Tax breaks to encourage activity in a particular area or sector can be highly successful.
But too much success can lead to their demise. The highest-profile tax-relief eliminated in last month’s budget was the special Vat rate for the hospitality sector.
The preferential Vat rate of 9% has gone back up to 13.5%. That relief was conceived in 2011, when the economy was tanking and there were concerns about employment generally, but in particular in the hospitality sector.
While good reasons were advanced for its retention, few could now maintain that the country’s hotels and restaurants are in the same dire straits that they were in 2011. That was enough to mark the end of this relief.
The Home Renovation Incentive is also being eliminated in 2018, but without as much fuss. The idea behind this incentive was to give people income-tax relief to the value of the Vat they were paying the builder or contractor on the price of the work.
Like the 9% Vat rate, it was introduced when the construction industry needed a boost. It’s been operating since October 2013, but is scheduled to be terminated in December. Its life was not extended in this year’s Finance Bill.
Revenue has published detailed statistics on the scheme. Since 2013, a staggering €2.1bn worth of work on extensions and improvements has been carried out on homes across the country. Almost 85,000 properties have been renovated.
That has resulted in claimed tax relief at a cost to the Exchequer of some €100m from the time the tax break was introduced.
However, perhaps given the need for new residential units, government clearly felt there was no need for further tax supports for an industry that should have little difficulty in generating new business.
But there can be more to tax-policy decisions than meets the eye. From time to time, tax reliefs are introduced that are less about giving benefits to taxpayers (though they do) than they are about regularising the black economy.
By creating a special tax incentive for home renovations, Revenue could be more sure that building work was being put through the books of the business. Revenue has long been suspicious of the construction industry. They tightly police it with a special tax-compliance regime unique to the industry, and known as relevant contracts tax.
This level of suspicion of the construction industry is not unique to the Irish Revenue. Some foreign revenue authorities also have special ways to police its operation, similar to the relevant contracts tax. However, the Home Renovation Incentive was more of a carrot than a stick, in achieving tax enforcement. The relief cannot be claimed without the householder identifying to Revenue the contractor who did the work and householders were happy to do so, for the prospect of a tax refund.
For anyone wishing to get work done in their home, and still get a tax break for it, time is running out. The work will need to have been completed and paid for by December 31.
Just over 51,000 have availed of the relief across its five-year time span. That number is now unlikely to grow. Most of us will be far too taken up, between now and December, preparing for Christmas, rather than ripping out bathrooms. Nevertheless, the Home Renovation Incentive was good while it lasted.
- Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland