The aim of Budget 2014, announced in the Dail this afternoon by the Minister for Finance, Michael Noonan (two months earlier than normal) is to reach a deficit target of 4.8% by the end of 2014. The overall budget of €2.5 billion includes €1.2 billion in revenue savings (inclusive of €500 million carried forward from last year). This e-zine looks at the key tax measures in the Budget.
Minister Noonan promised in the lead up to today’s Budget that he would introduce new initiatives to support economic growth. He confirmed that job creation is the number one priority. He has delivered on this promise with a total of 25 incentives for jobs and growth. The tax related measures include a new capital gains tax relief for the re-investment of proceeds from previous asset disposals in new trading activities, the extension of the current CGT property relief for a further year, the removal of EIIS (formerly BES) relief from the High Earners Restriction, relaxing the rules in relation to the R&D tax credit, the extension of the Living City Incentive relief to Cork, Galway, Kilkenny and Dublin, the introduction of a home renovation incentive and an increase in the VAT threshold for the cash receipts basis.
Further information on each of the taxation measures introduced is set out below.
Tax relief continues to be available at the marginal rate (currently 41%) on pension contributions.
Standard Fund Threshold
The Standard Fund Threshold (SFT) will be reduced from €2.3 million to €2 million from 1 January 2014. There is a total limit on the total capital value of pension benefits that an individual can draw in their lifetime from their pension (including all public sector schemes). This is known as the SFT and it has been adjusted in line with an earnings index since its introduction on 7 December 2005. The last adjustment was made on 7 December 2010 to €2,300,000. If an individual’s pension rights were in excess of this at 7 December 2010, they could claim the higher amount as their personal fund threshold (PFT).
Where the capital value of an individual’s pension benefits at retirement exceeds the SFT, or higher PFT if applicable, a chargeable excess arises which suffers an immediate ring fenced tax charge of 41%.
The SFT will be reduced from €2.3 million to €2 million from 1 January 2014. The SFT was expected to be reduced following the announcement in last years’ Budget that tax relief will only be given up to a level that will provide pension income of up to €60,000 per annum. The excess funding will be subject to an effective rate of income tax of 65%. Individuals with funds in excess of the new threshold can apply for a higher fund threshold i.e. PFT up to a maximum of the old threshold of €2.3 million. Individuals with an existing PFT will retain that PFT. It is important that an individual who may be affected by the reduction seek tax advice prior to 31 December 2013.
The current capitalisation factor of 20 used to determine the value of a defined benefit pension arrangement for the purposes of calculating an individual’s PFT is no longer applicable for valuing pension rights that accrue after 1 January 2014. Instead an age-related valuation factor which will vary according to the age of the individual at the point of draw-down of those rights will apply for the purposes of determining whether an individual has excess funding in their pension fund. The current capitalisation factor of 20 will remain for pension rights that accrue up to 1 January 2014. This change will have serious implications for individuals who previously had their PFT determined by the current capitalisation factor of 20, as following this change it is likely that the individual’s fund will now exceed the PFT that was agreed with Revenue. These individuals should now seek tax advice.
Pension Fund Levy
The Minister announced that the levy is to be increased to 0.75% for 2014 and will be extended to 2015 at a reduced rate of 0.15%. The Finance (No. 2) Act 2011 introduced a four year stamp duty levy of 0.6% per annum on the market value of assets under management in pension funds in the State. The levy applies for the four years from 2011 to 2014. When the pension levy was first introduced it was intended to be a temporary levy to apply for a four year period only. In last year’s Budget speech the Minister confirmed that the levy was to be a four year levy only. The Minister has not stated that the reduced levy of 0.15% for 2015 is to be a temporary measure.
Deposit Interest Retention Tax
Deposit Interest Retention Tax (DIRT) has been increased to 41% for interest payments made on or after 1 January 2014. Following the announcement in last year’s Budget that PRSI will apply to all individuals on their unearned income from 1 January 2014, it means that the effective rate of tax on deposit interest will be 45%. It is not clear how Revenue will collect the PRSI on deposit interest for employees whose only sources of income are wages subject to PAYE and deposit interest. The Universal Social Charge does not apply to deposit interest. The Financial Institution may agree to an early payment of deposit interest in some cases.
The rate of tax that applies to life assurance policies and investment funds has also increased to 41% for payments including deemed payments made on or after 1 January 2014. Consideration should be given to redeeming some funds prior to 31 December 2013.
Home Renovation Incentive
Tax relief is being introduced for certain expenditure on home renovations carried out in the period from 1 January 2014 to 31 December 2015. Renovations which will qualify for relief include extensions, window fittings, plumbing, tiling and plastering. The relief of 13.5% of qualifying expenditure will be granted as a tax credit over the two years following the year of expenditure. Expenditure must be a minimum of €5,000 and is available up to a maximum of €30,000. Therefore, if qualifying expenditure in 2014 is €25,000, a tax credit of €1,687 will be available in each of 2015 and 2016.
