ICAI Budget Bulletin
A. Income Tax
B. Business Taxation
C. Indirect Taxes
D. Economic Analysis
E. Press Release
F. Summary of Tax Measures
G. Budget 09 – Links
A. Income Tax
Income Levy
The Minister has announced the introduction of an income levy of 1% on income up to €100,100 and 2% on income in excess of €100,100. In his speech the Minister acknowledged that the income levy demanded solidarity by the taxpayers and was a necessary measure to restore the order and stability to the public finances. The levy is to be reviewed in the context of economic conditions. It is estimated that the measure will yield €815 million in 2009 and €1,180 million in a full tax year.
The income levy is not new to the Irish tax system. It was introduced previously in FA83 for one year when Alan Dukes was Minister for Finance, and was reintroduced in FA93 again for one year when Bertie Ahern was Minister for Finance. The only positive to note on the income levy if past use is to be relied on is that it was only used as a one year measure to plug the Exchequer. We hope that Minister Lenihan will follow the example of Mr Dukes and Mr Ahern and will only have recourse to the income levy for one year.
The income levy is no doubt a blunt method of generating tax revenue as it doesn't distinguish between the lower paid and the higher paid individual. However it will yield €1,180 million compared to a €300 million yield for every 1% increase to the top rate of income tax so it is ultimately blunt but effective in its objective.
Standard Rate Band Increases
New Standard Rate Bands from 1 January 2009 are as follows:
Current Proposed |
||
Single |
€35,400 |
€36,400 |
Married One Income |
€44,400 |
€45,400 |
Married Two Incomes |
€70,800 |
€72,800 |
The maximum transferability between spouses of €44,400 in 2008 is increased accordingly to €45,400 in 2009.
If nothing else, the modest rate band increases will offer a small offset to the effects of inflation.
Mortgage Interest Relief
The current rate of mortgage interest relief is to increase from 1 January 2009 for first time buyers from 20% to 25% in year 1, year 2 and to 22.5% in years 3, 4 and 5. Non-first time buyers relief is reduced from 20% to 15% from January 2009. The ceiling on the maximum sum allowable for claiming mortgage interest relief has not changed so in real terms the change in the rates of relief will not offer any respite to any taxpayer having difficulty in meeting mortgage repayments.
Health Expense Relief
One of the more effective tax reliefs of recent times has been significantly diminished on the announcement that tax relief on health expenses will reduce from 41% to 20% from 1 January 2009. Nursing home expenses are also to be standard rated from 1 January 2010. Health expense relief was widely used to shoulder the burden of expensive treatments such as laser eye surgery and non-routine dental treatments and tax relief offered on such cost will certainly be missed by many in the calculation of income tax liabilities for 2009.
DIRT
DIRT is a final liability tax – deducted by the financial institution at 20%, and that was the end of the matter even for marginal rate taxpayers. The self assessed must return the deposit interest to account for any levies arising. This will remain the case, except that now the DIRT rate is 23%; an increase in real terms of three percentage points. Recent events have suggested that cash deposits are not only the most conservative of investments, but also the ones attracting the safest returns. In a tightened budgetary situation, it is then perhaps understandable that the Government might wish to take its share.
B. Business Taxation
After a series of relatively uneventful Budgets in terms of business measures, the problem in Budget 09 is where to start. So let's start with the good news.
In Stamp Duties, all transactions on commercial property in effect were charged at 9%. This has been reduced to 6% in respect of instruments executed on or after 15 October 2008. The 6% rate will apply to aggregate consideration of €80,001 or more.
Equally welcome is not a rate cut as such, but an unequivocal commitment by Government to retaining the 12.5% rate of Corporation Tax. It must have been tempting in an environment where tax revenue was at a premium to look at the potential for an additional yield from Corporation Tax but this would have been truly counter productive. Instead the Minister's statement will reassure existing industry, and contribute to the marketing of Ireland as the premium European destination for Foreign Direct Investment.
