Overview
Budget 2016 was the final in a series of five Budgets during the lifetime of the thirty-first Dáil. As with all Budgets, the Minister was faced with demands well in excess of the resources available. In reality, the Minister needed to deliver a Budget at satisfying three requirements, as follows:-
- the need to demonstrate a degree of restraint so as to satisfy our EU partners and adhere to the requirements of the EU fiscal agreements;
- the numerous demands on the domestic front (global competitiveness, improved regime for entrepreneurs, parity of treatment for self-employed, and demands for greater social protections, etc.) against a backdrop of a perceived return to prosperity;
- the political reality of a pending General Election.
Overall, the Minister did a reasonably good job in satisfying all requirements. He was at pains to stressed the positive macro-economic position and focussed on a projected growth rate of 6.2% for 2015, 4.3% for 2016, and 3% per annum thereafter. He referred to projected 97% and 93% debt to GDP ratio at 31 December 2015, and at 31 December 2016, respectively, and a longer-term projection of 80% by 31 December 2021. Furthermore, the Minister indicated that the proceeds from the disposal of shareholdings in AIB, Bank of Ireland, and PTSB, would further enhance these figures. These statistics should satisfy our EU partners as they demonstrate a trend towards a 60% debt to GDP ratio as enshrined in the fiscal treaties.
The Minister announced changes to improve the attractiveness of Ireland as an international business location through the announcement of the Knowledge Development Box (KDB). He also announced a modest move towards establishing parity of treatment between employed and self-employed individuals through the announcement of a new Earned Income Credit, with the promise of further parity measures in future Budgets. For the entrepreneur, an enhanced capital gains tax regime was announced, while on the social inclusion side, expenditures of €750m were announced.
There was something too in the Budget for the so-called ‘squeezed middle’ with the announcement of reductions of up to 1.5% in the rate of USC, with this reduction aimed primarily at individuals earning less than €70k per annum. With an eye to the future, the Minister announced his intent, subject to resource availability, to the abolition of the USC over the course of the next Dáil. The Government will no doubt hope that these measures will be remembered when the taxpayer next visits the ballot box.
As ever, the detail of all the Budget measures will be set out in the Finance Bill, due or publication on 22 October next.
Indviduals
The following package of tax measures was introduced, aimed at reducing the burden for individuals, with a particular emphasis on the largest cohort of income tax payers comprising the so-called ‘squeezed middle’:-
1. The changes to the USC rates and bands are as follows:
The exemption limit below which no USC arises is to increase from €12,012 in 2015 to €13,000 in 2016.
In terms of an individual earning €70,000, the USC change will give rise to an annual saving of €902 in 2016.
Disappointingly, there was no reduction in the 8% rate of USC applying to incomes in excess of €70,045, nor in the 11% rate of USC applying to certain self-employed individual with income in excess of €100k. This penal rate of USC for certain self-employed individuals represents the biggest disparity between the treatment of employees and self-employed individuals, and is difficult to justify in the context of the Minister’s stated intention of fostering a culture of entrepreneurship.
Finally, it is perhaps worrying that the charges will take 42,500 earners out of the tax net – a clear narrowing of the tax base. This was previously identified as a significant factor in the collapse of tax revenues in 2008.
2. The Minister announced the introduction of an Earned Income Credit of €550 which, broadly speaking, is to apply to individuals not qualifying for the PAYE credit. While this is to be welcomed, it is to be hoped that the level of the earned income credit will steadily increase to the point where it equates to the PAYE credit, which currently stands at €1,650 per annum.
3. The Minister announced an increase in the Home Carer tax credit from €810 to €1,000 per annum. The Home Carer income threshold will also be increased from €5,080 to €7,200 per annum. This measure is to be welcomed in the context of the very valuable services provided by carers and represents a modest cost to the Exchequer in comparison to the cost that would arise in the absence of their commitment.
4. The Minister announced a minor change to the regime of employee PRSI. This relief is aimed at reducing the impact of stepped increases in PRSI and applies to annual income levels of between €18,305 and €22,048.
