A. Income Tax

B. Business Taxation

C. Indirect Taxes

D. Stamp Duties

E. Economic Analysis

F. ICAI Representations Outcome

G. Press Release

H. Summary of Tax Measures

A. Income Tax

Credits, bands and rates

Main changes in personal tax:

• Increase in personal tax credit from €1,760 to € 1,830 for a single person and pro-rata for married
• Increase in PAYE tax credit from €1,760 to €1,830
• Increase in top of 20-percent bracket from €34,000 to €35,400 for a single person and pro-rata for married
• Increase in certain other credits (carers, etc)

The budgetary situation is much tighter now than it was this time a year ago. Indeed, in order to sustain capital spending, the Minister is obliged to go for an overall budget deficit of almost one percent of GDP in 2008. So, the changes in credits and bands is the very minimum that could have been expected in the light of our desire (a) to keep low earners out of the net and (b) to keep average earners out of the top bracket. In fact, less than the minimum has been granted. Over the past year, consumer prices have risen by around 5 percent, but the increases in credits and in the income-level at which one enters the top rate have been increased by only 4 percent. Real tax rates will increase.

The reduction in the top rate is like Sherlock Holmes's dog that barked in the night – it didn't happen. This is a measure of the tightness of the budgetary position and puts in its place what we said last year – “The Minister's promise of a further 1% cut next year would be very difficult for any government to renege on”.

Other changes

Apart from the thresholds for exemption from tax on rental incomes being raised somewhat, the only other change of note in personal tax is that first-time buyers of houses are yet again singled out for special privilege. The maximum allowable for mortgage interest relief – already much higher for FTBs than for others – is raised by a further 25 percent (to €10,000 for a single person) but the current ceiling is unchanged for other buyers.

B. Business Taxation

While on the face of the Minister's Budget Speech, there may have been few enough changes affecting business taxation, the devil, as always, is in the detail. The forthcoming Finance Bill may not be particularly large, but it is certain to be complex.

Business Expansion Scheme

After the significant enhancements to the BES last year, it wouldn't have been realistic to expect too many changes in what was always going to be a tight year. There is one change – the requirement that recycling companies must be grant aided to qualify is being lifted. This is being replaced by a requirement that such companies’ business proposals must be certified by an industrial development agency or County Enterprise Board before they avail of the scheme. In our pre-Budget submission, we argued that the grant aid requirement for all companies should be lifted. This change can be seen as a small step in the right direction. EU approval will be required for the measure.

Research and Development

The base reference year for incremental expenditure on R&D (which qualifies for relief) is confirmed at 2003 for a further four years. The main criticism levelled at the Irish R&D regime is that it is based on incremental expenditure – growth from year to year – rather than actual expenditure as in some other territories. By confirming the base year as 2003, we have to all intents and purposes an actual expenditure regime for any venture undertaking R&D for the first time since that date. The certainty that this arrangement will persist for another four years is valuable in itself.

R&D is one of the very few areas of taxation incentive where EU approval need not be sought.

Preliminary Corporation Tax

Another welcome step in the right direction. Last year's Finance Act permitted companies with prior year CT liabilities of €150,000 or less to base their current year PT on the previous year's amount – we had made strong representations on this point. This threshold is being raised to €200,000, effective for preliminary tax payment dates arising after 5 December 2007. The topic had again been a subject in our pre-Budget submission. ICAI had argued for the arrangement to be extended to all companies and we raised the item during our meeting with the Minister. Hopefully he will see his way to progressively increasing the threshold each year.

The comparable threshold arrangement for startup companies is also being increased to €200,000.

Capital Allowances

While the standard fabric of business capital allowances is apparently unchanged, the capital allowances regime for cars goes green, with allowances now to be defined not only by reference to the capital cost but also by their emissions ratings. The allowances for cars with high CO₂ emission levels are effectively halved, and above a certain level, they will be eliminated altogether. Leasing expenses are similarly curtailed. Allowances will be defined under the same rules as are proposed for Vehicle Registration Tax.

The revised scheme will come into effect in respect of cars purchased or leased on or after 1 July 2008.

Film Relief

Film relief is to be extended for a further four years to 2012. “Revisions” are promised in the Finance Bill.

