Budget 2018 was delivered by the Minister for Finance Paschal Donohue on Tuesday 10 October “Budget Day”.

Radical? No. Innovative? Hardly. But the tax strategy of this Budget is significant because for the first time in several years the tax base has not been narrowed by the Minister’s changes. The main money spinner for Budget 2018 is a hike in stamp duty for commercial property transactions from 2 percent to 6 percent which is expected to generate revenue of €376 million per annum. And while the restriction to the intangible asset relief impacts the country’s FDI offering, changes to corporation tax could have been much worse given the pressure Ireland is under from international forces in the European Commission, the USA and OECD.

Personal taxes

In line with much publicised affirmations by the Minister and the Taoiseach to reduce the tax burden for low and middle income earners, the middle rates of USC are set to be reduced and the entry point to the top rate of income tax is due to increase. The Earned Income Credit and the Home Carer Credit will be increased and a new BIK system for electric vehicles will be introduced. The Budget documents also give us insight into the PAYE Modernisation project and steps for merging PRSI and USC.

USC

A reduction in the middle rates coupled with an increase in the income threshold was announced as follows:

• €12,012 – €19,372 @ 2 percent (reduced from 2.5 percent and income threshold increased from €18,772)
• €19,372 – €70,044 @ 4.75 percent (reduced from 5 percent)

The entry rate remains at 0.5 percent for income up to €12,012 and the balance of income from €70,045 remains subject to the USC at 8 percent.

There was no change announced to the income exemption of €13,000 per year. For self-employed income over €100,000 there was no adjustment to the 3% surcharge indicated.

For a single person earning €35,000 the USC changes mean a saving of around €70 in a tax year. If the person earns €70,000, the changes will result in a €158 reduction in their annual USC liability.

The USC relief for medical card holders will be extended for a further two years.

The USC changes are expected to cost €177 million next year.

Standard rate band

The standard rate band will increase by €750 for all earners. Therefore the entry point to the 40% rate of income tax will increase from €33,800 to €34,550 for all single earners and from €42,800 to €43,550 for married couples with one income earner.

This measure alone will mean a tax reduction of €150 per year for individuals paying tax at the top rate. Combined with the USC reduction, individuals will pay up to €308 less in tax next year.

Income tax credits

The Earned Income Credit for the self-employed will increase by €200 to €1,150 from 1 January 2018. This credit will still be €500 short of the PAYE credit of €1,650 for employees.

An additional €100 will be added to the Home Carer Credit to bring it up to €1,200.

Provision of employee motor vehicle

A new 0% BIK rate on electric motor vehicles provided in the workplace. This new measure will be in place for one year to allow for a comprehensive review of the BIK regime on motor vehicles in general.

Key Employee Engagement Programme

As was flagged by the then Minister for Finance Michael Noonan in his Budget speech last year, a new share-based remuneration incentive is being introduced from 1 January next. The incentive will aim to assist unquoted SME companies to attract key employees. Detail in the budget document tell us that the employee will be subject to capital gains tax on the disposal of the shares in place of the current income tax, USC and PRSI liabilities on exercise.

Merger of PRSI and USC

Over the past few months, the Minister has signalled his intention to merge the USC and PRSI into a single social insurance payment. During his Budget speech, Minister Donohue announced that a working group will be established to plan over the next year this amalgamation of PRSI and USC over the medium term.

PAYE Modernisation project

Revenue is currently undertaking a programme of PAYE Modernisation which will mean that from 1 January 2019 employers will need to calculate and report their employee’s pay and deductions as they are paid and report this to Revenue. This system will differ greatly from the current model with the abolishment of many of the current forms including P30, P35, P45 and P60s and will result in enhanced IT resources being required. Such modernisation was flagged in Budget 2017 and was followed up by a public consultation earlier this year.

In preparation for the Revenue PAYE Modernisation project, we have been told by Revenue that a range of compliance interventions will be undertaken at the end of this year and during 2018.

Amendments to the PAYE legislation to facilitate this modernisation are expected in the Finance Bill.

Corporation Tax Measures

Corporation Tax is a sensitive matter for Ireland. Over the last number of years, we have been the subject of constant scrutiny from the European Commission and the OECD, and the Government is tasked with dealing with international initiatives in the spirit of being good international tax citizens. The Budget measures, which mainly introduce a restriction to intangible asset relief along with announcements of further consultation on transfer pricing standards, are not as drastic or damaging as they might have been.

