Michael Noonan delivered his fourth Budget Speech to the Dáil today. The speech signalled the end of austerity with tax cuts for lower and middle income earners and the announcement of a corporation tax reform package. Higher earners will see the reduction of the top rate of income tax to 40% being mostly offset by a 1% increase in the USC charge. The 12.5% corporation tax rate is not up for discussion but the so called “Double Irish” structures will be abolished. A new enhanced intellectual property regime will be introduced.
Unemployment which currently stands at 11.1% is forecast to reduce to 10% next year down from 14.5% at the height of the recession. GDP is forecast to grow by 3.9% next year with the budget deficit at 2.7% below the 2.9% required target. Agribusiness and tourism are seen as the two most important indigenous industries. Improvements have been introduced to the tax regime for farmers and the 9% VAT rate for tourism has been retained. Conditions for reliefs recently introduced such as EIIS, FED and SARP have been relaxed.
The improvements to the EIIS are welcome to the SME sector but there is little else in the Budget to encourage entrepreneurship. This is in contrast to the excellent work on corporation tax reform for international business. It is hoped in the next Budget that a similar roadmap will be prepared for Irish indigenous business and there will also be reductions in the tax burden for middle and higher paid earners. 24% of taxpayers are paying 80% of the tax, this is not sustainable.
Finance Bill 2015 is due to be published on 23 October 2014 and will contain further detail on some of the measures announced.
Further information on each of the taxation measures introduced is set out below.
The Ministers’ intention is to reduce the 52% tax rate over the next 3 years. The marginal rate of tax has been reduced from 41% to 40%. The standard rate band of income tax has been increased by €1,000 from €32,800 to €33,800 for a single individual and from €41,800 to €42,800 for married one earner couples.
Universal Social Charge (“USC”)
The entry point for USC has been increased with the effect that incomes of €12,012 or less are exempt from USC. For amounts in excess of €12,012, the rates are set out below:
For Employees Self Employed
€0 to €12,012 1.5% 1.5%
€12,013 to €17,576 3.5% 3.5%
€17,577 to €70,044 7% 7%
€70,045 to €100,000 8% 8%
Balance 8% 11%
The higher rates of USC have been introduced to minimise the benefit of the reduction in the marginal rate of tax and the increase in the standard rate band to individuals who have income in excess of €70,044.
First Time Buyers – Deposit Interest Retention Tax (“DIRT”) relief
First time buyers who are saving to fund the purchase of their first home will be entitled to a refund of DIRT suffered on interest earned on those savings at any time in the two year period ending on the date of purchase of the property. The refund will only apply where the property is purchased in the period from 14 October to 31 December 2017 and will be limited to DIRT deducted from savings of up to 20% of the purchase price of the property.
Home Renovation Incentive
The Home Renovation Incentive was introduced in last years Budget and provided for tax relief for certain expenditure on home renovations carried out by home owners in the period from 25 October 2013 to 31 December 2015. This relief has been extended to landlords who carry out work on their rental properties from 15 October 2014 to 31 December 2015. The extension only applies to landlords subject to income tax. Therefore, it would appear that the incentive will not apply to Irish resident companies but will apply to non-resident companies.
Employment Investment Incentive Scheme (“EIIS”)
The EIIS is the replacement for the BES. The main differences between the EIIS and BES are that a wider range of companies can avail of the relief and also the initial tax relief for investors is at an effective 30% rate with further relief only available if certain employment criteria are met. The EIIS is recognised as an important source of funding for the SME Sector and is seen as an alternative to bank finance. The Minister announced a number of changes to EIIS. Firstly the holding period for EIIS shares has been extended from three years to four years. Three years was seen as too short a period for companies to develop.
The types of companies that qualify have been extended to medium size companies in non-assisted areas and also companies which are involved in the management of nursing homes and internationally traded financial services. Hotels, guesthouses and self-catering accommodation will remain eligible for a further three years. The amount a company can raise annually under the EIIS has been increased to €5 million with a lifetime cap of €15 million. These measures are subject to EU approval.
Regrettably there was no mention of increasing the initial tax relief available from the effective 30% rate. Although the remaining relief may be available if employment criteria are met, this is not under the control of the investors and is seen as making EIIS less attractive.
The pension levy was increased last year to 0.75% for 2014 and was extended to 2015 at a reduced rate of 0.15%. In last years speech the Minister was silent on when it would be abolished. However, he has now confirmed it will end in 2015.
Foreign Earnings Deduction (“FED”)
FED is a relief from income tax for individuals who are resident in Ireland but spend “qualifying days” working in various stipulated countries in 2012, 2013 and 2014. The Minister has extended the relief until the end of 2017. Chile, Mexico and certain countries in the Middle East & Asia have been added to the list of countries which qualify with effect from 1 January 2015. In addition, rather than having to spend a minimum of 60 days in the qualifying countries in order to qualify, only 40 days will be required. Furthermore, you could only count days which were one of at least four consecutive days in the foreign country but the Minister has provided for this to be reduced to three consecutive days and will now also include travel time as time spent abroad for the purposes of the relief. Where the relevant conditions are satisfied, an individual is entitled to a reduction in their income for income tax purposes up to a maximum of €35,000.
Special Assignee Relief Programme (“SARP”)
SARP is an income tax relief that applies to employees who having worked for a relevant employer for a minimum period of 12 months are assigned to Ireland to work for that employer or an associated employer. The relief applies in the case of employees who are first assigned to work in Ireland in 2012, 2013 and 2014. Where the relief applies, the employee can apply to have a certain portion of their income disregarded for income tax purposes. The Minister has extended SARP for a further three years to the end of 2017 and the upper salary threshold is being removed. In addition, the requirement to have been employed abroad by the employer prior to being assigned is being reduced to six months from twelve months. Further details are to be provided in Finance Bill 2015.
A tax credit at the standard rate has been announced on water charges up to a maximum of €500 per household per annum. Therefore, the maximum tax credit on an annual basis is €100. The tax credit will be available on a prior year basis.
There is an exemption from income tax for income received from the production of certain original and creative works. Since 2011, the maximum amount of income that could be exempted was capped at €40,000. This has been increased by €10,000 to €50,000.
Rent a Room Relief
Currently, where an individual rents out a room in their house and the rental income is less than €10,000, the income is exempt from income tax. The limit has been increased to €12,000.
There has been no change to the 33% CGT rate.
The 80% rate of tax that was introduced in 2009 which applies to profits and gains attributable to a relevant planning decision by a planning authority, is being abolished with effect from 1 January 2015.
The Minister also stated that he will launch a public consultation process to determine whether owners of zoned and serviced land are retaining it until prices increase. If it is determined that this is the case, he will consider what taxation measures could be taken to penalise those land owners.
Property Purchase Incentive
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. The relief applies for properties purchased between 7 December 2011 and 31 December 2014. The Minister confirmed that the incentive is not being extended beyond this date.
The Minister advised that Ireland’s corporation tax strategy has three key elements, being the rate, the regime and the reputation. He reaffirmed that the 12.5% rate is not for changing and is settled policy. In order to protect Ireland’s reputation he has advised that he is abolishing the “Double Irish” by making all Irish incorporated companies Irish tax resident. This change will take effect on 1 January 2015 for new companies and for existing companies there is a transition period until the end of 2020. Further details of this measure will be included in the Finance Bill which is due to be published on 23 October 2014.
R&D Tax Credit
The R&D Tax Credit regime has finally been modified to remove the 2003 base year restriction. This is a very welcome change which should considerably enhance a large number of companies’ future qualifying R&D corporation tax credit claims. This change is set to take effect from 1 January 2015.
The current R&D Tax credit regime essentially limited the corporation tax credit claimable to 25% of incremental qualifying R&D expenditure incurred over and above the R&D expenditure incurred by a company in an accounting period ending in 2003. Although last year’s Finance Act, excluded the first €300,000 from the incremental basis in calculating the R&D tax credit, long established companies in Ireland were still very limited as to what they could claim particularly if they had incurred a significant amount of R&D expenditure in the base year.
The above change will enhance Ireland’s attractiveness as an overall location for foreign direct investment.
Knowledge Development Box
A public consultation process has been announced for the development of a Knowledge Development Box, similar to the Patent Box which is currently in operation in other countries. For example, in the UK, the Patent Box enables companies to apply a lower rate of corporation tax to profits earned after 1 April 2013 from its intellectual property such as patented inventions and certain other innovations. This lower rate is currently 10%. It is intended that the Irish Knowledge Development Box will be levied at a similar low, competitive and sustainable tax rate and will be legislated for in next year’s Finance Bill. It is understood that the Minister intends for the applicable rate to be in the region of 6.25%.
3 Year Relief for Start-up Companies
In Budget 2009, the Minister introduced a measure whereby any new start-up company that commenced trading would be exempt from tax, including certain capital gains in each of the first three years provided that its tax liability in the relevant corporation tax year did not exceed €40,000. The relief has been extended and modified since 2009 so that the value of the relief is linked to the amount of employers’ PRSI paid by a company in an accounting period subject to a maximum of €5,000 per employee. If the amount of qualifying employers’ PRSI is lower than the reduction in corporation tax liability otherwise applicable, the relief will be based on the lower amount. This relief has been extended for new start-up companies commencing to trade in 2015. The Minister also indicated that a review of this relief will be carried out in 2015.
