As Budget 2024 approaches, the Irish Government  must grapple with a looming election and the need to ease the burden on citizens, explains Doone O’Doherty Budget 2024 will be delivered against a backdrop of record-breaking corporate tax receipts, an upcoming general election and continuing cost-of-living challenges. The Government is under pressure to deliver substantial tax savings. However, with just €1.1 billion set aside for tax cuts – down slightly from last year’s €1.13 billion – there isn’t much to play with. The balancing act for the Government is to put more money in people’s pockets without further fuelling inflation. Budget 2024 will likely include a number of once-off cost-of-living measures that support families. This gives the Government the opportunity to improve household finances without long-term consequences for the Exchequer or the economy. Income tax and the Exchequer For the first seven months of 2023, income tax yielded €18.2 billion in tax receipts for the Exchequer – up 8.8 percent on the same period last year.  Against this robust backdrop, the Government must respond to taxpayers who want to know how much less tax they will pay in January 2024 compared with today. However, with only €1.1 billion set aside for tax cuts, we shouldn’t expect to see any major giveaways. No decreases likely in income tax rates  We probably won’t see any decrease in income tax rates as cuts to both the 20 percent and 40 percent rates would, by themselves, exceed the €1.1 billion available. There was much debate in 2022 about the introduction of a third rate of income tax. However, there is little expectation that we will see it with the Government opting instead to increase the standard rate band. Last year, the threshold at which people moved into the 40 percent tax bracket increased by €3,200 to €40,000. A further increase of €1,500, as modelled by the Tax Strategy Group (TSG), would cost €298 million in the first year (€343 million for a full year). Increases to tax credits are also on the table. Budget 2023 increased the Personal Tax Credit, the Employee Tax Credit and the Earned Income Tax Credit by €75 each and the Home Carer Tax Credit by €100. The TSG estimates that a €50 increase in each credit this year will cost €242 million. The TSG also examined the concept of refundable tax credits. However, this would be a fundamental change to the Irish personal tax system, requiring careful consideration of policy, administration and cost implications. Linking the personal tax system with inflation The Programme for Government undertook to index-link bands and credits from Budget 2022 onwards. A recent report from the OECD on income taxes showed that 17 of the 38 OECD countries already automatically adjust personal income tax systems in line with inflation. Such a move would be expensive, but it would keep take-home earnings in line with inflation. Otherwise, it is hard to see how proposed tax cuts would be actual tax cuts, given the levels of inflation seen in the economy of late. USC burden likely to fall  We expect the Universal Social Charge (USC) burden to fall. A USC rate cut would be expensive, however. A more likely (and cheaper) option is widening USC bands. The abolition of the 3 percent USC surcharge for self-employed people would be positive. Retaining Ireland’s attractiveness Ireland’s personal tax system must compare favourably with other countries around the world to retain the country’s attractiveness. Special Assignee Relief Programme (SARP) continues to have a temporary placement on the statute book (it currently runs to 2025). A signal in Budget 2024 of the Government’s commitment to extend and enhance SARP would be welcomed by businesses. Higher employer PRSI There is a continuing need to raise more social insurance revenue as the population ages. Options include a higher PRSI charge for the self-employed and employers. However, this would not go down well with small businesses, who face increases to the minimum wage, high energy bills, additional sick pay provisions and upcoming pension auto-enrolment for employees, which will be introduced in 2024. Higher employer PRSI in some form seems inevitable in the years ahead, though perhaps not in this budget. Easing the cost of living and housing  The €1.1 billion set aside for tax cuts excludes once-off spending measures to help people with the cost of living. These are expected to include a repeat of last year’s energy credits. For landlords, the Minister for Housing has stated that he will consider “efficient and effective” measures to attract and keep them in the Irish market. For renters, we may see a repeat of (and maybe an increase in) the €500 rent credit introduced last year – although uptake has been lower than expected. Mortgage holders will be looking for some relief considering recent rate increases, which could include a targeted form of mortgage interest relief. And for first-time buyers, an extension of the Help to Buy Scheme (due to expire at the end of 2024) could be on the cards. Widening of the capital acquisitions tax-free threshold At present, children can inherit €335,000 tax-free from their parents, but there is an acknowledgement that this may not be enough to cover the cost of a typical family home. A widening of this tax-free threshold would be favourable. Budget 2024 comes at a time when the business community is focused on supporting the workforce with the cost-of-living crisis while managing the increasing costs of doing business. At the same time, businesses are focused on attracting, incentivising and retaining key talent and upskilling their workforce to meet changes in business practices – particularly technological disruption. Businesses need support through this challenging period.  Doone O’Doherty is Partner of People & Organisation at PwC Ireland