Likewise, the increase in the R&D credit from 20% to 25% will also help in the quest for FDI. This won't, as suggested, put us in the forefront of R&D regimes globally – that accolade goes to some non EU countries – but it won't do us any harm either.
Even the increase in Capital Gains Tax to 22% should not have too significant an impact on FDI, as on the face of it, the participation exemption appears unchanged. The Budget documentation suggests an increased yield from the 2% rate increase in the order of €160m. This is in the context of the CGT yield during 2008 having collapsed from comparable figures in 2007. The key driver for the CGT yield has historically been gains on shares, with gains on property following. We'll know better how accurate this estimate will be once the 31 October payments are in.
That of course has been a feature of this Budget – unlike other years, the important tax figures from November are known unknowns. What is immediately evident however is the acceleration of Corporation Tax payment dates for those companies which hitherto were not eligible to pay preliminary Corporation Tax on the previous year's outturn. The new position is worth quoting in full here (from the Department of Finance documentation):
“Companies with a corporation tax liability of more than €200,000 in their previous accounting period are obliged to pay preliminary corporation tax, amounting to 90% of the liability for the current accounting period, one month before the end of the current accounting period (and not later than the 21st of the relevant month). The current single payment for large companies’ preliminary corporation tax will be split into two instalments. This will apply to accounting periods commencing on or after Budget day, 14 October 2008.
The first instalment will be payable in the sixth month of the accounting period (e.g. 21 June for a company with calendar year accounts) and the amount payable will be 50% of corporation tax liability in the preceding accounting period or 45% of corporation tax liability for the current accounting period.
The second instalment will be payable (as at present) in the eleventh month of the accounting period (e.g. 21 November for a company with calendar year accounts) and the amount payable will bring the total preliminary tax paid to 90% of corporation tax liability for the current accounting period.”
It seems that an estimate to be made after the first six months can be based on the previous year's outturn – which is probably just as well. There are significant difficulties in preparing estimates based on what in effect are ten month management accounts. The new rules do not address this difficulty.
In better shape is the situation for start-up companies, who will enjoy a three year exemption from CT (including chargeable gains) insofar as the liability would not exceed €40,000. It will be interesting to see if this relief is to be confined to indigenous start-up companies; it has to get clearance from the EU under State Aid rules, and terms and conditions might well apply.
C. Indirect Taxes
The Minister announced an increase in the standard VAT rate from 21 per cent to 21.5 per cent with effect from 1 December 2008. This increase will apply to all goods and services which are currently subject to VAT at 21 per cent. The measure is estimated to yield €208 million in 2009 and €227 million in a full year.
As a consumer tax, changes to VAT for businesses are largely VAT “neutral”. However as most goods, services, fuels, clothing, cars, luxury items are subject to VAT at the standard rate, the Consumer Price Index will increase by 0.225% as a result of 0.5% change. It would appear that the rate increase is at odds with the predicted reduction in inflation to 2.5% as cited by the Minister for 2009.
Its notable that the 13.5% rate of VAT applied on the sale of new houses remains unchanged which fits in the Government's passive policy of encouraging the failing construction industry.
The Minister noted that there was no change to the Zero rate which applies to food, children's clothes and footwear, oral medicines etc.
The 21% standard rate has been in operation since 1 March 1991 with the exception of a short lived reduction in 2001.
By EU standards Ireland now ranks among the high VAT rate jurisdictions of Sweden at 25%, Finland 22% and Demark at 25%. Our nearest neighbour, the United Kingdom operates a 17.5% standard VAT rate. The difference in the Irish standard VAT rate compared to the average rate operating in most of the EU will make Ireland less competitive on sales to non business EU customers.
The Minister included the words mandatory e-filing and pro-business measures in the same breath and announced a further measure to encourage the uptake in the use of on-line filing in the form of an extended deadline for returns filed on ROS. It will be interesting to see if the incentives of an extended deadline will apply to businesses already in the mandatory e-filing net.
