Introduction
In a move to provide certainty and thus improve consumer confidence, the Minister confirmed that there would be no increase in income tax. Thus the income tax rates, bands and credits remain the same for 2012 as they are in 2011 – at a level which is equivalent to those in 2006. The exemption level for the Universal Social Charge has been increased to take approximately 330,000 low income and part time workers out of the tax net.
Much of this year’s taxation measures are in the indirect tax areas. This was indicated in the State of the Nation address on Sunday and while Mr Kenny said that the Irish people were not responsible for the economic crisis, all the people of Ireland will be impacted by the tax changes announced on Tuesday. This is inevitable where expenditure taxes are used to raise additional revenue.
The standard rate of VAT is being increased by 2% to 23% with effect from 1 January, 2012. This rate applies to a large basket of items which are essentials for many households including the lower paid in our society. When you add the increase in the price of petrol/diesel and heating oil and increases in motor tax– all non-discretionary expenditure for many people, and the increase in Deposit Interest Retention Tax by 3%, it is easy to see that everyone is impacted by these changes.
Income Tax
Over the last few consecutive Budgets, we have seen the marginal rate of income tax rise to 55% for those individuals with non-employment income in excess of €100,000. It is welcomed in a Budget that promised to raise €1.6bn through tax increases and additional charges, that the rates of income tax have not been changed.
This, combined with no reduction in tax bands or personal tax credits ensures that in times when efforts to encourage employment are paramount, that such efforts are adequately supported.
Universal Social Charge/PRSI
The social insurance system has seen significant changes over the most recent years through the introduction of the Universal Social Charge (USC) to replace the combined health contribution and income levy regimes in addition to the increase of the rate of PRSI from 3% to 4%.
Today’s Budget sees a welcome measure for those individuals on the minimum wage, and part time workers with the entry level being increased from €4,004 to €10,036 in 2012, and should contribute somewhat to easing the financial burden on such individuals.
Heretofore, employees with other sources of income such as rental income and investment income were exempt from PRSI on this income, whereas self-employed individuals were subject to PRSI on such sources of income.
This Budget has addressed this apparent discrepancy in that it is proposed that from 2013 employees will now be subject to PRSI on non-PAYE income.
High Earners’ Restriction
Various changes to the High Earners Restriction regime have seen the introduction of a minimum effective income tax rate of 30% for certain “high earners” claiming particular reliefs since its introduction in 2007.
In today’s Budget speech, the Minister acknowledged the fact that the restriction, combined with PRSI and USC, ensured that in reality such individuals had a marginal income tax rate of 44%.
However, no further immediate amendments have been introduced to the restriction, but he alluded to a possible revisit to the matter in Budget 2013 depending on the outcome of a Revenue report.
Illness Benefit Relief
In an effort to remove any incentive to absenteeism, the Minister announced the removal of the existing exemption for the first 36 days of Illness Benefit and Occupational Injury Benefit.
Mortgage Interest Relief
In a move surely to be welcomed by individuals who purchased their homes between 2004 and 2008, the rate of mortgage interest relief will be increased to 30% for first time buyers who purchased their homes in that period. For individuals who purchase a home in 2012, enhanced rates of mortgage interest relief will be applied as follows: • First time buyers: 25% • Non-first time buyers: 15% As confirmed in previous Budgets, mortgage interest relief will no longer be available for individuals who purchase a home after 2012, and will be completely abolished from 2018.
Workforce Mobility
Two specific measures targeting the taxation of internationally mobile individuals were announced in the budget. These announcements seek to encourage the movement of people in relation to two of the key areas which will affect Ireland’s road to recovery - the encouragement of a skilled workforce to come to Ireland and to assist the export sector which has performed well over recent times.
A Special Assignment Relief programme was announced by the Minister although specific details of the relief are expected in the Finance Bill. Such a programme will be welcomed following the various changes in taxation of foreign income introduced in prior budgets which have negatively impacted not only foreign employees working in Ireland but also in certain situations Irish domiciles returning home.
While some specific reliefs for foreign employments were introduced in 2009 and subsequently extended in 2010, these had only a limited benefit, proved complicated to operate and did not compare competitively with regimes elsewhere in Europe. Irish domiciles were also excluded from these reliefs.
Following the specific announcement of this new relief programme it is hoped that, when details are published, the programme will provide a significant incentive to encourage a skilled workforce to come to Ireland without introducing overly complicated conditions.