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

In every issue of The Bottom Line, we ask students for their thoughts on a particular topic. This month, we want to know: What do you hope to see in Budget 2024? Ellen Roycroft EY There is no denying the cost-of-living crisis is one of the largest issues faced by the Irish populace and that one of the main downfalls of this is the rising price of electricity and fuel.  The electricity credits afforded to all households last year helped with this burden substantially. I believe that a further instalment of these credits could set a buffer for those struggling to get through what will already be an expensive winter ahead. In addition to this, I would hope to see an increase in the fuel credit for those living in fuel poverty. The credit, in my opinion, should be extended and the criteria for meeting it relaxed.  With an increasing number of people needing financial help to heat their homes, this would help, in my opinion, both with the affordability of fuel for those already receiving the benefit and for those who may be just on the verge of fuel poverty. Aleksandar Elliot KPMG My hope is that Budget 2024 will be about helping those who need it most through the challenging environment we’re faced with currently, as well as building a more sustainable long-term future. In the short term, the focus should be on the most vulnerable and shielding them from the impact of inflation. Increases in pensions and fuel allowance, as well as help with back-to-school costs through child benefit, should be the top priority.  We cannot forget small businesses that would benefit from the retention of lower VAT rates that are due to expire. Finally, a key component of the cost-of-living crisis is energy. I would like to see the government seize the opportunity to help people reduce their energy usage, which will, in turn, help reduce bills whilst benefitting the environment in the long term. Retrofitting schemes, green finance and electric vehicle grants would be central to such efforts. Sean Cahill EY One of the biggest struggles for students and young professionals is affording rent. From battling to find suitable accommodation to being able to afford it, the housing crisis, in my opinion, is the biggest issue Ireland has now. Last year’s €500 rent tax credit was a brilliant first step in the right direction by our government in addressing this. However, with no short-term solution to this crisis, I feel it's the government's duty to provide further assistance. Since last year, rent has increased exponentially across urban areas in Ireland. Boosting tax credits and reliefs and even looking at setting rent ceilings would not only ease  the burden on tenants but also have a spin-off effect on local economies.  In the 2024 budget, I would love to see the government implementing a strategy to further help tenants and also show a clear long-term plan on how they intend to bring rental rates back to affordability.

The Minister for Finance, Michael McGrath TD, has welcomed growth in Modified Domestic Demand (MDD) in the second quarter of the year Despite the growth, the Minister noted that there were ‘several headwinds’ including constraints in infrastructure and slower growth among trading partners, and that it would be against this backdrop that Budget 2024 would be framed. The Minister for Finance, Michael McGrath TD, has welcomed growth in Modified Domestic Demand (MDD) in the second quarter of the year. Despite the growth, the Minister noted that there were ‘several headwinds’ including constraints in infrastructure and slower growth among trading partners, and that it would be against this backdrop that Budget 2024 would be framed. The figures as reported by the CSO in its publication of the Quarterly National Accounts showed that while MDD expanded by one percent relative to the previous quarter, consumer spending increased by 0.9 percent while GDP increased by 0.5 percent over the quarter. However, GDP was down 0.7 percent on an annual basis, reflecting the volatility of production in the multinational sectors and falling demand for certain pharma exports. Commenting on the figures, Minister for Finance, Michael McGrath T.D., said: “Firstly, while GDP was up on a quarterly basis in the second quarter, I am conscious that it fell by -0.7 per cent relative to the same period last year. This reflects a fall in Covid-related pharmaceutical exports triggered by the passing of the pandemic, as well [an] easing exports associated with so-called ‘contract manufacturing’. As has been well documented, multinational production in Ireland is extremely volatile and, given the outsized role the multinational sector plays in our economy, GDP is clearly not a useful measure of domestic living standards. In terms of the domestic economy, I am encouraged to see that Modified Domestic Demand (MDD) – my preferred metric of domestic economic activity – grew at a solid pace in the second quarter of the year. These data are consistent with trends in the labour market, where figures published last week show employment at its highest level ever at end-June. Importantly, consumer spending was a key driver of growth in the second quarter, increasing by 0.9 per cent over the quarter. This reflects a number of factors including the easing in inflationary pressures over recent months, the strength of our labour market and the role that Government support has played in supporting households. With three-quarters of our working age population in employment – a record high – this should support continued expansion of consumer spending in the coming quarters. While today’s data confirm continued growth in the domestic economy, I am conscious of several headwinds. Our economy is clearly operating at full-employment and capacity constraints, in both our housing and labour markets, are increasingly binding. Externally, growth is slowing in some of our main trading partners, and this could have knock-on implications for Irish exports. It is against this backdrop that Budget 2024 is being framed. We will, once again, need to strike the right balance: ensuring that budgetary policy is calibrated in a manner which avoids adding to the price pressures in our economy while, at the same time, supporting households and delivering the infrastructure and public services that our society needs.”