D. Economic Analysis
The economic picture – what a difference a year makes
The Minister made a significant play in the beginning of today's Budget speech that he was setting a path to tackle the problem in the public finances over a three year period. The three year approach though, is understandable. His own department now predicts a decline in GNP of 1.6% in 2008 and a further 1% next year. Growth is now not set to return until 2010.
Nowhere is the impact of this thee year plan more clear than in the Stability Programme Update published with the main budget documentation. The programme is published each year in accordance with our EU Growth and Stability Pact obligations.
In that document the Minister and the Department predict that the public finances will once again adhere to the 3% Maastricht deficit rule in 2011. In that year the General Government Deficit will fall to 2.9% having risen to 5.5% in 2008, reaching 6.5% in 2009 before falling to 4.7% in 2010. In the process the national debt will rise by 2011 to 47.8% of GDP, below the Pact's 60% ceiling. Despite its difficulties the Government believes its approach is within the medium term budgetary objectives laid out by the Plan.
Table 11 of the Programme Update is a telling table. It sets out the difference between this year's stability programme predictions and those of last years and they are stark. For example, the difference between the real GDP growth projection between 2008 and 2009 is 4.3%. Similarly, the difference in the General Government Balance projections for 2009 is an enormous 5.4%. These are strange times we are living in.
In so far as the projected General Government deficit for 2009 exceeds that of 2008 it is difficult to see how the Budget could be defined as a hairshirt, although the Minister was at pains to point out that his starting position today was a 7% deficit. It's as if the ship of state has to be stopped before it can be turned around.
Overall spending increased by 1.8% and for the first time in an age the current budget slipped into deficit. Concern that the Minister might take so much money of the economy and drive us further into recession has failed to materialise. Significantly capital spending is being maintained at about 5% of GNP. On other hand has the Minister done enough to justify the emphasis he placed at the beginning of his speech on stabilising the public finances?
If the growth and deficit figures have been transformed in a year, there has been stability elsewhere. Despite the VAT increase, the HICP (the harmonised index of consumer prices) is set to fall to 2.2% in 2009 and thereafter to under 2% in the years to 2011. The Consumer Price Index will fall to 2.5% and interestingly made the Budget speech this year despite being relegated behind the HICP last year. Unemployment is predicted to peak at 7.3% in 2009 on the back of a near 1% reduction in the numbers employed.
E. Press Release
Some important support for Foreign Direct Investment in a Budget biased against the consumer – ICAI
Almost no aspect of our tax system was left untouched by the Minister for Finance this evening according to The Institute of Chartered Accountants in Ireland (ICAI). While the focus of comment will inevitably be on the Income Levy, which uniquely is a tax on all earners, our disposable income afterwards will not go as far as it did with increases in VAT and Excise. The increase in the Deposit Interest Retention Tax rate to 23% will eat into the returns earned by individuals on bank deposits.
From a business perspective, the confirmation of the 12.5% rate of Corporation Tax, the reduction in Stamp Duty on commercial transactions by a third, and improvements to Research and Development tax credits will be welcome. In the international context, the Budget business measures will send out a signal to foreign direct investors that Ireland remains open for business. They will however find that Ireland has become a more expensive place than before to recruit and retain workers. It is now essential that the Minister's indication of further reforms towards developing a high skills economy results in a package of innovative incentive measures for high technology industry.
The benefits of the business package overall will be tempered by the increase in Capital Gains Tax, earlier Corporation Tax payments and wage inflation pressures from the higher personal tax regime.
“As usual, the devil will be in the detail when we see the Finance Bill” according to ICAI Director of Taxation Brian Keegan. “One of the more positive aspects of an early Budget is that we will know the shape of the Finance Bill before the next financial year in 2009”.
F. Summary of Tax Measures
The following points are derived from the documentation supporting the Budget speech of the Minister for Finance on 14 October 2008.
Income Tax
Personal Tax Credits and Bands
The standard rate tax band is being increased by €1,000 for a single person (or married one earner couple) and €2,000 for a married two earner couple.
Income Levy
A new income levy is being introduced that will apply at the rate of 1% to gross income up to €100,100 per annum or €1,925 per week. A rate of 2% will apply to income in excess of that amount.