Farm Taxation

This Budget sees some new measures reflecting changing circumstances in the family farm business. The detail provided is thin – we will have to wait for the Finance Bill perhaps for the issues to be fleshed out. Per the official documents to hand, the changes are as follows:

Tax Relief on the Dissolution of Farm Partnerships

A new relief from Capital Gains Tax on the dissolution of farm partnerships will be introduced in the Finance Bill. The relief will run for a period of 5 years and full details will be contained in the Finance Bill.

Milk Production Partnerships

Where a farmer on income averaging enters a milk production partnership the provisions that can result in a clawback of income tax will no longer apply.

Sugar Beet Diversification

Provision is being made to allow farmers in receipt of the Diversification Aid element of the Sugar Beet Compensation Package to spread these payments over six years for the purposes of calculating taxable income.

C. Indirect Taxes

There was a number of VAT measures announced in the Budget, mainly relating to the proposed changes to the VAT on property regime and to small businesses.

A proposed start date for the new VAT on property rules of 1 July 2008 has been suggested. This is unexpected as a 2009 start date (at the earliest) had been mentioned during discussions with the Revenue and the Department of Finance.

The key announcement in the excise area was an increase of 30c in the price of a packet of 20 cigarettes.

Highlights

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

I. Changes to Rules on VAT on Property

The changes to the VAT on Property rules were not explicitly mentioned by the Minister in his Budget speech, except by the reference to “Details of certain technical but important VAT simplification measures are set out in the Summary of Budget Measures.”

The Revenue Commissioners established a major review of VAT on property transactions in May 2005, with further consultation announced by the Minister in his Budget speech last year. ICAI has been representing members in this process through CCAB-I.

The Summary of Budget Measures includes an annex (E) which outlines the changes to the rules in relation to VAT on property.

The new rules will apply to both commercial and residential property supplied in the course of a business. The VAT charge on sales of new residential property will be unchanged.

In summary, the main provisions will include:

• The supply of buildings – whether by the sale of the freehold or via a very long lease (a “freehold equivalent”) – will be taxable only while the building is considered “new”.
• The supply of “old” buildings will be exempt from VAT, but there will be an option to tax such supplies.
• The supply of “building land” will be taxed in the same way as it is taxed currently. The VAT treatment of undeveloped land (e.g. farm land) will not be affected. Land that is sold in connection with a contract to develop it will continue to be taxable.
• Most leases will be exempt from VAT but leases that represent effective ownership will be treated in the same way as supplies of the freehold.
• There will be an option to tax rents on commercial buildings where the landlord and tenant are not connected persons.

In addition, a Capital Goods Scheme (CGS) will be introduced for property transactions; so that the VAT deductible will be proportionate to the business use of a property over a twenty-year period.

As always when a new system is introduced, it will result in three systems running concurrently – the old, the new and the transition. While transitional issues have been considered, it is crucial that all transitional issues are identified and resolved.

The detailed provisions enacting the new system for applying VAT to property transactions will be contained in the Finance Bill 2008.

According to the Budget documents, the new system will take effect from 1 July 2008. This is unexpected as a 2009 start date (at the earliest) had been mentioned during discussions with the Revenue and the Department of Finance. When one considers that the actual legislative rules will only be known after the publication of the Finance Bill 2008, which is likely to be early February 2008, there is clearly insufficient time for our members to adequately familiarise themselves with those rules prior to an implementation date of 1 July 2008.

Also, ICAI, under the umbrella body CCAB-I, had made a submission to the Department of Finance on the removal of the so-called “90% rule” which had been included in consultation documents on the proposals. It is unclear from the summary given in the Annex, whether our views and those of other bodies have been taken into account.

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.

II. VAT measures for Small Business

VAT Registration Thresholds for SMEs

Following on from his announcement in last year's Budget, the Minister has announced further increases in the VAT registration thresholds.

The VAT registration thresholds for small businesses are being increased from €35,000 to €37,500 in the case of services, and from €70,000 to €75,000 in the case of goods. These increases will take effect from 1 May 2008.

The ICAI had canvassed on behalf of our members to have the onerous burden of tax compliance further reduced this year. While welcome as a means of reducing the administrative burden for small businesses, there are EU rules governing the maximum registration thresholds, approximately €50,000 for supply of services and €100,000 for supply of goods. The Minister should avail of those maximum registration thresholds before a change is made at EU level.