To assist in the export sector the Minister announced a new Foreign Earnings Deduction for employees working temporarily (more than 60 days a year) overseas in certain developing countries including Brazil, Russia, India, China and South Africa. Again, specific details are expected in the Finance Bill however it should be noted that a Foreign Earnings Deduction relief programme has existed previously in Ireland before being removed from the end of 2003. This may give an insight into the intentions of the Minister.
Under the previous regime a proportion of employment income relating to workdays spent overseas could be excluded from taxation and the tax paid on this portion of income via the PAYE system could then be reclaimed by filing an appropriate tax return.
Legacy Property Incentives
Finance Act 2011 saw a number of significant reforms to legacy property incentives being proposed. Due to significant lobbying by a number of groups, it was proposed that such reforms would be subject to an Economic Impact Assessment.
The Minister announced in today’s Budget that such an impact assessment has been undertaken, and in a welcomed conclusion, determined that such proposals were unworkable and would impact significantly on investors who are currently vulnerable to insolvency.
However, whilst the all-encompassing changes to such reliefs introduced in Finance Act 2011 will not be implemented, certain reforms have been introduced for certain “high income investors” only so as not to impact on smaller scale investors.
- A property relief surcharge of 5% will be charged on investors with gross income over €100,000. It will apply to the amount of income sheltered by such property reliefs in a tax year.
- Section 23 relief will not be restricted or terminated for investors with gross income of less than €100,000.
- Under current rules, individuals with a pool of unclaimed accelerated capital allowances arising from a particular investment could carry these allowances forward against future rental income indefinitely until fully utilised.
- Where the tax life ends on or after 1 January 2015, going forward accelerated capital allowances may only be claimed within the tax life of the particular property. Where the tax life has ended before 1 January 2015, no unused accelerated capital allowances can be carried forward into 2015.
We await the Finance Bill for full details on the above.
Stamp Duty on non-residential property
In a surprise move, Minister Noonan has reduced the stamp duty rate applicable to commercial property to a flat 2% rate on the transfer of freehold and leasehold commercial property, including farm land and industrial buildings.
The reduction will be effective from 7 December 2011 and is a welcome announcement and one which, combined with the capital gains tax holiday announced today, will hopefully entice investors back into the commercial property market.
This reduction will apply to all other forms of commercial property as well such as stock, goodwill and debtors which may otherwise be liable to stamp duty when transferred.
This will benefit those seeking to transfer business assets after 7 December and should be viewed in conjunction with the proposals to amend the provisions for retirement relief from capital gains which may also apply to the transfer of business assets.
Consanguinity relief (i.e. transfers between close family relatives) from stamp duty on the transfer of non-residential property will be abolished on 31 December 2014. This is reflective of the fact that the revised rate of stamp duty on commercial property will be 2% from 7 December 2011.
Household Charge
The Local Government (Household Charge) Bill 2011 gives legal effect to the new €100 household charge/property charge payable by owners of residential property which will take effect from January 2012.
This may very well be a precursor to a valuation based property tax in the future. On a positive note, widening the tax base as it applies to capital assets is preferential to changes to rates of income tax.
The household charge will be due as and from 1 January 2012 and must be discharged by 31 March 2012 unless the property owners discharge the charge over four installments throughout the calendar year.
Where a property is rented for a period of less than 20 years, it is the landlord who will be viewed as the owner and therefore liable to the charge. In the case of properties rented for a period in excess of 20 years it will be the tenant who is liable for the payment of the charge.
Certain properties will be exempt from the charge including the following:
- Property owned by public authorities and charities
- Property held in a discretionary trust,
- A property where the owner has moved out by reason of long term mental or physical infirmity, and
- Mobile homes and house boats
In addition, certain property owners will be exempt from the charge; firstly those who are either in receipt of the mortgage interest supplement from the Department of Social Protection or, for the years 2012 and 2013, those whose property is located in an “unfinished housing estate”.
A list of the “unfinished housing estates” shall be made available by the Minister for the Environment, Community and Local Government once he is satisfied that the each of the developments is substantially incomplete.
For the moment therefore, it seems that the value of the property and the level of associated debt on the property is to be disregarded for the purposes of the charge. Also, the collection method to be used for the charge is yet to be decided.
We hope that the method used for this charge will not be similar to that for the NPPR charge which is performed solely online and has proven to be a burden for certain tax payers who are not used to filing tax returns online.