5. The Minister announced an extension of the Home Renovation Incentive (HRI) until 31 December 2016. The HRI was initially introduced to encourage individuals to spend money on the renovation of their homes and the relief was granted in the form of a tax credit equal to 13.5% of the value of the work undertaken, subject to a limit of €30,000. The relief was later extended to landlords. The extension of the relief until 2016 is to be welcomed.
6. There had been much pre-Budget speculation in relation to a relaxation of the Capital Acquisitions Tax (CAT) burden. The impact of a 65% increase in the rate of CAT, coupled with a c. 55% reduction in thresholds during the austerity years, had the effect of bringing the beneficiaries of very modest estates within the scope of CAT. Today, the Minister has announced an increase in the parent to child tax-free threshold of €55,000, bringing the tax-free threshold to €280,000.
While any increase in the threshold is to be welcomed, the change is unlikely to significantly improve the genuinely difficult financial position in which the beneficiaries of modest estates can find themselves. This is evidenced by the fact that the Government’s own estimate is that the annual cost of this measure is €33M. Furthermore, it is disappointing that no specific provision was introduced to deal specifically with the transfer of the family home. It is to be hoped that this is an area that will be revisited and substantially improved in the coming years.
7. As had been well signposted, the revaluation date for the purposes of Local Property Tax (LPT) will be rescheduled from 2016 to 2019. This is a welcome development, particularly for those living in the larger urban areas, as it means that the impact of substantial growth in property values over the last three years will not be reflected in increased LPT charges for another four years.
Corporates
An overriding theme of the Minister’s speech was the aim of protecting Ireland’s competitiveness and increasing activity in innovation. These objectives are particularly important in light of international tax developments and measures being adopted by the UK in terms of reducing corporate tax rates and an introduction of key incentives.
Measures which will assist indigenous Irish business include the following:
- a commitment to extend the three-year Corporation Tax Relief for start-up companies to the end of 2018;
- availability of Earned Income Credit for owner-managers of €550;
- a commitment to retain the 9% VAT rate for the hospitality sector for another year;
- an increase in the productivity levels for micro-breweries, while still qualifying for Excise Relief;
- a reduction in fees charged to retailers for accepting payments by debit card;
- a simplification of the commercial motor tax bands, coupled with an overall reduction in the level of motor tax for commercial vehicles.
Knowledge Development Box
The Minister announced last year, his intention to introduce a Knowledge Development Box (KDB) for Ireland with a public consultation having taken place in the intervening period. The Finance Bill will contain detailed provisions relating to the KDB which will essentially provide for a special 6.25% corporate tax rate (i.e. 50% of the mainstream corporate tax rate of 12.5%) on profits generated from R & D and intellectual property. The detail will be set out in the Finance Bill to be published on 22 October next.
However, the legislation will ensure that the incentive is compliant with OECD guidelines.
This measure, together with the existing R & D Credit Relief is a key measure in maintaining Ireland’s attractiveness as a location for R & D activity.
It is anticipated that the main qualifying assets for the special rate will be patents and copyright of software. It is further envisaged that the definition of qualifying R & D expenditure will broadly be the same as the definition currently used for the R & D tax credit, with the following exceptions:-
- expenditure on R & D outsourced to related parties, the cost of acquired IP and expenditure on buildings will be excluded;
- expenditure on R & D outsourced to unrelated parties would be fully included.
Travel & Subsistence Expenses
It is hoped that following on from the recent consultation in relation to the tax treatment of Travel & Subsistence payments that some changes will be included in the Finance Bill in this regard.
The commitment to provide clarity in relation to the issue of expenses to employees who are, for example, based at home, or for travel expenses incurred by non-executive directors is welcome as this can prove to be a problematic area due to changes in work practices over the years. It is interesting to note that the UK Government has launched a discussion paper on proposed reforms of the existing rules in the UK in relation to travel and subsistence expenses which proposes a revision of the concepts of ‘temporary’ and ‘permanent’ workplaces by the introduction of a ‘base’ concept. An employee’s base would be where they spend more than a specified percentage of their working time. It is hoped that new guidelines introduced will provide for clarity and simplicity.
