Budget 2013 was delivered by the Minister for Finance on the afternoon of Wednesday 5 December. The business package was the strongest element of the Budget; with the announcement of a Tax Reform Plan to support the SME domestic sector. The other main tax raising measures announced as part of the Budget are unlikely to have been a surprise to most; a new Local Property Tax, changes to the tax treatment of pensions and additional Excise Duties had been flagged in advance of the Minister's Budget speech. However, plenty of new items still featured.
Local Property Tax
Months of speculation concerning a Property Tax, now known as the Local Property Tax (LPT) were resolved by Minister Noonan on Budget day. The specific details involved with the tax were contained in the Finance Local Property Tax Bill 2012 which was subsequently published on Friday 7 December.
The key features of the LPT as announced in the Budget are as follows:
- The charge will take effect from 1 July 2013 meaning a half year LPT charge will apply initially, with a full year charge applying thereafter.
- Generally the owner of the property will be liable to LPT; otherwise the liability will rest with the tenant in the case of long leases (over 20 years) or life tenancies. Co-owners will be jointly and severally liable for the tax.
- LPT will be self-assessed, and as a mainstream tax will be subject to the usual Revenue enforcement and collection procedures.
- Taxpayers will be asked to identify or confirm the market value of the residential property. 1 May 2013 will be the Property Valuation Date with the initial valuation valid up to and including the year 2016.
- For the purposes of calculating LPT, property values will be organised into market value bands.
- The tax rate applied to the valuation will be 0.18% up to €1 million and 0.25% on the excess value over €1 million. These rates are fixed up to 31 December 2014. Thereafter, local authorities will have some discretion to vary the LPT rates by +/–15% of the national central rate.
Certain properties will be exempt, with the intention that such exemptions will provide some stimulus to the domestic housing market.
- Newly constructed but unsold residential property.
- New and previously unused properties that are purchased between 1 January 2013 and the end of 2016 which will be exempt until the end of 2016.
- Second-hand property purchased by a first time buyer between 1 January 2013 and 31 December 2013 will be exempt until the end of 2016.
‘Voluntary’ deferral arrangements are also available for owner-occupiers where the gross income does not exceed €15,000 (single) and €25,000 (couple). These limits can be extended where there is an outstanding mortgage and gross income less 80% of mortgage interest falls below €15,000/€25,000. Marginal relief will apply for owner-occupiers where income is €10,000 above the relevant limit.
Other Property “Charges”
The Household Charge will be abolished for 2013; however, outstanding liabilities in relation to 2012 will be pursued. Any arrears for 2012 will be capped at €130 if paid before 30 April 2013. From 1 May to 30 June 2013 normal Household Charge collection, late payment fee and interest procedures will apply. Thereafter, any outstanding Household Charge at 1 July 2013 will be increased to €200 and added to the LPT due on the property.
The Non Principle Private Residence (NPPR) Charge continues to apply for 2013, but will be abolished for 2014. Therefore, in 2013, second residences and rented properties will be subject to both charges.
Revenue has published a FAQ guidance document on the LPT. This guidance covers a number of practical areas such as; how the LPT will operate, payment methods and compliance with the tax.
According to the guidance, during March 2013, information will be sent by the Revenue Commissioners to liable persons advising them of their obligations in relation to the LPT and how to comply. Other key dates for the LPT according to Revenue's guidance are:
- 1 May 2013: Property Valuation and Property Ownership date
- 7 May 2013: Due date for filing paper LPT returns
- 28 May 2013: Due date for filing LPT returns electronically
- 1 July 2013: Commencement of phased payments such as direct debit, deduction at source from Salary / Occupational Pension or certain payments from the Department of Social Protection and Department of Agriculture, Food and the Marine and cash payments through certain service providers
- 21 July 2013: Bank Single Debit Authority Payment deducted
At the time of writing, the LPT Bill is expected to be debated in the Dáil in the middle week of December and it is understood that the Bill will be enacted before Christmas.
Personal Tax Measures
There were no increases to the income tax rates or changes to the tax bands and credits as promised by government. However, changes to the PRSI system and an increase to the USC rate for individuals aged 70 or over will hit people's net incomes. Tax rules on pensions are set to be amended to restrict tax relief to pension schemes and taxpayers will have the facility to make a once-off withdrawal from Additional Voluntary Contributions.