The levy is paid on gross income, before deductions for capital allowances or contributions to pensions. The levy does not apply to social welfare payments including contributory and non-contributory social welfare pensions. However, all other taxpayers, including low earners will be subject to the levy.
The income levy was first introduced in Budget 83 for one year where the then Minister for Finance Alan Dukes described the Government's room for manoeuvre in framing the budget strategy as extremely limited. Former Taoiseach and Minister for Finance Bertie Ahern reintroduced the measure in Budget 93, again for one year, as a means of seeking an equitable contribution from all income earners in a position to bear such a burden.
As with the previous times an income levy was introduced, it is expected that the measure in this year's Budget will also be temporary.
Mortgage Interest Relief
The current rate of mortgage interest relief is being increased from 1 January 2009 for first-time buyers, as follows:
- from 20% to 25% in year 1 and year 2 and
- from 20% to 22.5% in years 3, 4 and 5.
The additional relief will be available to new first-time buyers and first-time buyers who have bought a house in the last 4 years.
The rate of mortgage interest relief for non-first-time buyers is being reduced from 20% to 15% from 1 January 2009.
Health Expenses Relief
Health Expenses relief will be granted at the standard rate only from 1 January 2009, with the exception of nursing home expenses which will be standard rated from 1 January 2010.
Car Parking Levy
A flat rate levy of €200 per annum will be charged on employees whose employer provides them with car parking facilities.
The levy will be confined to employer provided car parking facilities situated in the main urban centres.
Preferential Home Loans and Other Loans
To reflect changes in interest rates, the specified rate in respect of loans (other than home loans) is being increased from 13% to 15%.
These changes will take effect from 1 January 2009.
Change in basis of Benefit-in-Kind (BIK) charge for company cars to relate it to the cars’ level of CO2 emissions
The Finance Bill will contain provisions to change the basis of the BIK charge on company cars to relate it to the cars’ level of CO2 emissions.
Cycle to work scheme
From 1 January 2009, the provision of bicycles and associated safety equipment by employers to employees who agree to use the bicycles to cycle to work will be treated as a tax exempt benefit-in-kind.
- The exemption may only apply once in any five year period in respect of any employee.
- There will be a limit on the value of such purchases of €1,000 for each employee.
The scheme may also be implemented via salary sacrifice arrangements.
DIRT
The rates of retention tax that applies to deposit interest, together with the rates of tax that apply to (a) life assurance policies and (b) investment funds, are being increased by 3 percentage points to 23% and 26% respectively.
The increased rates will apply to payments, including deemed payments, made on or after 1 January 2009.
Pensions
The annual earnings limit for determining maximum tax-relievable contributions for pension purposes is being set at €150,000 for 2009 as compared with the 2008 limit of €275,239.
The adjustment, in line with an earnings index, of the maximum allowable thresholds for pension funds on retirement (the Standard and Personal Fund Thresholds) will not be made for 2009.
By reducing the pension contribution limit, the Minister may have contained the most costly Income Tax relief, but largely at the expense of the private sector. In so doing, he has abandoned the line on recent Government policy to encourage adequate provision for retirement.
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 2009, the PRSI contribution ceiling will increase from €50,700 to €52,000.
VAT
Increase in standard VAT rate from 21% to 21.5%
The standard rate of VAT will be increased from 21% to 21.5% with effect from 1 December 2008. This increase will apply to all goods and services which are currently subject to VAT at 21 per cent.
The burden of the increase in the VAT standard rate will fall on the final consumer as businesses can usually offset any VAT charged on their purchases.
Corporation Tax
By holding the rate of Corporation Tax at 12.5%, the Minister has sent out a strong signal of confidence in Ireland as an ideal place to invest and develop business.
R&D Credit
The current 20% rate of tax credit for incremental expenditure undertaken by a company on qualifying research and development (R&D) is being increased to 25%. This will apply to accounting periods commencing on or after 1 January 2009.
