a means of allowing “multinational and indigenous companies to attract key people to Ireland so as to create more jobs and to facilitate the development and expansion of businesses in Ireland”. It is understood that this will be a new relief and will replace the current relief known as SARP. The exact details of this relief are expected in the Finance Bill.

Foreign Earnings Deduction

A Foreign Earnings Deduction will also be introduced where an individual spends 60 days a year developing markets for Ireland in the so called ‘BRICS’ countries (Brazil, Russia, India, China and South Africa). Again exact details were not announced by the Minister and are expected in Finance Bill 2012.

PRSI

There were two main measures in this area; one had been flagged in advance, the other not so.

The current relief of 50% of employer PRSI for employee contributions to occupational pension schemes and other pension arrangements is being removed from 1 January 2012. The change follows the previous 50% reduction announced at Budget 2010 effectively completely wiping out this relief.

The PRSI base is also to be broadened to previously exempted income. As per the Minister's Budget statement this extension will cover rental, investment and other forms of income from 2013.

Pension changes

The most anticipated change on pensions – restricting contributions to a rate below the 41% rate did not feature in the Budget. However, there were some changes to the tax treatment of pensions announced, the most costly change being the abolition of employer PRSI relief for employee contributions to pension schemes with effect from 1 January 2012.

The two other main changes to pension tax relief arrangements concern post retirement events. The annual imputed distribution applying to the value of assets in an ARF is to increase to 6% from 31 December where the total assets values are in excess of €2 million. At present all ARF holders are taxed on imputed income of 5% of the value of the fund (inclusive of any actual withdrawals). A similar imputed distribution is being applied to “Vested” PRSAs which are currently not subject to tax on imputed distributions.

Lastly ARF transfers on the death of an ARF owner to a child aged over 21 will attract a final liability tax of 30%-before now, the rate was set at the standard rate of tax of 20%.

The Minister made much of the contribution of the Pensions Industry in his speech, and indicated that he wanted to see future reforms including a rebalancing of the level of investment made by pension funds here and elsewhere. A consultation process with key stakeholders on developing an appropriate tax framework for pension was promised during 2012.

Value Added Tax

As expected, the Minister confirmed that the standard VAT rate will increase from 21% to 23% with effect from 1 January 2012. The projected tax revenue set to be raised by this measure is €670 million in a full tax year which accounts for the bulk of taxes needed by the Government in 2012.

The hike in VAT to 23% impacts on professional services such as accountancy and legal services in addition to supplies of goods such as electrical goods, cars, furniture, adult clothing and footwear.

The commitment not to increase the standard VAT rate beyond 23% during the lifetime of the Government will hopefully introduce some sense of stability in the sectors hit by the hike.

In his Budget statement, the Minister noted that increasing the VAT rate is the revenue raising mechanism favoured by 20 out of 27 of our fellow EU Member States in the last four years.

The Minister also announced that the VAT rate on district heating is to reduce from 21% to 13.5% subject to EU approval. The move is promoted as a measure to put supplies of district heating on an equal footing with the majority of energy supplies which are subject to the 13.5% VAT rate.

Excise and Carbon Tax

Following the trend in recent Budgets, there were several changes announced in this area. The usual suspects, petrol, auto-diesel and cigarettes increased in price from midnight Budget night. Other increases to the rate of carbon tax and excise duty were announced by the Minister which will take effect at different stages.

Carbon Taxes

The rate of carbon tax will be increased by €5 to €20 per tonne on fossil fuels. However this increase will be staged, with the increase applying to petrol and auto-diesel since Budget night and from 1 May 2012 to kerosene, marked gas oil, LPG, fuel oil and natural gas.

Excise Duty

Excise Duty on a packet of 20 cigarettes was increased by 25 cents (including VAT) with a pro-rata increase on other tobacco products on Budget night.

Motor Tax and VRT

The government plans to review the current CO₂ bands and rates structures in line with technological advances in motor vehicles. A public consultation was launched in this regard with a view to adjusting the bands with effect from a target date of 1 January 2013. Comments on the consultation document which can be found on the Department of Finance website are requested by 1 March 2012.

With regard to motor tax rates, proposed increases for 2012 in rates for private vehicles range from €11 to €158 depending on CO₂ emissions and engine size.

