Tax and support policy must also urgently accommodate property sector

Originally posted on Business Post 22 October 2022. 

Budgets are tricky things, as the British have recently discovered. They are not merely about balancing the national books. They are about ensuring there is a business environment which can fund national spending aspirations while providing decent levels of employment, wages and spending power.

They are also about convincing investors that your country is a safe place to put their money. This is a critical consideration for Ireland, given that about half of our national debt is owned abroad.

While there is a high element of drama around budget day, the publication of the Finance Bill last Thursday was a far more mundane affair. If budget speeches are poetry (at a stretch), finance bills are most definitely prose. A finance bill provides the detail of the Budget Day adventures, but also corrects its mishaps.

Given that Budget 2023 had involved spending so much money to deal with the cost of living crisis, mishaps such as the concrete levy were inevitable. Far more important than correcting the concrete levy was the change to the Temporary Business Energy Support Scheme (TBESS).

The scheme, announced on Budget Day, was for tax-compliant businesses that experienced a significant increase in their natural gas and electricity costs. The mishap here was that the announcement confined this support to businesses taxed under “Case I”.

This Case I moniker is jargon which not even tax students remark on, as there is no difference between trades and services when calculating profits. It’s a relic inherited from the 19th century, yet it was the term which the Minister for Finance used in his budget speech to exclude professional services businesses from the TBESS.

In practice, it would have meant that the high street convenience shop would get some help in paying for the electricity used by the soft drinks cooler, but the doctors’ surgery next door would get no help to pay for the electricity used by the vaccine refrigerator.

Official Ireland has long been suspicious of the services industry when it comes to business supports and tax incentives. Schemes such as the Employment and Investment Incentive Scheme (EIIS), whereby investors can get a tax deduction to buy into a business, are not available to services companies.

Start-up services companies are not eligible for a corporation tax holiday, but trading and manufacturing companies are. Owner-managed trading and manufacturing companies are allowed to retain profits to reinvest, but profits retained by owner-managed services companies are subject to a corporation tax surcharge.

More troubling, however, is the idea that services are in some way inferior to the more traditional trading and manufacturing activities. Such an idea does not make for good policy. The category of “professional, scientific & technical activities” accounts for over 10 per cent of all taxes collected, and 20 per cent of all self-employed income tax and universal social charge, according to recent figures from Revenue.

That’s a big sector to overlook when it comes to providing state supports, yet that was the original premise of the budget statement. It has now been corrected in the Finance Bill.

Perhaps the real surprise was that TBESS overlooked the services sector in the first place. An important policy aspect of the pandemic supports like the EWSS and the pandemic unemployment payment was that they were agnostic as to the nature and size of the business being helped, where it was located or its legal form. Companies, partnerships and the self-employed were all treated the same way.

While ‘trickle-down’ economic policy is increasingly discredited by no less a person than the American president, a ‘rising tide’ economic policy which attempts to support all industries in equal measure seems to have something going for it. In this country it may help explain the remarkable fact that the nation does not have to borrow to provide the cost-of-living supports promised in the budget.

If trades, manufacturing and services are now receiving equivalent policy treatment in the budget and Finance Bill mix, the missing piece is the private residential sector. There were modifications to the tax rules for landlords and tenants in the bill, but they don’t go far enough.

A change to the way rental income is taxed to reflect all of the business circumstances of landlords and not just their rental business would help keep smaller investors in the market. A system of tax debt warehousing for builders – like the system in operation during the pandemic – to defer Vat and PAYE bills until houses are completed and sold would make a significant difference to the financing of property development at very little cost to the exchequer.

Taken together, the budget and Finance Bill package demonstrates policy maturity and competence. Service business is being accommodated in tax and support policy which too often in the past was restricted to manufacturing, foreign direct investment and exporting activity. The next urgent step is to include the property sector.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland