By Colm Kelly, Senior Tax Partner, PricewaterhouseCoopers
In yesterday’s budget Brian Cowen had to balance the need for spending restraint in the face of tightening economic conditions with the commitments of a generous Programme for Government. For the first time in recent years the exchequer faces a budget deficit. In his own words the Minister decided to meet this challenge by “borrowing modestly and spending ambitiously”. As he laid out his budget he told the Dail that his number one economic priority was to do things now that would position the country for sustainable development in the years ahead.
In line with the commitments outlined in the Programme for Government, the Minister increased personal tax credits to keep those earning the minimum wage out of the income tax net. He also widened the standard rate band to protect those earning the average wage from paying the higher rate of income tax. As expected the Minister announced further increases to mortgage interest relief for first time buyers. The downside for individual tax payers was an increase in the employee PRSI ceiling from € 48,800 to € 50,700.
Following on from his announcement in last year’s budget the Minister adjusted Vehicle Registration Tax in order to tax cars according to their carbon emissions with effect from July 2008. In addition to this the Minister is to introduce measures that will restrict the availability of capital allowances for businesses in respect of high emission cars.
There was much speculation and debate in advance of the budget concerning stamp duty. The Minister made significant reforms to stamp duty for residential homes. The changes are beneficial across the board for home buyers and will hopefully give a shot in the arm to the slowing residential property market. Unfortunately the Minister failed to bring in any changes to stamp duty for non-residential property, and many capital business transactions will continue to be exposed to 9% stamp duty rates.
The Minister announced another change to the Research and Development tax credit introduced in 2004. There will be a further freezing of the base year at 2003 until 2013. There has been significant lobbying by industry for more far reaching changes to the credit. While the change announced yesterday is a welcome one, a more substantive review of the operation of the credit would be appropriate.
The Revenue Commissioners had earlier announced their intention to make significant changes to the VAT on property rules, and had released proposals for discussion. These changes to the VAT on property rules will affect virtually every business owning or renting property in the country. Some of the changes outlined in the summary of budget measures yesterday differ significantly from those included in the earlier Revenue discussion documents. Furthermore the Minister announced that the changes will come into effect from July 2008 rather than January 2009 as widely expected. All businesses will need to assess the impact of these changes in advance of the July implementation date, and those contemplating any kind of property transaction or spend need to do this urgently.
It was widely hoped that the Minister would change the way in which foreign dividends are taxed when received by an Irish company. Our current system taxes such dividends at 25%, with a credit for foreign taxes paid. This puts Ireland at a serious competitive disadvantage relative to many jurisdictions with which we compete for mobile investment- many competitor locations simply exempt such dividends entirely. This is a key issue which we hope will be addressed in the Finance Bill.
Following on from last year’s budget there were further welcome changes to reduce the administrative burden of tax for small and medium enterprises. These included increases to the threshold for preliminary corporation tax payments for both small and start-up companies and increases in the VAT registration thresholds for small businesses.
In a move that will be welcomed by the growing Irish film industry the Minister announced an extension of the existing film relief by four years to 31 December 2012. The Minister indicated that further changes can be expected in the Finance Bill, depending on the outcome of a study currently being carried out by the Department of Finance.
While Brian Cowen delivered a range of tax benefits for individuals and impressive reforms to stamp duty for residential property, there are a number of areas where innovative tax reform could significantly assist business competitiveness, and we hope to see further developments in the Finance Bill to be published early next year.