Restriction of tax relief for intangible assets

The measure announced provides that the deduction for capital allowances for intangible assets, and any related interest expense, will be limited to 80 percent of the relevant income arising from the intangible asset in an accounting period.

A tax deduction for capital expenditure incurred on the acquisition of specified intangible assets (SIA) is provided for under section 291A TCA 1997. SIAs include patents/registered designs, trademarks/brand names and know-how etc. The relief is seen as an essential part of our FDI offering.

Minister Donohue says that this measure will help sustain corporation tax receipts which are expected to drop from 2015 levels by 2020 and the measure is expected to raise €150m in addition tax per annum.

Public consultation on International Tax Strategy

The Seamus Coffey report provided a review of Ireland’s Corporation Tax code, see here. The report made a number of recommendations for further consultation in the areas of transfer pricing and Ireland’s response to the Base Erosion and Profit Shifting (BEPS) initative along with the EU’s Anti-Tax Avoidance Directive. The Minster launched this consultation titled “Update on Ireland’s International Tax Strategy’s International Tax Strategy”. The consultation period will run from 10 October 2017 to 30 January 2018, a period of 16 weeks.

Accelerated Capital Allowances for energy-efficient equipment extended to 2020

This is an incentive to encourage investment in energy efficient equipment for use in a company’s trade and is provided for under section 285A TCA 1997. The scheme was due to expire by 31 December 2017 but will now continue until the end of 2020.

Housing Sector

A large increase in commercial stamp duty, a promise to build an extra 4,000 new social homes in 2018 and a reduced holding period for the capital gains tax exemption were some of the highlights announced which saw the Minister allocate €1.83 billion into the crisis stricken housing sector for next year. Furthermore, in order to make it easier for developers to get funds and build homes, a new agency called Home Building Finance Ireland is being established which will draw on the established skills and expertise of NAMA.

Stamp duty

The rate of stamp duty on non-residential property will increase from 2 percent to 6 percent with effect from midnight Budget night. The new rate is still below the 9 percent rate that applied between 2002 and 2008 and is seen as a significant revenue raising measure which is projected to be €376 million in a tax year.

Stamp duty refund scheme

In order to address housing supply challenges, the Minster announced his intention to introduce a stamp duty refund scheme where commercial land is purchased for the purposes of housing development. The scheme will apply to developers who commence to build houses within 30 months of the land purchase. Further details of the scheme will be announced in the Finance Bill.

Mortgage Interest Relief

For owner occupiers who took out qualifying mortgages between 2004 and 2012, mortgage interest relief was expected to end on 31 December 2017. The Minister announced that in line with the objective of the Programme for Government, he would be extending the relief for these homeowners until 2020. The relief available in 2017 will be restricted to 75% in 2018, 50% in 2019 and 25% in 2020. The relief will cease in 2021.

Pre-letting expenses

In a move to encourage owners of vacant residential property to rent out property, a new deduction for expenses incurred prior to letting is being introduced. Prior to Budget 2018 the only pre-letting expenses that were allowed were letting fees, advertising fees and legal fees. This new measure will allow expenses such as painting, minor repairs and cleaning to be deducted against rental income. In order to qualify, the property has to have been vacant for at least 12 months, expenses have to be revenue in nature and cannot exceed €5,000 per property. If the property is taken off the rental market within four years, any relief given will be clawed back. The relief will be available for expenditure incurred up to the end of 2021.

Vacant site levy

In a further move to encourage the development of property, the Minister announced that the vacant site levy will be more than doubled; increasing from the current 3 percent levy rate that applies in the first year the site is vacant to 7 percent in the second and subsequent years. This means that where an owner of a vacant site does not develop the vacant land in 2018, they will pay a 3 percent levy in 2019 and the increased rate of 7 percent will apply for the second year, from 1 January 2019. If the land remains vacant in 2019, the 7 percent levy will apply in 2020. Effectively the vacant site levy will be a hefty 10 percent over two years.

Capital taxes

With no enhancements to entrepreneurs’ relief and no increases in any of the tax free thresholds for capital acquisitions tax, capital taxes were relatively untouched in the Budget announcements apart from some small tweaks.