Gift/Inheritance Tax
As was widely anticipated, the Minister has increased the rate of tax on gifts and inheritances from 25% to 30% with effect from 7 December 2011.
While this is a significant increase, it is still one of the lowest rates of gift / inheritance tax in Western Europe.
In addition, the Group A lifetime tax free threshold applicable to gifts and inheritances from parent to child has been reduced by a quarter to €250,000 while the remaining thresholds have not been altered.
This new threshold comes on the back of significant reductions in the tax free amounts over the last number of years and the new Group
A threshold is in line with the applicable threshold for 1999. Contrary to recent speculation there were no changes to various CAT reliefs such as business and agricultural relief introduced and hopefully no change to these reliefs will be contained in Finance Bill 2012.
Finally, the Minister has announced that the transfer of an Approved Retirement Fund on death to a child over the age of 21 will now be liable to tax at 30% in line with the revised CAT rate of 30%.
Capital Gains Tax
As expected, from 7 December 2011 the rate of capital gains tax will rise by 5% from 25% to 30%. In an effort to stimulate the property market, the Minister announced a capital gains tax holiday for capital gains arising on the disposal of property acquired between 7 December 2011 and 31 December 2013 which is held for seven years prior to disposal.
Further detail on this incentive was not forthcoming today however we welcome the statement and look forward to the publication of greater detail on this incentive. The Minister also announced the modification of retirement relief from CGT to encourage a timely transfer of farms and businesses.
We await further details of the amendments to the relief which will be announced in Finance Bill 2012.
Tax on savings
There is no doubt that the retention of deposits in Irish financial institutions is increasing with the amount of Euro on deposit at an all-time high.
In moves specifically targeting savings, the rate of DIRT has increased progressively over the last number of years from 20% to the current rate of 27%. The Budget has seen a further increase in the rate of DIRT to 30% from 2012.
It will remain to be seen if such changes will have any significant impact on the retention of cash deposits in Ireland. In line with previous years, the rate of tax on income and gains on various life assurance policies, foreign life policies and offshore funds has increased by a further 3%.
Domicile Levy
A Domicile Levy was introduced by Finance Act 2010 and ensured that certain individuals who are domiciled in and a citizen of Ireland, with worldwide income below €1 million, Irish property with a market value of more than €5 million, and an Irish tax liability of less than €200,000, were subject to an additional domicile levy of €200,000.
The conditions for the application of the Domicile Levy have been amended to ensure that it will no longer be a condition that an individual is a citizen of Ireland for the levy to apply. This is to counteract a perceived loop hole whereby an individual could renounce his or her Irish citizenship and thus avoid the domicile levy charge.
R&D credit employee reward scheme
An innovative announcement relating to R&D tax credits may have beneficial impact on certain key employees with confirmation that R&D credits may be used to reward employees in the form of a bonus.
Exact details are eagerly awaited although this again points to the move to encourage a skilled workforce to locate/stay in Ireland.
Pensions
The Minister has recognized that significant taxes have already been raised on pension funds through measures introduced in the last budget and the subsequent pension levy. He has now elected to take the necessary time to form a considered view of what further contribution pension funds can make, including greater investment in Ireland, rather than further reducing tax reliefs as originally laid out.
He has stated that he wants the pension system to be both sustainable and more equitable over the long run and will engage with various stakeholders to this end during 2012. That said there were two important strands of change that will see pensions, based on the government’s projections, contributing an extra €57m in 2012 and €95m in subsequent years. These are:
1. Removal of the remaining 50% relief on PRSI that employers benefit from where employees make pension contributions; and
2. Increasing the imputed income distribution on individuals with ARF holdings greater than €2m from 5% to 6%, introducing imputed income distribution liabilities on vested PRSAs consistent with ARFs, and taxing ARF proceeds paid on death to a child over age 21 at 30% in place of 20%.
The vast bulk of the additional revenue payable to the government will fall as additional cost on employers.
Applying consistent treatment between ARFs and PRSAs seems broadly appropriate. The higher 6% rate of imputed income on larger ARFs (e.g. ARFs >€2million) may see some individuals taking a once off additional withdrawal from their ARF to bring it below €2m, and therefore back into the 5% imputed income level.
That of course will depend on the size of the ARF and the extent to which the ARF is considered as a wealth transfer mechanism for the children of the beneficiary.
