It is no secret that Finance Minister Noonan has money to spend in Budget 2016.
With a general election looming, the demands from interested parties are extensive and varied. The challenge for Mr Noonan is to get the balance right.
There are different opinions as to how strong or sustainable the growth in the Irish economy is.
The fact is that Ireland is still borrowing to fund day-to-day spending. While the Government has approximately €1.5bn to put back into the economy in this budget, that is a small number relative to what has been taken out since 2008.
The numbers employed are increasing and what we need in this budget is to use the scarce funds available to create sustainable employment and encourage entrepreneurship. The tax system is critical in supporting this.
The entry point to Ireland’s 52% marginal rate of income tax is one of the lowest in the OECD. On a number of occasions, Mr Noonan has signalled his intention to reduce the rate of tax on work in this budget.
It is expected that this will be in the form of a reduction in Universal Social Charge (USC) and possibly some movement in tax bands. These reductions in tax should increase the disposable income of workers and act as an incentive to work.
Currently, the self-employed pay a higher rate of USC of 11% - 3% higher than employees — and have no PAYE tax credit. A self-employed single person on an income of €17,500 pays five times more tax and PRSI as an employee on the same income. Mr Noonan has committed to starting the process of reducing this gap in Budget 2016.
We may see a reduction of 1% to 2% in this higher rate of USC and we may also see Mr Noonan introduce an earned income credit for the self-employed. By reducing the tax gap between employed and self-employed, the minister would be sending out a strong signal that the Government supports entrepreneurship.
While economic conditions have improved, the availability of finance for SMEs is still a significant challenge.
A tax relief to promote loan capital investments in entrepreneurial business by individuals could create a significant new source of finance for entrepreneurs and SMEs. Central Bank figures suggest that in excess of €93bn is held by Irish banks in the form of Irish household deposits.
The introduction of a reduced rate of income tax on interest income received by a lender lending to the SME sector is one simple measure that would help get some of those deposits working in the economy.
Incentives for innovation have been a cornerstone of Ireland’s FDI policy. Mr Noonan announced last year that he would be introducing the Knowledge Development Box in Budget 2016.
The Knowledge Development Box will provide for a lower rate of tax — expected to be approximately 6% — on profits derived from the exploitation of intellectual property. It is important that the mechanics of claiming the relief will not be overly complex or burdensome so that the maximum number of SMEs can benefit.
There is a capital gains tax (CGT) relief available for entrepreneurs, but that relief is overly technical and difficult for would-be entrepreneurs to establish what the benefit might be.
The equivalent UK relief provides for a CGT rate of 10% on gains, subject to certain conditions. By introducing a similar relief in Ireland, Mr Noonan would be sending out a clear signal.
The tax burden on passing on a business has increased significantly since 2008. In an era where the next generation is arguably needed more than ever to drive the business forward, this situation is counter-productive.
The headline rate of CGT of 33%, combined with the reduction in CGT thresholds, means that the potential successors are beginning to reconsider whether it is worth receiving business assets. A reduction in the headline rate and/or an increase in the thresholds would encourage business succession.
Let’s hope the focus of Budget 2016 is on the tax burden on working and entrepreneurship and that the minister does indeed get the balance right.
Nicola Quinn is tax director at PwC in Cork
© Irish Examiner Ltd. All rights reserved