III.VAT changes for farmers

(a) Reduced VAT rate for certain agricultural inputs used to produce bio fuel

The VAT rate on the supply of elephant grass rhizomes, seeds, bulbs, roots and similar supplies used for the agricultural production of bio-fuels will be reduced from 21% to 13.5% with effect from 1 March 2008. The measure will assist in the development of agricultural production of such fuels.

(b) Farmer's flat rate addition

The farmer's flat rate addition is being maintained at 5.2% for 2008.

The flat rate is designed to recoup non-VAT registered farmers for the VAT they incur on their inputs.

IV. Other VAT announcements

Reverse charge mechanism in the Construction Sector

A reverse charge mechanism for VAT on supplies made by a subcontractor to a principal contractor in the construction sector is being introduced with effect from 1 September 2008. This is described as a simplification measure.

This measure will be the subject of consultation with the construction sector and the details will be outlined in the Finance Bill.

V. Excise & VRT

(a) Tobacco Excise

The Excise Duty on a packet of 20 cigarettes is being increased by 30 cents (including VAT) with a pro-rata increase on the other tobacco products, with effect from midnight tonight (5 December 2007).

(b) Alcohol

Licensing fees for Off-licences are being increased from €250 per licence to €300 per licence with effect from 1 October 2008.

In addition, the Minister announced a study into the public health benefits arising from a switch to lower alcohol beverages and intends to bring forward measures in his next Budget.

(c) Vehicle Registration Tax (VRT) to take greater account of CO₂ emission levels

The current VRT system uses engine size as the criterion to determine the VRT rate to be applied to a car.

Under the revised VRT system, the CO₂ emissions of a car will replace engine size as the criterion to determine the VRT rate payable on the car at point of registration. Lower emission cars will attract reduced VRT rates and higher emission cars will be liable to higher rates. The VRT rates will continue to be applied to the Open Market Selling Price of the car.

The revised VRT system will take effect on 1 July 2008.

(d) Vehicle Registration Tax (VRT) Relief Scheme for Hybrid Electric and Flexible Fuel Vehicles and VRT exemption for Electric Vehicles

The existing 50% VRT relief scheme for series production hybrid electric vehicles and flexible fuel vehicles expires on 31 December 2007. The scheme is being extended in its current form from 1 January 2008 until 30 June 2008, at which point the revised VRT scheme based on CO₂ emissions will be implemented.

From 1 July 2008 the relief for series production hybrid electric and flexible fuel cars will be adjusted to provide a relief of up to €2,500 on the VRT payable, in addition to the benefit of the new VRT CO₂ emission related system. This relief will apply until 31 December 2010.

Series production electric cars (i.e. cars which can be propelled solely by a rechargeable battery) and electric/battery-assisted bicycles are being exempted from VRT with effect from 1 January 2008.

(e) Excise on Electricity

Under the EU Energy Tax Directive all Member States are required to introduce an excise tax on electricity. In Ireland's case this must be done in 2008.

From 1 October 2008 the following EU minimum rates will apply; 50 cents per megawatt hour (MWh or 1,000 units) for business use and €1 per megawatt hour for non-business use.

However, electricity used by households will be exempt from the new charge as will electricity produced from renewables and combined heat and power generation.

Energy products and electricity used to produce electricity are also being exempted from excise taxation.

D. Stamp Duties

The elimination of the old “step” system of Stamp Duties was well overdue, irrespective of the current shape of the housing market. The main point to note is that the Stamp Duty reform deals only with residential property – commercial property arrangements remain unchanged.

Essentially the existing sequence of bands and rates is being replaced with two progressive rates – 7% and 9%. The first €125,000 will be exempt. The next €875,000 will attract a rate of 7%, and the balance will be taxed at 9%. There will be a general exemption for properties with a value of less than €127,000.

According to the figures from the Department of Finance, the percentage saving in Stamp Duty will in some cases be as high as 60%. All residential property transactions will be cheaper in Stamp Duty terms, but there is something of an anomaly in the pattern of savings. The savings can be less pro-rata on moderately priced houses at values in or around the national average than on higher value houses. For instance, on a house valued at €350,000, the saving on the old system is 25%. On a house costing €1m, the saving is 32%. Still, it's churlish to look a gift horse in the mouth.

