Missing the Feel Good factor

Jan 08, 2018

Sunday Business Post, 7 January 2018
The first week of a new year is often seized upon as a time for warning of things to come.  In general tax is easy to predict because it’s a certainty that tax will happen.  We now know much of the detail of how it will happen, as the Finance Act 2017 which gives effect during 2018 to last October’s Budget announcements was signed into law by the President on Christmas Day.  Most commercial activities in Ireland are suspended for that one day of the year, but it seems the ship of state must continue to sail regardless.

The modest changes to USC and tax bands will leave many workers a few euros more a week after taxes this year, but the elusive feel good factor will remain missing.  I think that’s because Government is refusing, as a stated tax raising measure, to index tax bands and allowances as the economy recovers.  Therefore as incomes recover we pay proportionately more tax on them.  This year’s trimming of USC doesn’t compensate for that.

Misfiring

If the gains for workers are modest, such gains as there are for business are painfully shy.  The fine print of Finance Act 2017 did not quite live up to the promises from Budget day. The main new initiative was the introduction of employee share ownership arrangements where the granting and exercise of share options do not immediately attract income tax.  The law as enacted excludes workers in a number of important sectors such as the professional services sector and the construction industry.  Yet again workers are being taxed not on how much they earn, but how they earn it.  2018 will also be a tougher year for employers to comply with their tax obligations, as the rules for settling PAYE defaults and mistakes will make the process a lot more costly. 

Other provisions could misfire. A new tax relief for refurbishing residential properties prior to letting them could actually be counter-productive in terms of bringing houses and apartments onto the rental market. That’s because the property has to be vacant for a period of 12 months prior to being let, thus creating an incentive to delay putting the property on the market.  A tightening of the rules on how companies can be funded prior to their sale was designed to ensure that an income tax charge could not be swapped for a lower capital gains tax charge.  Fair enough, but the way it was done has the side-effect of closing off some standard funding arrangements for management buy-outs.  That isn’t a great outcome within a recovering economy.

 

Gung Ho?

It’s not possible for businesses to plan for 2018 without making some provision for Brexit, even if the 2017 Finance Act hasn’t done so.  This gap possibly reflects the “you broke it you fix it” approach of government towards the end of the Phase 1 Brexit negotiations.  However the diplomatic achievements of last year in getting those negotiations across the line shouldn’t offer anyone a false sense of security. 

The EU set the terms for Brexit Phase 1.  Once it had won the battle over the sequencing of the Phase 1 discussions (at the outset it was to be the “row of the summer” according to the UK’s Brexit minister David Davis), Brussels got its way over the UK on pretty much all of the material aspects.  If anything the EU is now sounding a bit too gung ho over Phase 2.  The terms and conditions which Brussels has already set out for the UK entering a transition phase are stark. 

Under the EU negotiating guidelines for Phase 2 a Brexit transition would involve the UK continuing to follow the whole of existing and new EU law, while respecting EU budgetary commitments, related obligations and judicial oversight but without any say in EU decision-making.  Though admittedly an opening position and necessary under current EU law, these guidelines sound more like surrender terms than a basis for a future partnership.

A Short Transition

Given these terms, there is now surely a greater risk that the UK might just balk at what is being demanded in exchange for access to the Customs Union and Single Market during a transition.  That could result in a negotiated Brexit transition period being shorter than first envisaged, or not happen at all with Customs and VAT on UK imports and exports applying from April 2019.  Businesses could find that borders cease to become invisible quite quickly when the local Customs officer is looking for a cheque for tariffs or VAT, or have their shipments held up because of regulatory controls.  No EU member state can unilaterally eliminate these hazards in its own domestic tax legislation, but it can introduce cash flow and other relieving measures against the evil day.  Such measures were absent from Finance Act 2017.

Among the earliest tweets of 2018 from any government department was an invitation to use Revenue’s complaints procedure in case of mishap. Do they know something we don’t know, perhaps a warning of things to come?  Let’s hope not.  What we know already about the tax landscape for 2018 already gives plenty of warning.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland