Tax group recommends no drop in construction Vat, warns about falling motor tax take 

Ahead of Budget 2024, the Tax Strategy Group examined the argument for reducing the vat rate on construction materials from 13.5% to 9%, but advised these costs could then be passed onto the consumer.  Picture: Andrew Matthews/PA

Cutting Vat on the construction sector could cost the taxpayer €580m and would likely result in a spike in house prices, the Government’s tax advisors have warned.

Ahead of Budget 2024, the Tax Strategy Group (TSG) examined the argument for reducing the vat rate on construction materials from 13.5% to 9%, but advised these costs could then be passed onto the consumer.

Ireland’s past experience with tax incentives in the residential property sector strongly suggests the need for a “cautionary stance", and any reduction in the Vat rate could be used by contractors to “improve their cash flow", according to the group.

As more drivers make the switch to an electric vehicle, a move towards a system of car tax based on the weight of the vehicle is now "likely”, it also suggested.

The proposed ‘electrification’ of the national car fleet will also entail significant revenue risk, the group warned, with the Exchequer estimated to lose approximately €1.5bn worth of revenue annually from motor tax, Vat, and fuel excise from Internal Combustion Engines (ICE) vehicles.

Fossil fuel support measures such as the fuel allowance aimed at vulnerable households, "can lead to ‘fossil fuel lock in’ encouraging ongoing consumption of heavily pollutant fuels”, the group also warned Government.

Separately, a move to minimum alcohol prices could also reduce tax revenues as people would simply go across the border to buy drink.

The tax strategy papers published by the Department of Finance this evening provide a wide range of analysis on measures ahead of the upcoming Budget, including bringing vapes under the same tax system as cigarettes.

However, this may have to be done at EU level.

Recommendations 

Instead of a reduction in Vat for the construction sector, the TSG recommends more cash injections in the upcoming Budget for housing projects.

It also argues that allowing landlords to deduct their Local Property Tax (LPT) from their income tax would not keep them in the market.

"The Group also noted that such a measure would be unlikely to impact on landlords’ decisions to stay in or enter the rental market as well as its deadweight cost, and recommended against allowing (this measure)."

Meanwhile, while the existing vehicle tax structures “have a strong environmental rationale” with the more pollutant vehicles paying higher rates of tax, it is “likely” in the medium to longer term, vehicle taxes will shift to a weight-based vehicle tax or surcharge in order to protect the vehicle tax base.

A €1,000 tax cut for middle-income earners, as called for earlier this year by Fine Gael Ministers of State Jennifer Carroll MacNeill, Martin Heydon and Peter Burke, was not considered.

The much-debated move has caused division within the coalition, but its omission does not necessarily mean it will not be in October's Budget.

The report shows that the Social Insurance Fund, which takes in PRSI and pays out some social protection programs, returned to a surplus in 2022 following the wind-down of covid-related supports.

However, the review shows that by 2040, this will be in a deficit of €3bn a year if a "base case" is followed, or €3.1bn if the Government's decision to keep the State Pension at 66 and other pension commitments are followed.

By 2050, this deficit moves to €9.6bn in the base case, €15.6bn in 2060, and €24.9bn in 2076.

The report also warns that if the war in Ukraine continues and there was a multi-year recession coupled with lower-than-expected growth, this deficit would be over a trillion euro and the fund would be insolvent as soon as 2024.