International Business
As expected, the Budget sets out some measures aimed at adopting the Base Erosion and Profit Shifting (BEPS) policies published by the OECD last week. The Minister has announced that the Finance Bill will include provision for the introduction of Country-by-Country reporting to tax authorities. Essentially, multinational companies with consolidated revenues exceeding €750M will be required to submit a Country-by-Country report to their parent company. This annual report will provide details including revenues, profits, taxes paid and accrued, number of employees, capital retained earnings and tangible assets in each jurisdiction in which they do business. In terms of timing, the reporting applies to accounting periods commencing on or after 1 January 2016, with reports being submitted to the ‘home country’ within twelve months of the accounting year-end.
Investors
The following package of measures was announced by the Minister:-
1. The Employment and Investment Incentive Scheme (EIIS) was introduced some years ago as a replacement for the Business Expansion Scheme (BES). Since the outset, uptake has been poor due to certain unattractive elements of the relief package, and also due to the lack of investment appetite. The Minister has announced changes to the EIIS, effective 14 October 2015. Firstly, the doubling of the amount a company can raise annually from €2.5M to €5M, subject to a lifetime maximum of €15M (previously €10M) is welcome. Secondly, the EIIS has been extended to include investments in the extension, management and operation of Nursing Homes. Finally, one of the previous limitations of the relief was its non-application in certain geographical locations. This geographical location restriction has now been removed in respect of all otherwise eligible SMEs. These are welcome changes which will, hopefully, improve uptake. However, it is regrettable that the current system of granting income tax relief on a phased basis has not been replaced by a simple full year 1 benefit.
2. Earlier this year, the Department of Finance carried out a public consultation process in relation to developing a focussed package of tax measures for entrepreneurs. Following on from this process, the Minister has announced a reduced rate of CGT (20% rather than 33%) for individuals on the sale of part or all of their businesses. The relief will only apply in respect of chargeable gains up to a limit of €1M. This measure is to be welcomed as it does provide an immediate tax benefit to entrepreneurs. It also represents a significant improvement on a relief introduced in 2013 which provided relief from CGT on a very restricted basis. However, the proposed relief falls well short of the corresponding UK relief which provides for a 10% rate of CGT, with a limit of STG £10M applying. While the relief introduced today is modest in comparison with the corresponding UK provision, nevertheless, it is welcome and should be seen as the first step on the journey towards a more comprehensive relief.
3. The Minister announced that he intends extending the three-year corporation tax exemption that currently applies for certain start-up companies to 31 December 2018. Interestingly, the Minister commented that the availability of this relief cost the Exchequer €4.9M in 2013 but assisted in underpinning 11,750 jobs, thereby representing an average cost per job of €417. Given the substantial spin-off benefits for the economy of every reduction in the Live Register, the related cost is modest and demonstrates the value of targeted reliefs aimed at the entrepreneurial sector.
4. Finally, as a welcome development, the Minister announced that the annual pension levy of 0.15% of the value of private pension assets is to be abolished with effect from 1 January 2016. The pension levy was introduced some years ago as part of the package of austerity measures and generated much debate, given that it was targeted solely at private sector pension savings. Its imminent abolition is to be welcomed.
Farming
Finance Act 2015 implemented a number of measures set out in the report of the Agri-Taxation Working Group in terms of increasing land mobility and incentivising the transfer of farms to younger farmers. These measures included exemption from income tax in respect of rent from leased land, and amendments to CAT Agricultural Relief and CGT Retirement Relief. The Minister enhances these measures in this year’s budget by providing for a mechanism for two people, e.g. a father and son, to enter into a partnership arrangement which would provide for outright transfer of the farm to the younger farmer at the end of a specified period which is to not to exceed ten years. This mechanism would be implemented in tandem with an income tax credit of up to €5K per annum to be allocated on a pro rata basis to the partners in the partnership. The attractiveness of this proposal is to allow continued participation by the existing farmer while, at the same time, providing a transfer mechanism within a defined timeframe.
We await the Finance Bill for the detail of the provisions. The existing Stock Relief provisions and stamp duty exemption for young trained farmers is being extended to the end of 2018. In addition, farmers will benefit from the additional Earned Income credit of €500 being introduced for self-employed individuals.
Finally, woodlands’ income is no longer to be regarded as a ‘specified relief’ for the purposes of the Higher Earner Restriction. The practical impact of this is that the level of tax-free woodlands’ income (together with any other specified reliefs) will no longer be capped at €80,000 per annum per individual.