Particularly when it's uncertain what that horse might cost. The Minister reckons it might cost €190 million, but it is notoriously difficult to predict what effect a tax change of this significance might have on the housing market – remember Bacon? We hope it will be positive.

A few other points to note –

• This change will take effect in respect of instruments which are required to be presented to the Revenue Commissioners for stamping no later than 5 December 2007. Instruments which are executed in the 30 days prior to 5 December 2007 will therefore benefit from this change.
• Current exemptions in relation to first time buyers and buyers of new homes will continue to apply.

In relation particularly to the second point there are claw-back arrangements for certain owner occupiers where they cease to reside in the property which the Minister is also modifying:

• First-time owner-occupying purchasers of new or second-hand dwelling houses or apartments
• Other owner-occupying purchasers of new dwelling houses or apartments under 125sq m. Partial relief for owner-occupying purchasers of new dwelling houses or apartments over 125sq m.

This claw-back period is being reduced for all three reliefs from 5 to 2 years for deeds of transfer executed on, or after, 5 December 2007. For deeds of transfer executed before 5 December 2007, to the extent that a dwelling house or apartment is rented out on, or after, 5 December 2007, it will not involve a claw-back of relief where this happens in the third, fourth or fifth year of ownership.

E. Economic Analysis

What is most evident from the Budget today from an economic perspective, despite the decline from last year's bountiful position, is the relative health of the public finances. The announced General Government deficit of 0.9% today is an appropriate and sustainable response to the recent slowing of the economy and shows the Minister's willingness to borrow to fund investment despite it being a charge levelled by Fianna Fáil at the Opposition in recent years.

(The GGD is the figure used for Growth and Stability Pact comparison purposes and is replacing the traditional exchequer balance which would recognise the payment to the National Pension Reserve Fund as an outflow.)

That it is taking place against a debt GDP/Debt ratio of 25% for 2007, increasing to 26% in 2008 is indicative of the strength of the economy. The Stability Pact Update predicts the GGD to grow only to 1.1% and 1.0% in 2009 and 2010. This is against the backdrop of an 8.6% increase in overall public expenditure and a significant 12% increase in capital expenditure (which is set to average at 6% GNP over the budgetary cycle). Current expenditure is predicted to grow at 8.2%. The cost of the income tax package at €580m is one of the lowest in years.

The economic growth figure for 2008 has been revised downwards by the Department to 3.0% GDP and 2.8% GNP. The current budget balance is set to decline from an estimated €7bn in 2007 to €4.7bn in 2008. These are at the upper end of recent predictions but follow the additional monies injected into the economy in today's Budget. Tax Revenue for 2008 is only predicted to rise by 3.3% over the expected 2007 out-turn perhaps an indication that the Department of Finance doesn't intend to get its fingers burnt for a second year in succession. Despite the stamp duty package the Government is predicting a further decline in revenue of €315m in 2008 over the 2007 predicted out-turn.

The Minister is predicting a moderation of inflation with the Harmonised Index of Consumer Prices reducing from 2.8% in 2007 to 2.4% in 2008. The Consumer Price Index for 2007 however will average 4.9%. Interestingly, and perhaps fortunately for the Government its use has been discontinued in the future projections!

Despite a forecast in jobs growth for 2008 of 22,000 the unemployment rate is set to grow to 5.5% from 4.6%. This increase may yet cause problems for the Government.

The decision by the Minister to present this unified budget – in effect to announce the tax changes and spending increases on the same day – has gone some way towards restoring the significance of Budget day in the fiscal calendar.

F. ICAI Representations Outcome

Payment of Preliminary Corporation Tax

What we sought:

Extend the Finance Act 2007 rules for computing preliminary tax for smaller companies to all companies.

Outcome:

Eligibility threshold increased from €150,000 to €200,000, thereby bringing many more companies into this useful arrangement.

Thresholds for VAT registration

What we sought:

The VAT registration thresholds should be further increased to the maximum allowable limits.

Outcome:

Thresholds increased to €37,500 for services providers, €75,000 for traders.

Business Expansion Scheme

What we sought:

Re-examine the types of business which are eligible for BES.

Outcome:

Recycling Businesses may now qualify without prior grant aid.

Research and Development Relief

What we sought:

Refine and extend the R&D Credit Regime.

