The purpose of this bulletin is to consider some of the key tax measures announced in the Budget. This bulletin will not consider the expenditure-side increases, although these account for two thirds of the available fiscal space and are the primary focus of this year’s budgetary process.
Budget 2017 announced tax measures designed to support the economy with a particular focus on preparing for Brexit. The tax measures can be roughly categorised as targeting three key sectors.
1. Small and Medium Enterprises
Small and Medium Sized Enterprises are the engine of the economy. Budget 2017 has introduced a number of measures to encourage this important sector.
- Entrepreneur Relief is being enhanced. The CGT rate will be reduced to 10% on the first €1 million gain. This change is welcome as it will reduce the disparity with the UK, and should increase Ireland’s attractiveness as a location to set up a business. In addition, the Minister’s speech indicated that the €1 million limit would be reviewed in future budgets to compete with the UK regime (which has a STG£10M limit).
- The SARP (Special Assignee Relief Program) and FED (Foreign Earnings Deduction) schemes are being extended to 2020 and the conditions for FED have been somewhat relaxed with the foreign days requirement reduced to 30 days. Columbia and Pakistan have been added as qualifying countries. This is intended in the case of the SARP to reduce tax equalisation costs of moving executives to Ireland from abroad (including the UK) and in the case of the FED to open up its benefits to more employees of indigenous companies.
- The Earned Income Tax Credit is being increased by €400 to €950. The credit is targeted at self-employed persons and is aimed at compensating them for not being able to avail of the PAYE tax credit.
- A report reviewing the taxation of share-based remuneration has also been released. Share-based remuneration strategies are an important tool for retaining key staff. Reform in this area is long overdue and we are seriously out of step with regimes in the UK and elsewhere. While no measures were set out in the current Budget, it would be hoped that subsequent Budgets will address this issue. An attractive share-based remuneration regime would do much to support the growth of indigenous business and increase Ireland’s attractiveness as a foreign direct investment location.
- The 9% reduced rate of VAT is being retained for the hospitality industry. This should help alleviate some of the pressures which that industry is facing due to Brexit.
2. Housing / Residential Accommodation Sector
A shortage of affordable accommodation in Ireland’s main cities has become a challenge for our economy. It affects businesses seeking to attract staff, and can influence the decision to relocate to Ireland. Budget 2017 contains a number of measures to improve the situation, which when taken a whole should incentivise the development of quality affordable accommodation.
Landlords / Rental Sector,
- Landlords will have increased mortgage interest deductibility (rising from 75% currently, to 80% in 2017, with a commitment to increase by a further 5% each year until 100% deductibility is restored). This will go some way towards addressing the difficulties landlords have faced over the past number of years in servicing their borrowings.
- The Living City initiative is being extended to Landlords and will also apply to buildings that are currently commercial and are being turned to residential use. This is an income tax relief for expenditure on certain works to pre-1915 buildings in designated areas. In addition, the restriction that the property must have been previously used as a dwelling is being removed. This should assist in improving the housing stock in certain areas of our cities.
- The Home Renovation Scheme that applies to all rental residential properties since 2015 is being extended to the end of 2018.
Building & Development,
- The newly introduced Help to Buy Scheme should increase demand for newly built residential property and should therefore assist with adjusting prices of starter homes to a level that makes economic sense to build.
- The Building sector will benefit from the extension of the Home Renovation Scheme. This scheme subsidises the cost of carrying out works in a residential property by allowing the property owner to recover the VAT by means of a tax credit. This should encourage growth in the sector.
- The increase of the Rent-a-Room relief threshold to €14,000 should incentivise home-owners to let spare bedrooms.
- Home owners will also benefit from the extension of the Home Renovation Scheme.
- First Time Buyers will benefit from the Help to Buy Scheme.
3. Agri-Marine Sector
- A new Fishers Credit worth €1,270 will be introduced for fishers of wild fish and wild shellfish (minimum 80 days per annum).
- A scheme for decommissioning fishing vessels will be introduced.
- Unregistered Farmers will see an increase in the flat rate addition to 5.4% (from 1 January 2017).
- The introduction of low cost credit (sub 3%) on flexible terms.
- The extension of farm restructuring relief to 2019.
- A new CGT relief for persons receiving payments in respect of the raised bog restoration initiative.
- A ‘step-out’ from income averaging with deferral of tax.
- In addition, the scheme of accelerated capital allowances for energy efficient equipment is to be extended to sole traders. The measure was introduced in the context of agricultural measures, so it is unclear if the extension will apply to all sole-traders or just agricultural business. Clarification will be required.
CAT: There was some incremental improvement to the CAT regime. The Group A threshold is to be increased to €310,000, and the Group B and C thresholds will be also increased by 8%. The date on which the increases are to take effect was not specified. No changes were flagged regarding other reliefs/exemptions. The CAT rate remains unchanged at 33%. While the increase in thresholds is to be welcomed, the CAT regime continues to impose a high tax burden on individuals inheriting even modest amounts of wealth, and acts to discourage life-time gifts.