Capital Allowances for the Provision of Specified Intangible Assets
Currently, capital allowances are available to companies which incur expenditure on specified intangible assets, such as patents, trademarks, brand names and similar IP. The aggregate amount of capital allowances and related interest expense that may be claimed for any accounting period must not exceed 80% of the trading income of the relevant trade for that period excluding such allowances and interest. In effect, this means that a minimum 20% of income from the relevant trade is left within the charge to tax for an accounting period. This 80% restriction is now being removed.
Accelerated Capital Allowances for Energy Efficient Equipment
Expenditure on certain Energy Efficient Equipment qualifies for capital allowances at 100% in the year the expenditure is incurred. The provision was due to terminate on 31 December 2014 but has been extended to the end of 2017.
A number of taxation changes have been made to support the farming industry following the Agri-Taxation Review which was published as part of today’s Budget. Such new taxation measures are specifically targeting farmers and landowners to either actively farm their lands or to lease to other active farmers.
The income tax exemption thresholds that apply to long term farmland leasing have been increased by 50%. A further threshold has also been introduced for lease periods of 15 or more years meaning that income of up to €40,000 will be exempted in respect of such long leases.
Previously the above farm leasing relief could only be availed of by individuals who were aged 40 years or more. This age threshold has now been removed.
The above income tax exemption thresholds are also to be extended to farmers who lease their farmland to lessees who are companies. Previously the income tax exemption was only available where the farmland was leased to individuals subject to satisfying other conditions.
The income averaging tax regime is also being extended to include farmers who generate income from another trade or profession if this is due to on-farm diversification. The current income averaging regime allows an individual to make an election to be assessed to tax for a particular tax year based on the average of three years’ of farming profits provided certain conditions are satisfied. Budget 2015 is also increasing the range for income averaging from 3 to 5 years.
VAT and 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 5% to 5.2% with effect from 1 January 2015.
Capital Gains Tax (“CGT”)
CGT – Retirement relief
CGT relief is currently available on a transfer or sale of leased farmland provided the farmland has not been leased for a period exceeding 15 years subject to certain other conditions being satisfied. Budget 2015 has now extended this relief to farmland which has been rented out for a period of up to 25 years prior to the date of disposal. In addition, retirement relief will also now apply to land let under conacre, which is disposed of, or converted to long term leasing before the end of 2016.
CGT – Restructuring relief
Finance Act 2013 introduced a new tax measure giving farmers relief from CGT for farm restructuring such as the sale, purchase or exchange of farmland in the period from 1 January 2013 to 31 December 2015 subject to certain conditions being satisfied. This relief is now being extended to the end of 2016. The qualifying criteria have also been expanded to permit restructuring that will involve whole farm replacements.
Capital Acquisitions Tax (“CAT”)
CAT – Agricultural Relief
Budget 2015 is seeking to limit the application of CAT agricultural relief to gifts and inheritances of agricultural land to individuals who are either “active” farmers or individuals who will lease out the agricultural land on a long-term basis for agricultural use to “active” farmers. This new restriction is intended to take effect from 1 January 2015 and will also be subject to other conditions, the details of which are expected to be disclosed in the upcoming Finance Bill.
Budget 2015 has also announced two stamp duty measures of relevance to farmers. It is proposed that agricultural leases of between 5 and 35 years in duration will be exempt from stamp duty provided the leases are entered into by active farmers.
Consanguinity relief, which is a stamp duty relief that halves the applicable rate of stamp duty on transfers of non-residential property to certain relatives, is being extended for a period of three years where the transferor is 65 years or under and the transferee is an “active” farmer. This means that such transfers of non-residential land will attract a lower rate of stamp duty of 1% on the basis that the current applicable rate of stamp duty is 2%. Consanguinity relief in respect of all other non-residential property transfers to relatives will otherwise be phased out by the end of the year.
There are no changes to VAT rates. The Minister extended the 9% VAT rate applying to the tourism sector but advised that it will be kept under review.
There has been no change to the 33% CAT rate or the thresholds.
There have been no changes to general stamp duty rates.
Please do not hesitate to speak with your PMQ contact if you would like to discuss any aspect of the Ezine.
The above is intended as a general guide to the measures announced in Budget 2015. It is possible that the measures described above may be modified and may be subject to change in the Finance Bill. No action should be taken on the basis of the above without obtaining professional taxation advice.