Outcome:

Base year for assessing incremental expenditure fixed as 2003 for 4 years.

G. Press Release

ICAI – Minister avoids temptation to stifle economy

(Wednesday, 05 December 2007) The Institute of Chartered Accountants in Ireland (ICAI) said that the Minister for Finance's Budget avoided the big mistake that could be made at this point in our economic development – retrenchment.

The decision to allow the GGD to increase to 0.99% to allow investment in the National Development Plan (NDP) to be sustained and increased is consistent with the key need of the business community as identified by the ICAI/IIB Bank Chartered Accountants Business Sentiment Survey over the last year and should promote business confidence.

Underlying the policies announced today is recognition that tax policy drives behaviour. This approach, which in the past has driven urban renewal and rented property incentives, is now being directed to empower people to take environmental decisions.

The adjustments to the Stamp Duty regime constitute meaningful and imaginative reform. The elimination of the old step system of Stamp Duties was well overdue, irrespective of the current shape of the housing market.

Of equal significance is the increase in Mortgage Interest relief, which addresses the cost of finance. “In our view, the cost of finance is as significant a factor as the capital cost of housing. Overall, the changes will provide meaningful and welcome relief to homeowners. The measure which allows homeowners to convert their properties to rented residential use after two years, instead of five, will mainly assist the rented residential property market.” said ICAI Director of Taxation Brian Keegan.

“The improvements to the R&D regime are of particular importance” said Keegan. Modern high value manufacturing cannot survive without R&D facilities. When companies are encouraged to locate their R&D facilities here, the chances of our retaining their manufacturing facilities are greatly improved. Coupled with the expenditure commitments towards the NDP, this should help keep Ireland towards the top of the list as the best location for multinationals wishing to establish a foothold in Europe.

Indexing the income tax bands and credits should assist employers in managing wage inflation; outside of that, income tax policy seems to be aimed at maintaining the status quo. Leaving the PRSI regime for employees largely unchanged was on balance a positive move. “The reform of PRSI is not simply a matter of adjusting thresholds and rates – any reform would result in the effective introduction of an additional tax on employee income”.

Lastly, ICAI has warmly welcomed the tax improvements geared towards the disabled and those who care for them. “In successive Budgets, Minister Cowen has shown himself alert to the burdens of this sector of our society. By increasing the Home Carers Allowance and the Incapacitated Child Allowance again, he is making a real difference,” Keegan concluded.

H. Summary of Tax Measures

Budget 08 – Summary of Tax Measures

The following points are derived from the documentation supporting the Budget speech of the Minister for Finance on 5 December 2007.

Income Tax

Personal Tax Credits and Bands

The main changes to income tax bands and credits reflect indexation to take account of inflation.

Mortgage Interest Relief

The current annual ceiling on the amount of interest that can be allowed on a mortgage is being increased for “first-time buyers” from €8,000/€16,000 single/ married to €10,000/€20,000 single/married. These changes take effect from 1 January 2008.

The additional relief will be available to “first time buyers”, i.e. for the first seven years for which there is an entitlement to mortgage interest relief.

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, it is being increased from €1,800 to €2,000 per annum for a single person and from €3,600 to €4,000 per annum for widowed and married persons.
• This equates to a tax credit of €400 per annum for single persons, and €800 for widowed and married persons, under 55 years of age.
• For those aged 55 years and over, the maximum level of rent paid on which tax relief can be claimed is being increased from €3,600 to €4,000 per annum for a single person and from €7,200 to €8,000 per annum for widowed and married persons.

This equates to a tax credit of €800 per annum for a single person, and €1,600 per annum for widowed and married persons, over 55 years of age.

Rent-a-Room Scheme

The limit of the exemption from income tax which applies to rent received, where a person rents out a room or rooms in his or her principal private residence, is to be increased from €7,620 to €10,000.

Business Expansion Scheme

The requirement that recycling companies must have received grant assistance before availing of the Business Expansion Scheme (BES) is to be replaced by a requirement that their business proposals must be certified by an industrial development agency or County Enterprise Board before they avail of the scheme.

As the BES is an approved State Aid, it will be necessary to advise the European Commission of this proposed change.

Tax Relief on Trade Union Subscriptions

The standard-rated tax allowance in respect of subscriptions paid by members of trade unions is to be increased from €300 to €350 per annum.

