Budget 2021 is the next instrument in the government's response to the impacts of COVID-19 on the Irish economy. Between the pandemic and a possible disorderly Brexit, Budget 2021 will not be a normal budget, says Kim Doyle.
COVID-19 has presented unprecedented challenges for the global economy. Governments, along with their tax authorities worldwide, have adopted and administered emergency measures to preserve the health of their people and defend against collapse of their economies. In Ireland, we had a mini-Budget in the form of the July Jobs Stimulus, a €7.4 billion package of measures aimed at supporting the Irish economy in response to the impact of COVID-19. We also have a number of administrative measures in operation by Revenue to ease taxpayers’ compliance burden.
Brexit also brings challenges. At this stage, we do need to respond to the immediate impacts of Brexit, and a possible disorderly Brexit, and plan for the long-term stability and robustness of the Irish economy.
Climate change is, too, the ‘defining challenge of our generation’, according to the Minister for Finance. And, indeed, a raft of measures were introduced last year to tackle this challenge, while others were promised in the future.
EU and OECD tax reform proposals continue to pose challenges and bring additional uncertainties into play. The impact of these on the Irish economy could extend well beyond corporation tax receipts and may influence unwanted changes in investment decisions by MNC groups going forward.
Framing Budget 2021
Budget 2021 may target revenue raising measures to cover the expenditure introduced to deal with the recent challenges brought about by COVID-19 and a possible disorderly Brexit, but any budgetary measures must avoid undoing the impact of the July Jobs Stimulus Package. Health and housing priorities will also have to be addressed in the budget. The government has said the measures will focus on the short-term and not beyond 2021.
The government has pledged no increases to income tax credits or bands. (This is also promised in the Programme for Government.) The level of government expenditure over the coming months is unlikely to fall substantially, if at all. Despite the backdrop, tax receipts for the first eight months of 2020 are only 2.3% behind the same period in 2019. Given that some of this deficit is a timing issue and will be recovered in 2021, this is a remarkable outturn. September tax returns will be the final “piece in the jigsaw” before the final Budget 2021 is decided, according to the government.
Expectations
Pre-COVID-19, Budget 2021 was expected to be framed around Brexit and climate change. Now, amid a pandemic, what are we more likely to see in the Budget from a tax perspective?
Income tax
Considering the government has stated there will be no broad based increases in income taxation, we don't expect to see much by way of income tax measures. We may see some modest tax cuts in the form of increased tax credits for stay-at-home parents and other credits and reliefs targeting lower and middle income earners.
We would like to see a long-term commitment to a reduction in our high marginal tax rates of 52% and 55% for employees and self-employed respectively; however, there is no fiscal space to make any pledge to reduce these rates in the short-term.
The concept of broadening the tax base, so more people pay a little, has long been debated with very little reaction by government. The main reason may be it is likely to be unpopular with constituents. However, considering the challenges for the Irish economy, the government may need to embrace this concept but balance it with the pledge for no broad income tax increases.
A new form of tax relief for individuals working remotely is a possible outcome of the Department of Business, Enterprise and Innovation public consultation on Guidance for Remote Working. Some responses to this summer consultation called for changes to the tax rules for reimbursement of employee expenses and changes to the tax treatment of expenses incurred by employees. We may see some tweaks to the Irish Tax Code in response.
Corporation tax
The government reaffirmed its commitment to the 12.5% corporation tax rate in the Programme for Government. The importance of this commitment is evident in the remarkable tax receipts for the eight months to end of August 2020, which are largely driven by large corporation tax increases along with a strong start to the year pre-COVID-19 and more resilient income tax receipts.
Ireland is obliged under EU law to implement changes to our tax code to restrict the interest tax deduction taken by companies. At the time of writing, these changes are more likely to take effect in 2022.
The EU agreed last year to park its digital tax proposals in order to allow global consensus be reached through the OECD digital tax discussions. Changes to accommodate any digital tax proposals will be premature in 2020 and, therefore, unlikely to be a feature of Budget 2021.
Capital taxes
In order to further stimulate the economy, lowering both the CGT and CAT rates will likely promote activity in the market and should ultimately see assets put to a more productive use. This rate reduction has been called for and debated in recent years. Perhaps Budget 2021 will deliver.
Considering residential property prices have fallen in recent months, there may be scope to increase the related Stamp Duty rate. However, such a rate increase will likely be unpopular among constituents and not helpful considering the struggles reported by many in getting a foot on the property ladder.
VAT
The extension of the 9% VAT rate to construction services would help encourage the scale of property development needed to absorb the current demand and address the housing shortage. The re-introduction of the 9% VAT rate to stimulate the hospitality sector would complement the other measures, such as the Stay and Spend Tax Scheme.
An extension of the new temporary 21% VAT rate, while desirable by many, is unlikely; the headline VAT rate is a useful revenue raising measure.
Increasing the threshold for cash-receipts basis of accounting, and the VAT registration thresholds, may support businesses to deal with the current challenges.
Old reliables
Petrol and diesel excise increases may feature, particularly in the context of requirements to address climate change. Increases in the excise to diesel only to bring it in line with the cost of petrol at the pumps is more likely.
Excise increases on alcohol and cigarettes is possible but the hospitality sector has already taken a battering due to COVID-19 and any further perceived attacks may not be in favour.
Conclusion
Overall there isn’t the fiscal space for wide-ranging and significant tax reductions and reliefs in Budget 2021. But the Budget 2021 equation must consist of tailored tax measures to support and stimulate the hardest hit sectors of the Irish economy and defend against the impacts of a possible disorderly Brexit on the economy while also satisfying climate change targets.
Kim Doyle FCA is Tax Director, Head of Tax Knowledge Centre in Grant Thornton.
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