VAT
The standard VAT rate will increase from 21% to 23% with effect from 1 January 2012.
The VAT rate on district heating will be reduced from 21% to 13.5% in the Finance Bill. This will bring district heating into line with the supply of heating fuels which is currently taxed at 13.5% and will help to encourage the uptake of district heating
Mineral Oil Tax
There has been a significant increase in the rate of mineral tax that applies to petrol and auto diesel. The rate has risen from €15 per tonne of carbon dioxide emitted to €20 per tonne. In practical terms this will result in an increase of 1.4 cents per litre of petrol and 1.6 cents per litre of Diesel which will apply from 7 December – these increases are VAT inclusive but do not take into account the increase in the VAT rate that will apply from 1 January 2012.
Tobacco Products Tax
With effect from 7 December duty on cigarettes will increase by 25 cents a packet (including VAT) with a pro rata increase across other tobacco products. Again the price will likely rise further when the VAT rate is increased in January of next year.
Vehicle Registration Tax
Driven by falling receipts from VRT and Motor Tax the Government has pledged to review the bands and rates currently used to calculate VRT. Since 2007 VRT receipts have fallen from €1.4 billion to €365 million and whilst the primary reason for this has been the fall in quantity and price of new car sales and the switch to cheaper cars, the restructuring of the way in which VRT was calculated has exacerbated the underlying economic factors.
The method of calculating VRT was previously restructured to be calculated on the basis of carbon emissions, however the improved emissions of vehicles generally combined with the switch to more fuel efficient vehicles has compounded the fall in VRT revenues. The government has undertaken to enter into a public consultation period with a view to adjusting bands with effect from 1 January 2013.
Submissions to the consultation should be submitted by 1 March 2012.
Motor Tax
There has been a similar, albeit not as stark, fall in Motor Tax Revenues, with the switch to lower taxed fuel efficient cars being cited as a major cause of this fall in Revenue. Cars registered after 1 July 2008 pay motor tax based on cc emissions, with cars registered before 1 July 2008 paying motor tax based on the cc capacity. From 1 January 2012 motor tax rates across all categories both for pre and post 1 July registered cars will increase significantly.
View details of the increased rates in the PDF document.
Betting Duty
Currently, betting duty only applies to bets placed in betting shops and does not apply to bets placed by Irish punters by phone or online. In the Finance Bill in January 2011 it was proposed that bookmakers would pay betting duty at 1% on bets made by way of the internet, telephone or other electronic means (remote bets), and that there would be a new excise duty of 15% to the commissions, relating to remote bets, made by betting intermediaries, including betting exchanges, from parties in Ireland.
Additionally, it was proposed that bookmakers that take remote bets would be licensed and subject to an excise duty of €5,000 on the grant of the license. The fee for renewal of the license to be based on the bookmaker’s turnover. A similar regime should apply to betting intermediaries that provide facilities that allow person make remote bets.
There were also consequent changes to the VAT legislation to provide that the services of the remote bookmakers and intermediaries referred to above would be exempt from VAT. The Minister has now stated that the Betting (Amendment) Bill is being drafted with the final draft due in 2012. The intention is that the new regime will commence from the second quarter of 2012 and should bring in additional tax yield of €10m in 2012 and €20m in a full year.
Farmer Taxation
The farming sector received significant focus in today’s Budget in a number of welcomed measures:
- Retirement Relief (a relief from capital gains tax) is to be modified for individuals transferring farms and businesses to the next generation, to incentivise such transfers to take place before the individual reaches the age of 66. The details of the modifications to the relief will be introduced in the Finance Bill.
- For farmers operating through a farming partnership, the rate of stock relief is to be enhanced to 50% for all registered partnerships, and to 100% for certain young trained farmers forming such partnerships.
- The top rate of stamp duty on farm lands (and also to commercial and industrial buildings) has been reduced from 6% to 2%.
Although farmers are generally not required to register for VAT they are entitled to recover VAT on certain items of capital expenditure, the minister has indicated that the VAT refund Order will be extended to provide that unregistered farmers can reclaim VAT paid on wind turbines purchased after 1 January 2012.
This is to be welcomed as another positive step in making Ireland a leader in sustainable energy production. In extending the tourist agenda the 9% rate of VAT will apply to admission to open farms. This rate was designed to boost the tourism sector and it seems only right that open farms should benefit in the same way as other similar entertainment attractions.