This is equivalent to a total tax credit of €70 per annum.

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 being increased from 4.5% to 5.5%, and
• the specified rate in respect of other loans is being increased from 12% to 13%.

These changes will take effect from 1 January 2008.

Remittance basis of taxation

Following discussions with the European Commission, the tax treatment of investment income and income attributable to the exercise of foreign employments outside the State (i.e. the remittance basis of taxation) will extend to UK-sourced income.

The UK Pre Budget Report also dealt with issue, from a UK perspective.

The Finance Bill will extend the relevant treatment from 1 January 2008.

Extension of s481 – Film Relief

The current provisions in relation to the tax relief for investment in films are due to terminate on 31 December 2008. The scheme will be renewed for another 4 years to 31 December 2012.

Any revisions that may be necessary to the scheme will be provided for in Finance Bill 2008.

PRSI Changes

Leaving the PRSI regime for employees largely unchanged was on balance a positive move. The reform of PRSI is not simply a matter of adjusting thresholds and rates – any reform would result in the effective introduction of an additional tax on employee income.

Employee PRSI annual ceiling

From 1 January 2008, the PRSI contribution ceiling will increase from €48,800 to €50,700.

Employee PRSI weekly threshold

From 1 January 2008, the employee weekly threshold for liability to PRSI will increase from €339 to €352.

Corporation Tax

Preliminary Tax payment arrangements for Small Companies

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 €150,000 to €200,000. This will be effective from preliminary tax payment dates arising after 5 December 2007.

While this measure is to be welcomed, ICAI would like to see all companies being allowed to base their preliminary tax payments on prior year results.

Preliminary Tax payment arrangements for Start-up Companies

Under the measure introduced in last year's Budget, new or start-up companies with a Corporation Tax liability of €150,000 or less, for their first accounting period are not required to pay preliminary tax in respect of that first accounting period.

The tax liability threshold under this arrangement for new or start-up companies is also being increased to €200,000 and this change will also be effective from preliminary tax payment dates arising after 5 December 2007.

Research and Development

The base year for expenditure which is used to calculate the qualifying incremental expenditure on research and development (R&D) under the tax credit scheme is being fixed at 2003 for a further 4 years to 2013.

The change will provide an additional incentive for increased expenditure on R&D in future years and it will offer more certainty to industry in relation to the tax credit scheme.

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

International Financial Reporting Standards (IFRS) Rule

Transitional arrangements which relax the interest charge on underpaid preliminary Corporation Tax for companies in very specific circumstances for certain companies whose accounts are based on International Financial Reporting Standards (IFRS) will be changed in the Finance Bill so that these arrangements can be used on a permanent basis.

Stamp Duty

Reform of the Charge to Stamp Duty on Residential Property

The current Stamp Duty system applicable to residential property is being reformed.

A simplified system, incorporating an exemption of €125,000 with 2 progressive rates instead of the existing 6 rate bands, is being introduced with immediate effect.

Transactions not exceeding the €125,000 exemption level will not be liable to Stamp Duty. For amounts above this €125,000 exemption level, but not exceeding €1 million, Stamp Duty will be charged at 7% on the excess over €125,000. Where the property exceeds €1 million, the part in excess of €1 million will be charged at 9% with the remainder between €125,000 and €1 million subject to a 7% charge.

In addition, properties with a value in excess of €125,000 but not exceeding €127,000 will not be liable for stamp duty.

This change will take effect in respect of instruments which are required to be presented to the Revenue Commissioners for stamping no later than 5 December 2007. Instruments which are executed in the 30 days prior to 5 December 2007 will therefore benefit from this change.

Current exemptions in relation to first time buyers and buyers of new homes will continue to apply.

Claw-back of Relief for First-time Purchasers and other Owner-Occupiers

An exemption from Stamp Duty is generally available for first-time owner-occupying purchasers of new or second-hand dwelling houses or apartments. There is also an exemption available for other owner-occupying purchasers of new dwelling houses or apartments under 125m². In addition, partial relief is also available to owner-occupying purchasers of new dwelling houses or apartments over 125m². These exemptions/reliefs are clawed-back where the purchaser rents out the dwelling house or apartment, other than under rent-a-room arrangements, within 5 years of the date of the deed of transfer giving effect to the purchase.

