The imperative for the Minister for Finance in this Budget was to do as little harm to business as possible, given the financial constraints he is under. In fact many of his measures will help business, with a knock on benefit for employment.
“It was essential that the Minister selected tax measures which would result in a sustainable tax yield not just in 2012 but for the years ahead” according to Chartered Accountants Ireland Director of Taxation, Brian Keegan. “We are now moving towards an era of higher headline rates, but with a variety of specific reliefs for desired economic activity – in effect a tax model comparable to the system we had during the years of strong growth in the 1990s”.
The business package was the strongest element of the Minister’s Budget.
The proposed improvements to the Research and Development regime will put Ireland in a strong position in this very competitive arena for Foreign Direct Investment. Importantly, the Minister has also recognised the role of the individual in developing expertise, both by allowing for mechanisms to directly reward innovation and effort by the individual, and broadening the scope for buying in expertise. Some of the benefit of the R&D Tax Credit can be passed on to the employees involved in the R&D development in the first instance – a trickle-down effect which had been advocated by this Institute.
A recurring challenge has been the promotion of indigenous R&D expertise; the new rule ensuring R&D expenditure amounts up to €100,000 will qualify is an appropriate incentive for the Irish SME sector.
Changes for Property Buyers
Improvements to Mortgage Interest Relief may make all the difference in meeting mortgage payments for hard pressed families – Mortgage Interest Relief is granted at source, so improvements will make an immediate difference to the monthly payments.
New CGT rules hold out the prospect of property becoming a form of longer term investment with a tax free return. In a normal market, and because it is time limited, it would have an immediate effect on the volume of property transactions. Now however its success will largely be determined by the availability of loan finance. It could however tempt some investors out of other forms of savings and investments and back into the property market.
The reduction in the Stamp Duty rate on commercial property to 2% will not revive the commercial property market on its own, but it is a removal of one hindrance to transactions in the context of a general property recovery.
Legislation to apply the €100 charge on Private Residences was published even in advance of the Minister's speech. This new charge will also effectively increase the existing €200 per annum levy on the majority of non-Principal Private Residences to €300. The fairest form of property tax in the Institute's view is one which is computed with reference to the cost to the local authority of providing services and amenities.
Two percentage point VAT increase
The VAT increase will be more disruptive to the domestic economy than to internationally traded goods and services. However, a 2% increase is unlikely to lead to significant changes in consumer behaviour. The impact on the Consumer Price Index is also less than it would have been in normal circumstances, following a period of deflation. It is likely that this VAT increase is here for the long term, but equally it is useful to have the undertaking that the rate will not be increased further in the lifetime of the Government.
Carbon tax increases
An increase in carbon tax without compensating measures for those who cannot avail of alternative lower carbon emission fuels is not a carbon tax, but a tax plain and simple. Because of this, we can expect little or no environmental benefits from the measure. Expressed in amounts per tonne of carbon, the impact of a €5 per tonne increase translates approximately to a 1 to 2 percentage point increase in fuel costs, depending on the type of fuel involved.
The transport sector is especially sensitive to fuel price increases. The Carbon Tax increases will undoubtedly result in higher commuting costs and higher transport and delivery costs for businesses.
Property tax reliefs
The Minister was in a good position to make a judgement call on the continued existence of property tax reliefs. This is because we have now seen the impact of the first full year of operation of the new High Earners Restriction rules, which result in the majority of individuals claiming property reliefs paying income tax (before USC and PRSI) at a minimum rate of 30%. The Minister's decision not to engage in the planned blanket restriction will enable many investors to meet their property funding commitments. This pragmatic approach, against a backdrop of a continuously falling property market, will ultimately be of benefit to all taxpayers.
New Tax Incentives
Rather than adopt a scattergun approach spreading scarce tax resources across a wide variety of initiatives, the Government seems to have focussed on particular sectors such as agriculture.
This focussed policy constitutes a recognition on the Government’s part of the role that tax incentives can play in promoting economic recovery. While the agriculture sector has traditionally been the recipient of more generous tax treatments than other sectors, the capacity of Irish agriculture to succeed in a global marketplace, combined with its potential for positive impact in rural Ireland merits the enhanced treatment on offer. Ends.
Reference: Brian Keegan, Director of Taxation, Chartered Accountants Ireland