Representatives from the Institute, under the auspices of the CCAB-I, met with the Minister for Finance, Michael McGrath T.D and his team earlier this week to discuss CCAB-I’s pre-Budget 2024 submission. The need to simplify the tax system and reduce the administrative burden on businesses was discussed, as were the complexities experienced by small businesses, in particular, when availing of several of the business tax reliefs. The importance of long-term investment in critical infrastructure, not least housing, in order to maintain Ireland’s position as a competitive place to do businesses and also to retain and attract talent was also highlighted.  

9 July 2023 – The success of future generations must be prioritised over short-term measures in Budget 2024, to ensure economic and societal progress in the decades to come. This is according to the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I), the umbrella group which represents over 50,000 professional accountants, as it published its Pre-Budget Submission today.   The submission, entitled ‘Supporting Ireland’s Transition to a Sustainable future’, prioritises the long-term, highlighting that while the Irish economy has doubled in size in the past decade, we still have significant shortfalls in healthcare, housing, transport infrastructure and education. Demographics are exacerbating these shortfalls.  The submission identifies two key areas for budgetary focus;  The introduction of an intermediate 30% rate of income tax to reduce the tax burden on younger workers; and Investment in housing capacity to accommodate our young workforce and our significant FDI community. Commenting, Tax and Public Policy Lead at Chartered Accountants Ireland, Cróna Clohisey said:  “In the absence of a long-term focus, we risk an intergenerational divide becoming a chasm. The half-year Exchequer returns of €41bn published this week highlight more than ever the difficult decisions government faces in Budget 2024. This sum represents an 11% increase on the same period last year, but it is now, when the Exchequer is relatively robust, that government should limit itself to modest budgetary tax adjustments and put real spending power behind sustained investment in infrastructure, particularly housing.  “Our economic position is strong, but it is not future-proofed. There is a real divide between generations in terms of access to housing, pensions security and many other indicators. We need Ireland to be a country our young people choose to stay in and that others choose to bring their skills to, but we cannot do that without long term, strategic interventions in transport, health, and housing.”  Reforming the income tax system  Ireland’s 40% tax rate is high in comparison to other competitor countries and the CCAB-I believes that introducing a third rate of income tax of 30% would make the system more equitable. It would also enhance Ireland’s attractiveness as a place to work, particularly among younger workers.   Ms Clohisey continues: “Workers in Ireland pay income tax at a rate of 40% once they earn €40,000. This entry point is below the average wage and is significantly lower than most countries across the UK and Europe where incidentally having more than two tax rates is extremely common.” “Speaking on behalf of a mobile profession where most are in the early stages of their careers and are planning their futures, introducing an intermediate 30% rate would make the system more attractive and more equitable, lessening the tax burden on workers and putting more money in their pockets. An intermediate rate would also support Ireland’s FDI offering. The government needs to take immediate action to address the inequities that clearly exist within the system.” The submission also proposes: Income tax credits and rate bands should be index-linked to earnings to account for inflation Employers’ PRSI should not be increased The rate of CGT and CAT should be reduced from 33% to 20% The CGT annual exempt amount should be increased from €1,270 to €5,000  The Category A threshold for CAT should be increased from €335,000 to €350,000  The CAT small gift exemption should be increased from €3,000 to €5,000. Housing measures The CCAB-I believes that small private landlords are critical in boosting Ireland’s housing supply, particularly in provincial towns where demand is not sufficient to justify large-scale investment in the private rental sector.  Ms Clohisey continues: “Our members tell us that one of the biggest barriers to expansion is the lack of adequate, affordable housing that is reasonably located for their staff. We do our young people an enormous disservice by limiting their opportunities to live and work where they want to.” “The tax burden of small private landlords should be the same as that for companies at the 25% rate, rather than at the marginal rate of 52%. On the supply side, to enable property developers to manage their cash-flow, a tax debt warehousing system, like that created during the pandemic, could be developed whereby the collection of taxes such as PAYE is delayed until all housing units have been sold.” The submission also proposes: Local property tax should be allowed as a deduction against rental income Wear and tear rates for fixture and fittings should be increased from 12.5% to 25% per annum to facilitate landlords investing in the maintenance of properties Where landlords retrofit a property to improve its energy rating, 100% capital allowances should be offered in the year of work ‘Rent-A-Room’ relief should be increased to match the standardised average rent and the ‘cliff-edge’ for qualifying for relief should be removed. The Rent Tax Credit should be permanently included in legislation. ENDS Issued by Chartered Accountants Ireland on behalf of the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I). Read the submission in full here.  About the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I) The Consultative Committee of Accountancy Bodies-Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants which combine to represent over 50,000 professional regulated accountants in Ireland.