The current weekly PRSI floor of €127 available to employees (full rate contributor) will be abolished (€26 for modified rate contributors). This is an exemption of €6,604 of income from PRSI in a full year and the change announced in the Budget will mean an additional €265 PRSI liability in a full year for employees in the PRSI net. Also a feature of the Budget is an increase in the minimum annual PRSI contribution for self-employed individuals from €253 to €500.
PRSI is also to be extended from next year. From 1 January 2013, modified PRSI rate payers will be subject to PRSI on their trade or professional income and any unearned income. PRSI will apply to unearned income, such as investment and rental income, for all individuals from 1 January 2014. These changes to PRSI will mean that all sources of income will be subject to PRSI. At the time of writing collection of the extended PRSI charge is not known. Details are expected to emerge over the course of next year.
Universal Social Charge
From 1 January 2013 individuals aged 70 or over and medical card holders earning €60,000 or more will be subject to the standard rates of USC. This means that such individuals will be subject to USC at a maximum rate of 7% up from a current maximum rate of 4%.
Individuals will be allowed a once-off option to withdraw up to 30% of the value of funded Additional Voluntary Contributions made to supplement retirement benefits. While this measure offers the option to access cash, the withdrawal is based on the value of the fund and will be subject to the taxpayer's marginal rate of tax. The option to withdraw will be available for 3 years from the passing of Finance Bill 2013.
Changes will be put in place in 2014 to the Standard Fund Threshold which sets the maximum allowable tax-relieved pension fund. Other possible changes will also be made to give effect to the commitment in the Programme for Government to cap taxpayers’ subsidies for pension schemes which deliver pension income of more than €60,000.
Other personal tax measures announced as part of the Budget include:
- In respect of charitable donations made on or after 1 January 2013 a new blended rate of 31% tax relief will apply to all donations. A number of simplification measures to reduce the administration burden will also be introduced.
- In his budget speech, the Minister also announced that the Joint Oireachtas Committee on Finance and Public Expenditure Reform will examine proposals to ensure recognition of donations from philanthropists who make significant donations to initiatives that would aid Ireland's economic recovery.
- An increase from 12.5% to 13.5% in the specified interest rate used in calculating the taxable benefit from preferential loans, other than home loans. The specified rate used to calculate the taxable benefit from home loans is decreased from 5.0% to 4.0%.
- Top Slicing relief will no longer be available from 1 January 2013 on ex-gratia lump sums in respect of termination and severance payments where the non-statutory payment is €200,000 or over.
- The Foreign Earnings Deduction is to be extended beyond the BRICS countries for work related travel to Algeria, Democratic Republic of Congo, Egypt, Ghana, Kenya, Nigeria, Senegal & Tanzania.
- The rate of DIRT will increase from 30% to 33% on payments made on or after 1 January 2013. This is the fifth successive year of increases to the DIRT rate which has seen increases from 20% rate in 2008 to 30% in 2012 and now to 33% in 2013.
Initiatives for the SME Sector
This year's Budget concentrates on initiative for small and medium sized industry. While recent Budgets have focused on measures to incentivise foreign direct investment and the export industry, the Minister announced that that “the operating environment in the domestic economy remains difficult, particularly for small and medium enterprises. To give this critical sector a helping hand, I am bringing forward a 10 Point Tax Reform Plan”
The 10 Point Tax Reform Plan includes measures across a number of different taxes. The key measures are:
3 Year Relief for Start-up Companies
The 3 Year Relief for Start-up Companies is to be extended to allow any unused relief arising in the first the three year of trading due to insufficiency of profits to be carried forward for use in subsequent years. Disappointingly, the relief continues to be restricted by reference to Employers PRSI paid in a particular year.
R&D Tax Credit
The R&D Tax Credit regime provides for a 25% tax credit for incremental expenditure on certain R&D activities over expenditure in a base year (2003). A volume basis was introduced for the first €100,000 of qualifying expenditure in 2012 and this is set to be increased to €200,000 in 2013. Department of Finance documentation also notes that the R&D Tax Credit regime will be reviewed in 2013.
Amendments to the Close Company Surcharge
A rather modest increase in the de minimis amount of undistributed investment and rental income which may be retained by a close company without giving rise to a surcharge was made, increasing the current limit from €635 to €2,000.