This claw-back period is being reduced for all three reliefs from 5 to 2 years for deeds of transfer executed on, or after, 5 December 2007. For deeds of transfer executed before 5 December 2007, to the extent that a dwelling house or apartment is rented out on, or after, 5 December 2007, it will not involve a claw-back of relief where this happens in the third, fourth or fifth year of ownership.

Financial Cards

Changes are being made to the Stamp Duties applicable to ATM/Debit cards, charge cards and credit card accounts.

The charges for ATM/Debit/Combined cards will take effect on the year ending 31 December 2007 and for Credit cards for the year ending 1 April 2008.

In addition, commencing in 2008, financial institutions will be required to make a preliminary payment in December of each year, of the Stamp Duties on financial cards due to be paid in the following year. This payment will be based on 80% of their Stamp Duty liability for the previous year. The date on which customers are charged will not be changed.

Bills of Exchange (including Cheques)

The Stamp Duty rate on Bills of Exchange is being increased from 15 cent to 30 cent in respect of Bills of Exchange drawn on, or after, 6 December 2007. In the case of cheques, the increase will apply in respect of cheques supplied by financial institutions to customers on, or after, 6 December 2007.

Stamp Duty & Capital Gains Tax

Increase in Site to Child Exemption from Stamp Duty and Capital Gains Tax

The existing Site to Child relief from Stamp Duty and Capital Gains Tax provides an exemption under both taxes on sites with a market value not exceeding €254,000, where a parent transfers the site to a child for the purposes of constructing the child's principal private residence.

The exemption threshold of €254,000 is being increased to €500,000. This change will take effect in respect of disposals made on or after Budget day.

VAT

VAT Registration Thresholds for SMEs

The VAT registration thresholds for small businesses are being increased from €35,000 to €37,500 in the case of services, and from €70,000 to €75,000 in the case of goods.

These increases will take effect from 1 May 2008.

While welcome as a means of reducing the administrative burden for small businesses, there are EU rules governing the maximum registration thresholds, approximately €50,000 for supply of services and €100,000 for supply of goods. The Minister should avail of those maximum registration thresholds before a change is made at EU level.

Reduced VAT rate for certain agricultural inputs used to produce bio fuel

The VAT rate on the supply of elephant grass rhizomes, seeds, bulbs, roots and similar supplies used for the agricultural production of bio-fuels will be reduced from 21% to 13.5% with effect from 1 March 2008. The measure will assist in the development of agricultural production of such fuels.

Review of VAT on Property Transactions

A review of the current system of applying VAT on property transactions has been carried out.

Provision will be made in the Finance Bill for the introduction of a new system for applying VAT to property transactions. According to the Minister, the changes are designed to simplify the rules for VAT on property, while ensuring a more equitable treatment for taxpayers.

The new rules, which are outlined in the Indirect Taxes section of this ICAI Tax, will apply to both commercial and residential property supplied in the course of business. The VAT charge on sales of residential property is unchanged.

The new system will take effect from 1 July 2008.

Reverse charge mechanism in the Construction Sector

A reverse charge mechanism for VAT on supplies made by a subcontractor to a principal contractor in the construction sector is being introduced with effect from 1 September 2008. This is a simplification measure.

This measure will be the subject of consultation with the construction sector and the details will be outlined in the Finance Bill.

Car Taxation

Vehicle Registration Tax (VRT) to take greater account of CO₂ emission levels

The current VRT system uses engine size as the criterion to determine the VRT rate to be applied to a car.

Under the revised VRT system, the CO₂ emissions of a car will replace engine size as the criterion to determine the VRT rate payable on the car at point of registration. Lower emission cars will attract reduced VRT rates and higher emission cars will be liable to higher rates. The VRT rates will continue to be applied to the Open Market Selling Price of the car.

The revised VRT system will take effect on 1 July 2008.

Vehicle Registration Tax (VRT) Relief Scheme for Hybrid Electric and Flexible Fuel Vehicles and VRT exemption for Electric Vehicles

The existing 50% VRT relief scheme for series production hybrid electric vehicles and flexible fuel vehicles expires on 31 December 2007. The scheme is being extended in its current form from 1 January 2008 until 30 June 2008, at which point the revised VRT scheme based on CO₂ emissions will be implemented.