In order to qualify for relief the payment must be made to a tax compliant contractor. Therefore, an individual is likely to be charged VAT at 13.5% by the contractor. Broadly, the effect of this relief is that the VAT paid by the individual to the contractor will be claimed back by the individual as a credit over the following two years. It is hoped that this will assist those compliant in the construction sector to compete with those working in the black economy.
Start Your Own Business
Where an individual who has been unemployed for at least 15 months sets up a new unincorporated business, they will be exempt from income tax for a period of two years. The maximum amount in each year that is exempted is €40,000. It is not clear if the €40,000 exemption refers to the income tax liability or income. There is also no reference in the Budget documentation as to whether the income is exempted from the Universal Social Charge and PRSI. This will only be clear when Finance Bill 2014 is published on 24 October 2013.
Top Slicing Relief
Top slicing relief will no longer be available from 1 January 2014 on ex-gratia lump sums in respect of termination and severance payments. Currently, the relief applies so that the maximum income tax rate that applies to a non-statutory lump sum payment up to €200,000 is the individuals average income tax rate over the previous three years rather than the marginal rate of 41%. Individuals nearing retirement might consider doing so prior to 31 December 2013.
Tax Relief for Medical Insurance Premiums
Tax relief at source is granted on medical insurance premiums. With effect from 16 October 2013, relief is restricted to €1,000 for each adult covered and €500 for each child covered. Therefore, for a family of two adults and two children tax relief will only be available on the first €3,000 of their premium.
Employment and Investment Incentives Scheme (“EIIS”)
The Minister has announced that the EIIS will not be subject to the High Earners Restriction where the investment is made in the period from 16 October 2013 to 31 December 2016. This incentive scheme was introduced by Finance Act 2011 to replace the Business Expansion Scheme (“BES”). The BES was introduced to encourage employment in certain types of companies through the provision of tax relief for investment in these companies. Up until now, the relief was subject to the High Earners Restriction. It is hoped that this will encourage more investment in EIIS.
Living City Initiative
The Minister has announced that the scheme will be extended to Cork, Galway, Kilkenny and Dublin. The Finance Act 2013 introduced a new urban renewal scheme, the “Living City Initiative”, aimed at encouraging the refurbishment of Georgian buildings in certain cities. Under the scheme, owner occupiers of residential premises are entitled to claim a deduction for refurbishment costs from their income over a 10 year period and landlords of certain commercial premises are entitled to claim capital allowances in respect of refurbishment expenditure over a seven year period. When introduced the scheme applied only to certain areas within Limerick City and Waterford City. In addition when introduced only refurbishment of residential buildings constructed in the period 1714 to 1830 qualified under the scheme. The Minister has announced that the scheme is to be extended to all buildings built prior to 1915.
The above amendments are subject to receipt of EU State Aid approval
2014 will be the last year that individual investors can claim film relief. In 2012, the Department of Finance carried out an Economic Impact Assessment on film tax relief. Further to that assessment film relief was extended to 2020 in Finance Act 2013. The fundamental change introduced in Finance Act 2013 was that film relief will no longer be available to individual investors. The new relief provides for a single tax credit of 32% that is to be paid directly to a qualifying producer company. The new scheme was to commence in 2016 but it has been announced today that this is being brought forward to 2015.
Capital Allowances and Losses
Capital allowances and losses claimed by passive investors in respect of plant and machinery used in manufacturing trades will be subject to the High Earners Restriction.
Tax Relief on Loans to Acquire an Interest in a Partnership
Tax relief will no longer be available for interest paid on loans drawn down to invest in a partnership from 15 October 2013. Existing loans will continue to qualify for the relief but the relief is to be phased out over four years from 1 January 2014.
Finance Bill 2014, which is due to be published on 24 October 2013, will include measures to ensure that Irish registered companies cannot be ‘stateless’ in terms of their place of tax residency. The Minister has again shown his commitment to retain Ireland’s 12.5 per cent corporate tax rate, which is critical for winning mobile foreign direct investment. He has published a new international tax strategy statement that sets out Ireland’s objectives and commitments that guide its approach to international corporate tax issues. It includes participating in the OECD Base Erosion and Profit Shifting project to come up with a global solution for taxing multinational companies.
Research and Development Changes
From 2014, the first €300,000 (previously €200,000) of expenditure on research and development will be eligible for relief regardless of whether the company was carrying on research and development activities in 2003. Qualifying expenditure on research and development for accounting periods commencing on or after 1 January 2014 will therefore be €300,000 plus the excess of expenditure in the current accounting period over expenditure in 2003 subject to the proviso that qualifying expenditure cannot exceed expenditure in the current accounting period.
The amount which can be subcontracted out to other unconnected persons has been increased to the greater of €100,000 or 15% (from 10%) of the research and development expenditure.
The current provisions allow companies entitled to the R&D tax credit to surrender a portion of the credit to individuals who meet the definition of key employees to reduce their own income tax liability. It was announced that amendments will be made to remove some barriers to the uptake of this relief. There will be more detail on this in Finance Bill 2014 which is due to be published on 24 October 2013.