A similar increase is being made in respect of the surcharge on undistributed trading or professional income of certain service companies. This increase will bring limited relief but marks the first change to the close company rules in favour of a taxpayer in many years.
Increase in VAT Cash Accounting Threshold
The annual VAT cash receipts basis threshold for small and medium enterprises is to being increased from €1 million to €1.25 million with effect from 1 May 2013.
Agri-Food Industry Support
The Agri-Food Industry also features in the Tax Reform Plan, with extensions announced to stock relief and the broadening of the definition of registered farm partnerships. However, a reduction to the VAT flat-rate addition from 5.2% to 4.8% was also announced in the Budget.
Real Estate Investment Trusts
One of the new items featuring in Budget 2013 includes the introduction of that Real Estate Investment Trusts (REITs) into Irish legislation. One of the aims of the regime is to provide an after-tax return for investors similar to that of direct investment in property, while also giving the benefits of risk diversification. The regime is also intended to eliminate the double layer of taxation which can hinder the holding of property through a company.
REITs have been in place in the UK since 2006.
The Film Tax Relief Scheme is to be extended to 2020. The Minister also announced reform of the operation of the scheme, by moving to a tax credit model in 2016. At the moment, an individual can invest up to €50,000 in a qualifying film investment scheme and claim tax relief at their marginal rate of the amount invested.
Details are sketchy on what exactly a move to the tax credit model will mean; the Minister said that these changes are to be put in place to “rectify the anomaly by which investors received a disproportionate amount of the tax relief as opposed to the funds going to production”.
Employment and Investment Incentive (EII)
The EII Scheme will be extended from 2014 to 2020 subject to the usual requirement for State Aid clearance. According to feedback to the CCAB-I survey undertaken in October of this year, the number of potential EII scheme projects numbered in single digits. Therefore, simply extending the relief without modifying the conditions and availability is likely to have limited benefit.
Foreign Account Tax Compliance Act (FATCA)
Minister Noonan announced as part of his Budget Speech that Ireland has concluded its Inter-Governmental agreement on FATCA, and that this would be of benefit to Irish business.
FATCA is part of a United States effort to combat tax evasion by US persons holding investments in offshore accounts. It requires US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report on those assets, but also requires foreign financial institutions to report directly to the Internal Revenue Service certain information about foreign financial accounts. Governments in several countries are working towards a Memorandum of Agreement with the US authorities to address this reporting requirement.
Enabling provisions for the domestic application of FATCA compliance may be required in Finance Bill 2013, to be supplemented by Regulations. Ultimately, the information flow between the US and participating countries will be two way, albeit perhaps with a bias in the volume of information going to the US.
Ireland has a good track record of cooperating with other countries in the management of taxes and the exchange of information. The early conclusion of this FATCA accord contributes further to this track record.
Capital Taxes Measures
Following the trend in recent Budgets, the Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT) rates are both increased from 30% to 33% for disposals on or after 6 December 2012. Capital transaction activity will not be helped by the increased rates. Given that the overall yield from these taxes is mainly driven by activity and not rates, it remains to be seen if the increase can be justified.
Additionally, the current group tax free thresholds for CAT are each reduced by 10% as follows:
- Group A threshold falls to €225,000 from €250,000;
- Group B threshold falls to €30,150 from €33,500; and
- Group C threshold falls to €15,075 from €16,750
Farm Restructuring Relief
A new relief from capital gains tax arising on disposals of farm land for farm restructuring purposes was also announced. Relief will be available where the proceeds of a sale of farm land are reinvested for the same purpose. This is a once-off relief and the sale and purchase of the farm land must occur within 24 months of each other with the initial sale or purchase transaction occurring between 1 January 2013 and 31 December 2015. The relief will also apply to farm land swaps subject to certification by Teagasc for all transactions seeking relief. However, the commencement of this relief is subject to EU State Aid approval.
While the Minister's Budget 2013 speech was relatively short, the supporting Budget documentation is unusually lengthy, and hints at a sizeable Finance Bill 2013. Details on some of the measures announced as part of the Budget are a bit hazy which further suggests that Finance Bill 2013 will be of significance.
To end, Happy Christmas to you all and best wishes for 2013
Kimberley Rowan is Tax Manager with Chartered Accountants Ireland