Introduction

The Minister for Finance (the “Minister”) delivered Budget 2016 on the 13th of October 2015. The final Budget of the Fine Gael/Labour Coalition’s term of office introduced a broad range of tax cuts and spending increases in light of the upcoming general election and Ireland’s strengthening economy. With GDP growth for 2015 forecasted at 6.2%, unemployment falling below 10% and a decreasing national debt, the Government were in a position to reduce the burden on taxpayers and to provide a more competitive environment in which to do business.  The modest improvements for businesses, entrepreneurs and individuals included in this Budget are to be welcomed and it is hoped that future budgets will expand on these. 

There were a number of changes for businesses and entrepreneurs announced in the Budget.  These include the introduction of the Knowledge Development Box which is designed to increase Ireland’s attractiveness as a location for intellectual property (“IP”) development and investment, the retention of relief for start-up companies, improvements to the Employment and Investment Incentive Scheme and Capital Gains Tax (“CGT”) relief for entrepreneurs.  While the new 20% rate of CGT applicable to the disposal of business assets is welcome, it remains uncompetitive with the 10% rate applicable to entrepreneurs in the UK. 

There have been a number of changes to the personal tax regime, specifically to reduce the tax burden on the “squeezed middle”.  Cuts in the rates of USC will see the marginal tax rate for those earning under €70,044 fall below 50% for the first time since 2009.  The Minister introduced an Earned Income Credit for the self-employed as part of a desire to gradually bring about a greater parity of tax burden with PAYE workers. There were also minor changes to Capital Acquisitions Tax and PRSI.

While some aspects of Budget 2016 are politically driven and there are shortcomings in relation to entrepreneurs and SMEs, Budget 2016 is representative of Ireland’s emergence from the financial crisis.

Business Taxes & Measures

Knowledge Development Box (“KDB”)

A 6.25% rate of corporation tax to profits arising from certain IP assets which are the result of qualifying Research and Development (“R&D”) activity in Ireland is being introduced.  Ireland’s KDB is being described as the first OECD compliant patent box in the world.  It is being introduced to encourage the development of intellectual property in Ireland in response to growing international competition for such businesses.

Implementation of OECD Recommendations for Multinational Companies

The Minister announced that the upcoming Finance Bill will introduce country by country reporting on certain aspects of the activities of multinational companies headquartered in Ireland in line with the recommendations of the OECD’s Base Erosion and Profit Shifting (“BEPS”) reports.  This will allow for confidential data to be shared with other tax authorities.

9% VAT Rate

The reduced 9% VAT rate for tourism-related goods and services is being retained. The measure has been of great benefit to the tourism sector in Ireland but the Minister noted that “the case for retaining the measure for the hotel sector in Dublin is diminishing each year”.

Employer’s PRSI

The weekly threshold at which employer’s PRSI is charged at 10.75% is being increased from €356.01 to €376.01.

Film Relief

The cap on eligible expenditure under the film tax credit is increased from €50m to €70m.

Bank Levy

The levy on financial institutions which was due to expire at the end of the year is to be extended to 2021.  The levy is forecasted to generate €750 million in revenue over the extended period.

Commitment to 12.5% Corporation Tax Rate

The Minister again reiterated the Coalition’s commitment to ensuring that Ireland’s 12.5% rate of corporation tax is kept in place.

SME & Entrepreneurship Measures

Capital Gains Tax Relief for Entrepreneurs

A lower 20% CGT rate instead of the normal 33% rate will apply to net chargeable gains arising from the disposal of the whole or part of a business or trade subject to a lifetime limit of €1 million.  This relief will apply from 1 January 2016.

Retention of Relief For Start-Up Companies

The relief from corporation tax on trading income and chargeable gains for start-up companies in their first 3 years of trading will be extended to 2018.

Employment and Investment Incentive Scheme (“EIIS”)

Changes to EIIS which had been subject to review under the EU State Aid rules have been given EU approval.  With effect from 14 October 2015, the maximum amount of finance that can be raised by a company is now set at €5 million annually subject to a lifetime maximum of €15 million.  The extension, management and operation of nursing homes will now also come within the scope of the EIIS.

Personal Taxes

USC

The USC exemption threshold has been increased from €12,012 to €13,000, removing approximately 42,500 workers from the scope of the charge.  The 7% rate is being reduced to 5.5%, the 3.5% rate is being reduced to 3% and the 1.5% rate is being reduced to 1%.  The new 5.5% rate entry threshold has been increased from €17,556 to €18,668.  The Minister confirmed that the reduced rates of USC for people aged 70 or over and medical card holders under 70 whose aggregate income for the year is €60,000 or less will remain as before.  Self-employed income in excess of €100,000 continues to be charged at 11%.

The tables below set out the new USC regime:

New USC Bands and Rates

Click here to view table.

New USC Bands and Rates

Click here to view table.

Capital Acquisitions Tax (“CAT”)

With effect from 14 October 2015,  the CAT lifetime tax free threshold in respect of gifts and inheritances under the Category A threshold, generally from parents to their children, is being increased from €225,000 to €280,000.

Earned Income Credit

An Earned Income Credit of €550 will apply for the self-employed, farmers and proprietary directors who are ineligible for PAYE credit on their salary income.  This credit is being introduced as part of a pledge to bring about equal tax treatment for the self-employed. 

Employee’s PRSI

A new tapered PRSI credit of €12 per week for those employees earning up to €424 per week is to be introduced.

Pension Levy

The Minister confirmed that the Pension Levy will be allowed to expire at the end of 2015 as planned.

Indirect Taxes

A number of indirect tax and excise measures were also announced in the Budget.  As mentioned above, the Minister confirmed that the VAT rate of 9% for the hospitality sector will remain in place.

The following changes were also announced:

  • An increase in tobacco products tax with a 50c increase in the cost of a pack of 20 cigarettes.  A pro rata increase will apply to other tobacco related products.  This was the only tax increase mentioned in Budget 2016.
  • A special relief reducing the standard rate of alcohol products tax by 50% on beers was introduced in last year’s budget.  The relief will now be available upfront as well as through a rebate, creating a cash flow benefit for the industry.
  • Annual commercial motor tax is to be reduced to €500 for commercial vehicles between 4,000kgs and 12,000kgs and €900 for commercial vehicles over 12,000kgs. 
  • There are two changes in relation to electronic payments.  Firstly the current stamp duty charge on ATM cards and combined cards will be abolished at the end of the year and replaced with a 12c ATM withdrawal fee which will be be capped at €2.50/€5 per annum per card.  Secondly the interchange fees that retailers face for accepting card payments are to be halved to 0.30% for domestic credit card transactions and 0.10% for domestic debit card transactions.