The increase in the R&D credit is to be welcomed. This should encourage more knowledge based industries to locate in Ireland. However, it is essential to expand the R&D measures, not just in percentage terms but also in terms of the types of industries that qualify for the relief. Also, additional measures must include reliefs to encourage skilled innovators to come to Ireland.
Preliminary Tax payment dates for Large Companies
The current single payment for large companies’ preliminary corporation tax will be split into two instalments. This will apply to accounting periods commencing on or after Budget day, 14 October 2008.
At present, large companies, i.e. companies with a corporation tax liability of more than €200,000 in their previous accounting period, are obliged to pay preliminary corporation tax (amounting to 90% of the liability for the current accounting period) one month before the end of the current accounting period (and not later than the 21st day of the relevant month).
For accounting period commencing on or after 14 October 2008:
- The first instalment will be payable in the sixth month of the accounting period. The amount payable will be 50% of corporation tax liability in the preceding accounting period or 45% of corporation tax liability for the current accounting period.
- e.g. 21 June of the current year for a company with a 31 December year-end.
- The second instalment will be payable (as at present) in the eleventh month of the accounting period. The amount payable will bring the total preliminary tax paid to 90% of corporation tax liability for the current accounting period.
- e.g. 21 November of the current year for a company with a 31 December year-end
The bringing forward of the payment date for large companies (i.e. companies with a liability of more than €200,000), has compounded the inequity of the corporation tax system for those companies. Even though the first instalment may be based on the prior year results, the second instalment must be based on the current year results which are not known at the date of payment.
Surely the Minister could have allowed these companies to base the two preliminary tax payments on the previous year's results when they are expected to make an earlier payment.
Exemption for Start-up Companies
New start-up companies which commence trading in 2009 will be exempt from tax, including capital gains, in each of the first three years to the extent that their tax liability in the year does not exceed €40,000.
This measure is being examined to ensure it is compliant with EU rules on State-Aid.
This exemption is to be welcomed. It should encourage the setting up of smaller enterprises which could assist the economy in terms of employment.
Capital Allowances
Energy-efficient Equipment
The tax incentive (introduced in Finance Act 2008) which provides for capital allowances of 100% of expenditure incurred by companies in the year the equipment is purchased is being extended from three categories to seven categories. The new categories to be included in this scheme are:
- Data server related systems and large energy saving office equipment associated with Information & Communications Technology.
- Efficient heating/electricity provision equipment and control systems.
- Efficient electrical and control equipment associated with Process & Heating Ventilation and Air-conditioning systems.
- Alternative fuel vehicles.
Newly constructed commercial buildings
Where newly constructed commercial buildings are used before being sold and the sale does not take place within one year of first use, the purchaser gets the value of available capital allowances on expenditure on a more restrictive basis.
The one year time limit for disposal is being extended to two years.
Seveso-listed industrial facilities
A new ring-fenced tax incentive scheme will be introduced to facilitate the removal and relocation of Seveso-listed industrial facilities which hinder the residential and commercial regeneration of Docklands in urban brownfield areas.
The EU Seveso Directive (96/82/EC) seeks to protect public safety by placing land-use restrictions on new residential and commercial development near locations where potentially dangerous activities are undertaken.
This scheme is subject to clearance by the European Commission from an EU State-Aids perspective.
Stamp Duty
Commercial Property
The top rate of duty is being reduced from 9% to 6% in respect of instruments executed on or after 15 October 2008. The new rates are:
Aggregate Consideration |
Rate of Duty |
Up to €10,000 |
Exempt |
€10,001 to €20,000 |
1% |
€20,001 to €30,000 |
2% |
€30,001 to €40,000 |
3% |
€40,001 to €70,000 |
4% |
€70,001 to €80,000 |
5% |
Over €80,000 |
6% |
Financial Cards
Stamp Duties applicable to ATM and Debit cards are being reduced by 50%.
The changes for ATM and Debit cards will take effect for the year ending 31 December 2008, the duty for which is normally collected from bank customers by financial institutions in early 2009.
