With Budget 2019 just weeks away and limited fiscal space for manoeuvre, what are the key themes under consideration?

With two months to go, what can we expect to see in Budget 2019 and what is being sought in the pre-Budget submissions made to date? At this stage, it is safe to predict that low and middle income earners will do relatively better from Budget 2019 than higher income earners. Any cut to the top marginal tax rates of 52% and 55% for the employed and self-employed respectively would be a big surprise.

Likely measures in Budget 2019 include a widening of the tax bands, pushing more income outside the 40% top income tax rate, and an increase in tax credits. Both measures are of relatively more benefit to lower and middle income earners. Small reductions in the USC rates and tweaks to the bands can also be expected, again of relatively more benefit to lower and middle income earners.

The above changes will likely make up the bulk of the tax breaks we can expect in October. The cost of last year’s equivalent changes amounted to €400 million and didn’t leave much room for further tax cuts.

Pre-Budget submissions

Pre-Budget submissions made to date have focused on a few key areas, with entrepreneurship a recurring theme that features in both the CCABI and ITI submissions.

Despite previous Government commitments to bring our tax regime for entrepreneurs more in line with the UK equivalent, the €1 million cap on gains liable to the reduced 10% capital gains tax (CGT) rate remains. Other anomalies in the legislation have also been central to submissions to the Minister.

While it is difficult to fathom why more hasn’t been done for Irish entrepreneurs, particularly given our exposure to any dip in foreign direct investment, I wouldn’t hold out for any significant improvements in the regime this year. We may therefore be left with the €1 million cap for another year, although I hope that this won’t be the case.

On a similar theme, a more attractive tax regime for share options (the KEEP scheme) was introduced last year, broadly providing CGT treatment rather than income tax on share option gains. While welcome, there are a number of practical difficulties under the existing legislation which make it difficult to access in many cases. Improving the accessibility of the KEEP scheme, in line with promoting entrepreneurship, has been identified in pre-Budget submissions made.

Private pension provision

Over the past number of years, successive Finance Bills have reduced the attractiveness of making pension contributions, with recent media reports raising the spectre of even more significant adverse changes. This seems to run against concerns as to how well-provided we are for the post-retirement years. At a minimum, tax relief at marginal income tax rates for pension contributions should be maintained. Many pension pots still bear the scars of the recession.

Property supply

Other matters identified in pre-Budget submissions, and likely to feature in future submissions, include considering the position of landlords in an effort to improve supply and pricing in the rental sector and an increase in the capital acquisitions tax (CAT) thresholds, which remain significantly behind 2008/09 levels.

In respect of landlords, the restriction on the deductibility of interest costs has been removed, albeit on a phased basis over five years. It is difficult to understand why a full deduction for interest incurred isn’t reinstated immediately – at present, an unprofitable letting can still result in a tax charge.

Tax issues

On the corporate tax front, there will be significant changes announced on Budget day with most of the detail in the subsequent Finance Bill/Act.

From 1 January 2019, Ireland will be obliged to introduce Controlled Foreign Company (CFC) legislation, broadly aimed at ensuring that the profits of low-taxed subsidiaries can be subject to tax in the Irish parent company if there is insufficient substance in the foreign subsidiary. The legislation implementing CFC rules will be included in the Finance Bill and has been the subject of much discussion in recent months. While our legislation must fit within the parameters of the relevant EU Directive, it is critical that it protects both Irish and foreign parented groups to the greatest extent possible.

In tandem with the CFC changes, we can also expect a change to the taxation of foreign dividends and branches. While foreign dividends generally suffer no additional Irish tax due to the availability of foreign tax credits, the rules are complex and in some cases unclear. Going forward, we may have a much more straightforward regime that broadly exempts foreign dividends completely, thus providing more simplicity and certainty – although, we may have to wait until next year’s Finance Bill.

Last year, we saw a change to the intangible asset regime, re-introducing the 80% cap on allowances. I suspect we won’t see any further significant change this year, although pre-Budget submissions have included the research and development (R&D) tax credit and enabling loss-making companies to claim the full tax credit in year one as opposed to over a three-year period.

In summary, for most taxpayers, Budget 2019 might look similar to Budget 2018. A key focus of pre-Budget submissions has been on entrepreneurship and ensuring that the right tax incentives are in place to encourage innovation in Ireland.

Peter Vale FCA is Tax Partner at Grant Thornton.