Capital Taxes

There was a mix of unexpected and already anticipated changes in these areas. The intended aim of these measures appears to be increased activity in capital transactions during 2012.

Capital Gains Tax (CGT)

For disposals made after 6 December 2011, the rate of CGT increased from 25% to 30%.

The Minister also outlined plans to modify retirement relief from CGT to incentivise the timely transfer of farms and businesses before owners reach the age of 66. This measure is set to complement the Government's policy to improve the age profile of the farming sector and facilitate a return to the land for workers displaced by the collapse of the construction section.

Capital Acquisitions Tax (CAT)

The rate of CAT also increased for gifts and inheritances made after 6 December 2011 from 25% to 30%. As a means of ensuring a “fair distribution of the tax burden”, the Minister also announced the reduction in the CAT tax free Group A threshold from €332,084 to €250,000.

Stamp Duty

A flat 2% rate of stamp duty will apply to transfers of non-residential property in respect of instruments executed on or after 7 December 2011. As the new flat rate could give rise to a greater stamp duty liability than that currently available under the multiple rates regime, the new flat rate will not apply to instruments executed before 1 July 2012 where the rate change would increase the duty payable and the instrument contains a certificate that a binding contract was in place before 7 December 2011.

Intra-family transfers of non-residential property will continue to benefit from Consanguinity Relief which reduces the rate of stamp duty by 50% until 1 January 2015.

A New Approach to Property

Between the Minister's resolve not to fully restrict existing property reliefs, coupled with a new incentive, there may be some role again for the inclusion of property within a balanced investment portfolio.

The Minister appears to be making significant changes to the curtailment of section 23 property reliefs and capital allowances, as contained in Finance Act 2011. This legislation was subject to Ministerial Order following an economic review and consultation process.

Rather than pursue the Finance Act 2011 measures, an additional levy, described in the supporting Budget documentation, as a higher rate of USC, will be applied to any income sheltered by property reliefs, provided that the individual's gross income is in excess of €100,000. The exact details of the new rules are expected in the Finance Bill but a note on the Revenue website ‘Property Relief Surcharge’ is helpful in understanding the change.

Residential owner occupier relief is not affected by these new proposals.

A new relief from CGT is being introduced for the first seven years of ownership for properties bought between Budget night and the end of 2013, where the property is held for more than seven years. Where such property is held for more than seven years the gains accrued in that period will not attract CGT. When asked at his press conference what types of asset would be included, the Minister just confirmed it was property (as distinct from other types of asset). Doubtless the Finance Bill will circumscribe the assets involved.

Farming Sector Tax Issues

The farming sector was the focus of tax measures aimed at accelerating the transfer of farms and the introduction of a scheme of enhanced stock relief.

CGT Retirement Relief Measures

In an effort to encourage the transfer of farms from one generation to the next before the current owner reaches 66 years of age, full CGT Retirement Relief will only be available where the disponer is aged between 55 and 66. If the disponer is aged over 66 years on claiming Retirement Relief, then an upper limit of €3 million will be applied on transfers to children.

For transfers of assets outside the family, the current upper limit of €750,000 will only be available where the disponer is aged between 55 and 66 years of age. This limit will be reduced to €500,000 on non-family transfers if the disponer is aged over 66 years of age.

The current upper limit of €750,000 applies for a transitional period of two years for individuals currently aged 66 or who reach that age before 31 December 2013.

Further details are expected in the Finance Bill.

Stock Relief

The Government appears to favour farming partnerships as the best business model for the sector and announced an enhanced 50% stock relief for registered farm partnerships and a 100% stock relief for certain young trained farmers forming such partnerships. The enhanced treat-ment is set to run until 31 December 2015 but is subject to state aid clearance by the EU Commission and therefore may fall foul of long delays before implementation as is common practice for tax relief measures subject to such clearance.

VAT

Flat rate farmers will be entitled to claim of refund of VAT on the purchase of wind turbines from 1 January 2012.

Admissions to open farms will be liable to VAT from 1 January 2012 at the 9% VAT rate.

Conclusion

The imperative for the Minister in Budget 2012 was to do as little harm to business as possible, given the financial constraints he is under. Many of the measures announced are expected to help business, with a knock on benefit for employment.

Kimberley Rowan is Tax Manager with Chartered Accountants Ireland

Email: kimberley.rowan@charteredaccountants.ie