Bills of Exchange (Including Cheques)
The Stamp Duty rate on Bills of Exchange is being increased from 30 cent to 50 cent in respect of Bills of Exchange drawn on, or after, 15 October 2008. In the case of cheques, the increase will apply in respect of cheques supplied by financial institutions to customers on, or after, 15 October 2008.
Capital Gains Tax
Change in Rate of Tax
The rate of capital gains tax is being increased to 22% from 20% in respect of disposals made from midnight on 14 October 2008.
Change in Payment Dates
The payment date in respect of disposals in the period January to November is being changed to mid-December and the tax on disposals in December will now be due on the following 31 October (the existing pay and file date).
Charge on Non-Principal Private Residences
A charge on all non-principal private residences will be introduced in 2009. The new charge will be set at €200 per dwelling and will be levied and collected by local authorities.
It will be payable by the owners of private rented accommodation, holiday homes and other non-principal residences but will not be applied to new dwellings as yet unsold.
Farmer Taxation
Stamp Duty Relief for Young Trained Farmers
The stamp duty relief for Young Trained Farmers is being extended for 4 years and the relief will apply in respect of instruments executed no later than 31 December 2012. The relief had been due to terminate on 31 December 2008.
Stamp Duty Relief for Farm Consolidation
The stamp duty relief for a farmer consolidating his/her holding relief is being extended to 30 June 2011. The relief had been due to terminate on 30 June 2009.
Farmers Stock Relief
The 25% general farming stock relief and the special 100% stock relief for Young Trained Farmers is being renewed for a further 2 years to 31 December 2010.
Farm Pollution Control Relief
The scheme of capital allowances for expenditure on certain pollution control measures relief is being extended to 31 December 2010. It had been due for cessation on 31 December 2008.
Excise
Air Travel Tax
An air travel tax applying to all departures from Irish airports will come into force on 30 March 2009.
The general rate applying will be €10 per passenger with a lower rate of €2 for shorter air journeys (those under 300 kms).
Petrol
Petrol is being increased by 8 cent per litre (including VAT) with effect from midnight on 14 October 2008.
Tobacco
The Excise Duty on a packet of 20 cigarettes is being increased by 50 cent (including VAT) with a pro-rata increase on other tobacco products, with effect from midnight on 14 October 2008.
Alcohol
Excise Duty on a standard bottle of wine is being increased by 50 cent (including VAT) with effect from midnight on 14 October 2008. Pro-rata increases are also being applied to other wine, and certain other fermented and intermediate products.
A reduced rate of excise duty, at 50% of the full appropriate excise duty rate for beer and cider, will be introduced for low alcohol beer and cider (beer and cider products with an alcohol by volume content of 2.8% or less), with effect from midnight on 14 October 2008.
Licences
A range of alcohol-related licensing fees, including off-licences, but excluding pub licences, are being increased to €500 in each case. These increases will apply from the appropriate annual renewal dates in 2009.
Betting duty
The betting duty rate will be increased from 1% to 2% with effect from 1 January 2009.
New Motor Tax Rates and Fees for Trade Licence Plates
The Budget provides for increases in motor tax rates and fees for trade licence plates. The proposed increases are 4% for cars below 2.5 litres and CO2 bands A to D, and 5 % for cars above the 2.5 litre threshold and CO2 bands E, F and G. Goods and all other vehicles will also increase by 4% with no increase for electric vehicles. Trade plate licences will also increase by 4%.
The new rates will apply to motor tax discs and trade licences taken out for periods beginning on or after 1 January 2009.
G. Budget 09 – Links
Click on the above title to access the various links to the published content.
Department of Finance – http://www.budget.gov.ie/
Revenue Commissioner – http://www.revenue.ie/index.htm?/budget/budget2009/index.html
Department of Social and Family Affairs –http://www.welfare.ie/topics/budget/bud09/index.html
Department of Education –http://www.education.ie/home/home.jsp?maincat=&pcategory=10861&ecategory=10876§ionpage=12251&language=EN&link=link001&page=1&doc=42252
