Tax

Balancing the books

Jun 02, 2020
Peter Vale considers the items that could become long-term features of Ireland’s tax regime under the new government.

In the April issue of Accountancy Ireland, I wrote about the expected impact of COVID-19 on Exchequer receipts for 2020 and beyond. We have now seen the evidence with both VAT and excise down roughly 50% on similar months last year.

While some of the drop in VAT receipts might be down to timing with companies deferring payments, a large chunk is an unquestionably permanent loss in VAT revenue due to lower spending.

The income tax figures for May are also expected to show a significant drop, due to vastly lower numbers in employment.

The Department’s view is that corporation tax figures will hold up better. I hope this forecast is right, but I fear that the hit to corporate profits will be higher than anticipated, with refunds for prior years and losses carried forward likely to feature.

What is next?

So, what does this mean for future taxes? Will the relatively healthy state of our public finances entering the crisis make for a less painful exit?

The Minister for Finance, Paschal Donohoe T.D., has stated that he will not raise taxes this year as doing so would stifle the ability of the economy to recover. This makes sense, assuming we can afford to do it.

You also cannot simply raise taxes and expect to collect more tax revenue; you reach a tipping point, after which further hikes result in less tax collected. And many of our taxes are already high.

Tax reliefs

Of course, ruling out impending tax increases does not mean that there will not be a focus on tax reliefs. While many tax reliefs have been abolished over the last decade or so, certain targeted reliefs remain available to taxpayers.

It is unlikely that tax reliefs incentivising environmentally friendly behaviour will be targeted. Furthermore, the research and development (R&D) tax credit is also unlikely to be affected as it encourages more sustainable jobs.

Reliefs that allow business assets to be passed (typically) to the next generation are more likely to be in scope. Generous reliefs exist for both the disponer and the recipient.

These reliefs escaped the guillotine in the past as they continued to make economic sense; a large tax bill was avoided on a potentially illiquid event, allowing the business to be driven forward by the next generation.

Capital taxes

Capital taxes are likely to be targeted by the Minister, perhaps initially by way of curtailment of reliefs and in the medium-term via an increase in rates. That said, capital tax rates are already high with our 33% rate one of the highest in the EU. In contrast, the UK capital gains tax rate is 20%.

We know that when the capital gains tax rate was halved from 40% to 20% some years back, the tax-take doubled. An increase in capital gains tax rates could see the opposite effect, with fewer transactions and potentially more tax planning resulting in a lower tax yield.

Broadening the tax base

One thing the Minister may look at in the future is broadening the income tax base. It is questionable as to whether this would be regarded as an increase in taxes, but it would generate more tax revenue.

Broadening the tax base would mean more people paying tax, albeit many would pay very little. Adjusting the current exemption limits and credits would facilitate this.
Broadening the tax base was a recommendation of the Commission of Taxation over a decade ago, but we have not seen it followed by governments since. While the notion of everybody contributing something may resonate more in the current environment, it may still prove politically unpalatable.

Property tax

In the medium-term, depending on the state of the public finances, other tax-raising measures may be considered. The options aren’t exactly limitless.

Our VAT rate is already comparatively high, as are our income taxes. Our corporation tax rate is low but effectively untouchable.

One tax rate that is low in a European context is property tax, in particular for residential property. Many economists see property taxes as the least distortive, so an increase in property taxes might be the ‘least bad’ way to raise taxes.

Tackling property taxes would be a brave move for a new government, but potentially something that could be done in year one or year two of a new term.

Conclusion

In summary, tax increases later this year are unlikely – although we may see certain reliefs targetedand the ‘old reliables’ such as cigarettes and alcohol are unlikely to escape.

In the medium-term, COVID-19 will mean that tax-raising measures are likely to feature. In my view, a broadening of the tax base and an increase in property taxes are the most likely outcomes.

Both of the above could be long-term features of our tax regime, although much will depend on future government priorities.
 
Peter Vale FCA is Tax Partner at Grant Thornton.