Capital gains tax (CGT)

There were no improvements announced to entrepreneurs’ relief on Budget Day. Chartered Accountants Ireland continues to advocate that this relief, as it currently stands, is not operating to its optimal effect in a number of respects.

The seven year CGT relief is to be amended to allow the owners of qualifying land or buildings to sell those assets between the fourth and seventh anniversaries of their acquisition and still enjoy relief from CGT on chargeable gains.

This relief was originally introduced by Finance Act 2012 and brought a capital gains tax exemption on disposals of land or buildings acquired in the period commencing on 7 December 2011 and ending on 31 December 2013. The second Finance Act of 2013 extended the period within which the land or buildings may be acquired for the purposes of this relief to 31 December 2014.

The intention of the relief was to help stimulate activity in the property market. This reduction of the ownership period to allow relief for disposals after four years of ownership and not seven should go some way to further stimulating property transactions in Ireland, especially when coupled with some of the other measures announced.

Capital acquisitions tax (CAT)

Agricultural land placed under solar infrastructure will continue to be classified as agricultural land (formerly it would no-longer have been deemed agricultural land), but with a condition restricting the amount of the farmland that can be used for solar infrastructure to 50 percent of the total farm acreage. This will apply for the purposes of both CAT agricultural relief and CGT retirement relief.

Chartered Accountants Ireland is disappointed that an opportunity was not taken to align the rate of CAT with international rates applied to similar taxes. Also, the restrictions to the dwelling house exemption introduced in Finance Act 2016 remain too harsh.

In addition, the unchanged CAT thresholds are disappointing, the current thresholds are not sufficient to exempt children inheriting the family home when we consider that the average value of an Irish family home is often above €300,000. The UK, for comparison purposes, currently provides a couple with an inheritance tax nil rate band combined of £650,000 in total. From 6 April 2020, the combined total increases to £1 million when the phasing in of the new residence nil rate band is completed.

Stamp duty reliefs

To facilitate the intergenerational shift in farm ownership and management, consanguinity stamp duty relief for inter-family farm transfers is extended for a further three years. This relief applies to transfers of farm land by specific individuals. As this is an extension of a relief, according to the Budget 2018 documents, the net amount coming in should be revenue neutral.

VAT, excise and climate change measures

VAT overall remained relatively untouched though a special scheme is finally to be introduced for the charities sector. And, from midnight Budget night, those with a bad habit will have to dig deeper in their pockets to satisfy their craving.

VAT

Charities are exempt from VAT under the EU VAT Directive and as a result cannot recover VAT incurred on goods and services that they purchase. The Department of Finance and the Irish Charities Tax Reform Group have been examining how charities might be compensated in this regard.

As a result, the Minister has now announced a Charities VAT Compensation Scheme. This is essentially a VAT refund scheme to compensate charities for the VAT they incur on their inputs. The scheme will be introduced in 2019 in respect of VAT expenses incurred in 2018. Charities will be entitled to a refund of a proportion of their VAT costs based on the level of non-public funding they receive. An amount of €5m will be available to the scheme in 2019.

Moving onto the weather here in Ireland. Something we never expected to write about in the context of Budget announcements. Whilst we can’t say we live in sunny climes here, skin cancer is the most common form of cancer. Recognising the clear link between sunbed use and this cancer, the VAT rate on sunbed services is to increase from the reduced rate of 13.5 percent to the standard rate of 23 percent from 1 January 2018. This increase is more likely a behaviour changing strategy given it is projected to have a minimal gain for the exchequer. So, the message is get the fake tan out if you’re a fan of bronzed skin.

And, whilst it’s certainly not our Irish weather which brings the tourists here in their droves, Failte Ireland and many in the tourism sector are big fans of the reduced 9 percent rate for tourism. The Minister was keen to laude tourism as a national success story despite the uncertainty of Brexit. That said, one clear impact of the UK’s decision has been a continuing weakness in the value of sterling. While prices in Dublin continue to rise, the Minister is keen that VAT policy cannot be decided on the basis of one location only but must be in the context of the national interest. Accordingly, the VAT rate on the tourism and services sector remains at 9 percent.