There has been no change announced in the CGT or CAT rates which remain at 33%.
Property Purchase Incentive
The Minister has announced that the relief will also now apply to properties purchased in 2014. Finance Act 2012 introduced relief from CGT for gains arising on the disposal of land and buildings situated in any EEA State including Ireland. Provided the property is held for at least seven years a portion of any gain arising would be exempt from CGT. If the property is held for seven years the full gain is exempt. If it is held for longer the portion exempt will depend on the period of ownership, for example 7/8ths of the gain arising on a property held for eight years is exempt from CGT. When the relief was introduced it was provided that the relief would only apply to properties purchased on or before 31 December 2013.
CGT Entrepreneurial Relief
The Minister has announced a new CGT relief for what he described as “serial” entrepreneurs i.e. individuals who invest, dispose and re-invest in assets. Where an individual disposes of assets (the original assets), invests in a new business (the second business) and subsequently disposes of the second business, the individual will be entitled to reduce any CGT liability arising on the disposal of the second business by way of a CGT credit. The CGT credit will be the lower of:
In order for the relief to apply the second disposal must not be made within three years of the disposal of the original assets.
The relief will only apply to investments in what the Minister described as “productive trading activities”.
There appears to be an element of retrospective relief being given here in that credit may be claimed for CGT paid on a disposal of assets which has occurred from 1 January 2010.
Commencement of this relief is subject to receipt of EU State Aid approval.
CGT Retirement Relief
The cap on retirement relief which was introduced in Finance Act 2012, for individuals who are aged 66 or over, applies to disposals from 1 January 2014. Retirement relief for CGT purposes will only be available on proceeds up to €3 million where the disposal is to a child and up to €500,000 on a disposal to a person other than a child.
CGT Retirement Relief for Farmers
CGT retirement relief which is currently available on a transfer of leased land by a farmer to a child is being extended to transfers by a farmer to a person other than a child. The land must be let under a long term lease (minimum 5 years) and must be used for the purposes of farming by the individual for a period of 10 years immediately prior to it being let.
There are no changes to VAT rates. The special rate of 9% applying to the hospitality sector remains in place. It was due to revert back to 13.5% in January 2014. The Minister has not reduced the 13.5% rate applying to the construction sector but has instead introduced income tax incentives for refurbishment of principal private residences.
Cash Receipts Basis Threshold Increased
The annual threshold for accounting for VAT on a cash receipts basis will increase from €1.25 million to €2 million from 1 May 2014. This is a welcome development and should assist cash flow for small to medium sized businesses. Consideration should be given to moving to a cash receipts basis if a business is likely to fall within the new threshold.
Disallowance of Input VAT
A new measure has been introduced to encourage early payment of purchase invoices and assist cash flow. Where a business which has not paid for supplies (in full or in part) within six months, it will have to repay the VAT input credit claimed on those supplies.
Farmer’s Flat Rate
The farmer’s flat rate scheme compensates unregistered farmers for VAT incurred on their farming inputs. The rate is being increased from 4.8% to 5% from 1 January 2014.
There have been no changes to general stamp duty rates.
Transfers of Shares on the Enterprise Securities Market
Stamp duty is payable at 1% in respect of transfers of shares. The Minister has announced an exemption from stamp duty for transfers of shares on the Enterprise Securities Market (ESM). The ESM is the market established by the Irish Stock Exchange for smaller companies which are at an early or growth stage of their development.
Levy on Domestic Financial Institutions
The Minister has announced that a levy will be imposed on domestic financial institutions for the period 2014 to 2016. The levy payable will be linked to the amount of tax paid on deposit interest by the financial institution in 2011. It is forecast to yield €150 million on an annual basis.
Property tax will be levied for a full year in 2014 which is estimated to yield a further €250 million. It was only levied for six months in 2013.
Air Travel Tax
The Air Travel Tax which was introduced back in March 2009 is being reduced to zero from 1 April 2014 to encourage airlines to develop new routes and build traffic volumes. Interestingly the tax is not being abolished and may be reintroduced in the future.
The Minister has announced that there will be a reform of the Appeal Commissioners in 2014 in order to ensure that compliant taxpayers have an independent, fair and efficient appeals process available to them.
The excise duty on a packet of 20 cigarettes and a pint of beer or cider and standard measure of spirits is being increased by 10 cents while the duty on a 75cl bottle of wine increases by 50 cents with effect from 16 October 2013. There are no increases on petrol or diesel products. Revenue will continue their focus on the illegal sale of tobacco, alcohol and diesel products.
Report on High Earners Restriction
The Revenue Commissioners’ report on the impact of the High Earners Restriction in 2011 was published today. Some interesting statistics disclosed in the report are as follows:
Finance Bill 2014 is due to be published on 24 October 2013. The government has agreed that it will be passed prior to 31 December 2013.
Please feel free to give us a call to discuss any of the changes that may impact on you.