From 1 July 2008 the relief for series production hybrid electric and flexible fuel cars will be adjusted to provide a relief of up to €2,500 on the VRT payable, in addition to the benefit of the new VRT CO2 emission related system. This relief will apply until 31 December 2010.

Series production electric cars (i.e. cars which can be propelled solely by a rechargeable battery) and electric/battery-assisted bicycles are being exempted from VRT with effect from 1 January 2008.

Capital Allowances (and Expenses) for Business Cars

A revised scheme of capital allowances and leasing expenses for cars used for business purposes is being introduced. The revision will link the availability of such allowances and expenses to the CO₂, emission levels of the vehicles. Cars will be categorised by reference to CO₂, emissions with the emissions bands being broadly consistent with the new VRT system, as follows:

Category A Vehicles	Category B/C Vehicles	Category D/E Vehicles	Category F/G Vehicles
0—120g/km	121—155 g/km	156—190g/km	191g/km +

Cars with CO₂ emission levels in Category A/B/C above will benefit from capital allowances at the current car value threshold under the existing scheme of €24,000, regardless of the cost of the car. Cars in Category D/E will receive allowances of 50% of the current car value threshold or 50% of the cost of the car, if lower. Cars in Category F/G will not qualify for capital allowances.

As regards leasing expenses, cars in Category A/B/C will benefit from a proportionately higher deduction than the actual leasing expenses where the cost of the car is less than €24,000. Cars in Category D/E will get 50% of the leasing expenses they would otherwise benefit from under the current scheme. Cars in Category F/G will not qualify for a deduction for leasing expenses.

The revised scheme will come into effect in respect of cars purchased or leased on or after 1 July 2008.

New Motor Tax Rates and Fees for Trade Licence Plates

In order to support funding for local authorities, the Budget provides for increases in motor tax rates and fees for trade licence plates. The most recent increase in motor tax rates took effect from January 2004.

The proposed increases are 9.5% for cars below 2.5 litres and 11% for cars above that threshold. Goods and all other vehicles will also increase by 9.5% with no increase for electric vehicles. Trade plate licences will also increase by 9.5%. The increases in motor tax rates must be viewed against the background that since the beginning of 2004, inflation has increased by over 15%.

The new rates will apply to motor tax discs and trade licences taken out for periods beginning on or after 1 February 2008.

Excise

Tobacco

The Excise Duty on a packet of 20 cigarettes is being increased by 30 cents (including VAT) with a pro-rata increase on other tobacco products, with effect from midnight on 5 December 2007.

Alcohol

Licensing fees for Off-licences are being increased from €250 per licence to €300 per licence with effect from 1 October 2008.

In addition the Minister announced a study into the public health benefits arising from a switch to lower alcohol beverages and intends to bring forward measures in his next Budget.

Excise on Electricity

Under the EU Energy Tax Directive all Member States are required to introduce an excise tax on electricity. In Ireland's case this must be done in 2008.

From 1 October 2008 the following EU minimum rates will apply; 50 cents per megawatt hour (MWh or 1,000 units) for business use and €1 per megawatt hour for non-business use.

However, electricity used by households will be exempt from the new charge as will electricity produced from renewables and combined heat and power generation.

Energy products and electricity used to produce electricity are also being exempted from excise taxation.

Farmer Taxation

Farmer's flat rate addition

The farmer's flat rate addition is being maintained at 5.2% for 2008.

The flat rate is designed to recoup non-VAT registered farmers for the VAT they incur on their inputs.

Tax Relief on the Dissolution of Farm Partnerships

A new relief from Capital Gains Tax on the dissolution of farm partnerships will be introduced in the Finance Bill.

The relief will run for a period of 5 years and full details will be contained in the Finance Bill.

Milk Production Partnerships

Where a farmer on income averaging enters a milk production partnership, the provisions that can result in a clawback of income tax will no longer apply.

Sugar Beet Diversification

Provision is being made to allow farmers in receipt of the Diversification Aid element of the Sugar Beet Compensation Package to spread these payments over six years for the purposes of calculating taxable income.

Fishing Industry

Tax Relief on Fishing Vessel Decommissioning Payments

Provision will be made for amending the taxation code to assist the take-up of the decommissioning scheme to support the restructuring of Ireland's fishing fleet.

Details will be contained in the Finance Bill.