Excise and old habits

In a Brexit protection measure, and as expected, fuel excise duty remains unchanged.

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, and an additional 25 cents on roll your own tobacco. This will take effect from midnight 10 October 2017 and will bring the price of cigarettes in the most popular price category to €12.

This is expected to raise €64 million for the exchequer in a full year. But you can still enjoy your glass of wine or beer (responsibly) safe in the knowledge that these won’t cost anymore from a tax or duty point of view.

Combatting climate change

In line with the National Mitigation Plan, the Minister has asked his officials and the Economics and Social Research Institute to carry out a review of carbon tax. This is intended to generate proposals for Budget 2019 around the role of tax in driving changes to behaviour in households and business.

The beginning of 2018 will also see proposals being brought forward for discussion in relation to vehicle registration tax (VRT) on leased vehicles. This is specifically to meet the requirements of a recent Court of Justice of the European Union judgement which held that the Irish VRT rules infringe the freedom to provide services across EU borders. Under current Irish law all importers of vehicles are obliged to pay the entire tax liability for permanent vehicle registration.

Sugar tax

If the announced tax on sugar sweetened drinks (SSD) is followed through next April we will see an increase in the price of certain soft drinks and similar beverages. A tax of either 20c or 30c per litre on drinks with a sugar content beginning at over
5 grams per 100 millilitres will be introduced from April 2018.

Details of the tax read similar to the regime to be introduced in the UK, also to begin from 1 April next. The sugar tax will be at a rate of 30 cent per litre on non-alcoholic, water based and juice based drinks which have 8 grams and above of sugar per 100 millilitres. A reduced rate of 20 cent per litre will apply on such drinks with between 5 and 8 grams of sugar per 100 millilitres.

According to the SSD information note published along with the budget documents by the Department of Finance, the tax will not apply to dairy products and pure fruit juices with a nutrition value are also out of scope. Products produced by small producers exempt from particular EU food labelling obligations will also be exempt from the SSD.

This new tax is expected to yield €30 million next year and €40 million in a full year.

Brexit

Brexit was a theme which trickled into many aspects of the Budget speech. Minister Donohue was very clear in stating that Brexit will likely result in permanent changes in trading activities and patterns for Irish businesses. Chartered Accountants Ireland had called for a change to VAT import rules to deal with the upfront VAT costs that traders will face on imports from the UK under the current system which will cause cash flow problems when the UK leaves the EU and are disappointed not to see these mentioned.

The Minister did acknowledge that SMEs would need to look beyond the UK into other markets for trading purposes and would need support to do so. To aid this, the Government announced a Brexit Loan Scheme which will see €300 million being made available at competitive rates to these businesses to bolster short term working capital needs. The Minister was keen to highlight that this scheme will be available to food businesses given their unique exposure to the UK market.

Minister Donohue also highlighted the particular exposure that will be experienced by the agri-food sector and said the loan scheme, which is supported by the European Investment Bank Group, the European Commission and the Strategic Banking Corporation of Ireland, would enable businesses to plan for Brexit and “grow into the future”.

In terms of further Brexit-proofing the economy, the commitment to the Rainy Day Fund which was announced in last year’s Budget was renewed and an additional allocation of capital expenditure of €4.3 billion over the next four years was announced.

Additional funding is also being plugged into the Department of Agriculture, Food and the Marine for 2018 and further Brexit response measures will be announced. These actions, along with the retention of the 9 percent VAT rate for tourism are all seen as positive policies in terms of protecting the economy from the risks of Brexit.

In addition, the Minister said that Ireland needs to be able to proactively respond to the challenges and opportunities that will arise from Brexit. To enable this, 40 staff will be recruited to the Department of Business, Enterprise and Innovation and other agencies next year.

Finance Bill 2017

The Department of Finance has confirmed that the Finance Bill will be published on 19 October. The timetable for the Bill tells us that it will pass all stages in the Dáil by mid-December.

According to the Department of Finance timetable, the Bill will move to debate at Committee Stage on 7 November and is due at Report Stage on
21 November. The Bill is expected to pass to the Seanad on 28 November.

The Bill will legislate for the Budget tax measures above. Also, it is usual for the Bill to contain measures not announced by the Minister. We will be scrutinising the Bill and will report on the main measures in the November issue of tax.point.