Tax measures that may boost economic activity are welcome
It remains to be seen whether the benefit of these measures will outweigh the negative impact of the increase of the VAT rate.
The Government’s solution for increasing tax revenue in this year’s budget was very straightforward, with a 2% increase in the VAT rate from 21% to 23% expected to generate additional tax revenue of €560 million while the €100 household charge is expected to generate tax revenue of €160m.
With the minister saying there will be no further increase in the standard VAT rate during the term of this Government and stating that increases in income tax has an impact on jobs, it will be most interesting to see how the Government will generate the increased tax revenue required in future.
The increase in the VAT rate will take effect from January 1 and consequently non-registered taxpayers should look at crystallising expenditure before the end of this year.
The other primary source of tax revenue in this year’s budget was an introduction of a number of measures to tax the wealthy.
The DIRT tax rate is being increased by 3% to an effective rate of 30%. In addition, the Capital Gains Tax (CGT) and Capital Acquisition Tax (CAT) rates are being increased from 25% to 30% with effect from budget day. Furthermore, the tax-free threshold for transferring assets from parent to child is being reduced from €332,084 to €250,000.
A further interesting measure is that an upper limit of €3m is being introduced for CGT Retirement Relief on the transfer of business and farming assets disposed of within the family where the individual transferring the asset is aged over 66 years. This will apply from January 1, 2014, and the objective is to encourage parents to transfer their farming and business assets before the age of 66. In the case of the sales of farming and business assets outside the family, the retirement relief amount will be reduced from €750,000 to €500,000 for individuals aged over 66 years. Again, this will take effect from January 1, 2014.
An additional surcharge introduced is in respect of taxpayers with gross income over €100,000 who utilise a property-based tax relief. A rate of 5% is to be charged on the amount of income sheltered by the property relief in that year. This represents a further eroding of tax relief on property tax shelters for the higher income taxpayers.
Tax measures have been introduced in the areas of property, farming and the SME sector which are most welcome.
The most significant measure in property is the cut to stamp duty on non-residential property (including farmland) from 6% to 2% in respect of instruments executed from today. This is expected to cost the Exchequer €64m a year. However, the low rate may generate a lot of property transactions and result in more revenue. Another measure is that consanguinity relief on inter-family transfers, which halves the rate of stamp duty, will be abolished after January 1, 2015. This may encourage inter-family transfers before then. However, given that the stamp duty rate will only be 2%, consanguinity relief in the future is less attractive.
A further measure is that a CGT exemption will be apply on the first seven years of ownership of properties bought between budget day and the end of 2013 where the property is held for more than seven years. The gains accrued will not attract CGT.
For small businesses there are a number of welcome changes. The first €100,000 of qualifying research and development expenditure will benefit from the 25% tax credit on a volume basis. Furthermore, the present restrictions on sub-contracted R&D costs are being relaxed where such expenditure does not exceed €100,000. A further interesting concept is that part of the R&D credit may be paid tax-free to key employees who have been involved in the development of the research and development expenditure.
For businesses exporting, the introduction of a foreign earnings deduction for employees temporarily relocating to BRICS countries may be very attractive. For those renting NAMA commercial properties under leases with upward-only rent reviews, there may be an opportunity to reduce the rental charge to current market-value rates.
As an incentive to such farm partnerships, a 50% stock relief is being introduced, with 100% being available for certain young trained farmers. This should encourage the creation of farming partnerships.
* John O’Flynn is a tax partner based in Cork with Deloitte.
