With Budget Day approaching, Tom Woods outlines his recommendations for ensuring this year’s measures support social and economic progress
With Budget 2024 just two weeks away, Ireland is experiencing mixed economic fortunes.
On the positive side, near full employment and significant exchequer receipts would suggest that the Government has an unprecedented range of policy choices to consider.
Nevertheless, the economy is also facing constraints. Inflation and interest rates offer limited room for manoeuvre, making selecting the right policy choices much more difficult.
Housing
KPMG suggests introducing a new low VAT rate on the sale of new builds to help with the affordability of purchasing a new home.
We also support the reintroduction of mortgage interest relief to help homeowners with rising interest rates and growing mortgage repayments.
We recommend that the taxation of professional landlords be reformed to put them on a similar footing to trading businesses. This would help to attract and retain more landlords and boost the supply of housing stock in the rental market.
Reintroducing a controlled and targeted Section 23-type rented residential relief (tax relief applying to rented residential property in a tax incentive area) would also promote housing investment in less sought-after areas.
The workforce
As a small, open economy, our successful tax policy has helped make Ireland a location of choice for multinational business.
As a country at close to full employment, we need an attractive personal tax regime to keep and grow mobile talent to support the growth of domestic and international businesses in Ireland.
There is a range of budgetary measures that would help us in this regard, including the widening of the personal tax bands and credits, consideration of a new intermediate tax rate of, say, 30 percent, and the automatic indexation of credits and bands to help dampen the impact of inflation and protect the value of wages.
The taxation of share-based remuneration could also be simplified, and we would like to see some improvements to the Special Assignee Relief Programme (SARP).
Innovation and entrepreneurship
The impact of foreign direct investment (FDI) on the Irish economy can’t be overstated.
However, the ongoing changes to the international tax landscape emphasise the importance of having the most enticing regime within the new rules.
As mentioned above, an inviting personal tax regime will become more critical, as will having an appealing research and development (R&D) regime to promote and foster more innovation.
Several measures could be introduced to promote more innovation, including an upfront entitlement to cash refunds of R&D tax credits for smaller businesses.
The R&D tax credit of 25 percent could be improved to either 30 percent or 35 percent to make it more attractive internationally.
Moreover, the rules and the application process to qualify for this credit should be simplified. Other jurisdictions continue to refine and improve their R&D offering, so it has never been more important for Ireland’s regime to be as inviting as possible.
International changes also underscore the need to support the growth of the domestic sector.
We have made several recommendations to support SMEs. These include introducing a new 20 percent capital gains tax (CGT) rate on the sale of shares in SMEs and some improvements to entrepreneurs’ relief to promote investment in SMEs.
We advocate simplifying the rules underpinning the Employment Incentive Investment Scheme (EIIS) to make it more accessible and easier for businesses to raise capital.
We also propose that the standard income tax rate of 20 percent be applied to dividends paid by SMEs.
This should encourage promoters of SMEs to remain committed to growing their business and enable companies of scale to emerge from the domestic SME sector without the need to sell down equity.
Climate
Ireland’s ambitious climate goals will present challenges and opportunities for individuals and businesses. Several tax supports could be considered to help Ireland achieve its climate goals.
These include measures to promote private finance for green investments via ESG bonds and pension funds. We also believe that tax measures could be introduced to help accelerate the move to electric and hybrid vehicles and support the agricultural sector in its transition to more sustainable practices.
Inflation
While the exchequer receipts are in rude health currently, this revenue may be vulnerable in the future, and a measured approach will be needed when deploying the available resources.
While there is potential for some measures to impact inflation, the significant benefits of achieving policy objectives need to be weighed up against their inflationary impact.
The measures unveiled in the forthcoming budget will signal the Government’s direction of travel across many issues. The good news is the resources are there to help sustain our social and economic progress.
Tom Woods is Head of Tax at KPMG
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