Budget 2023: Our Pre-Budget Comments
It’s one week until budget day, and anyone expecting a budget giveaway may live in hope but will probably die in despair.
Personal Taxes
Ireland’s high marginal tax rates apply at a relatively low level. Initial tidings of a 30% tax band to spread the burden according to means and increasing middle-income earners’ take-home pay has faded from the agenda.
The cost of remote working has an unintended consequence in the form of increased costs for businesses and employees. Remote working relief is worth about €100 per year. With the low value and administrative burden of claiming the relief, I would hazard a guess that most reliefs go unclaimed. A simplified process or a tax new tax credit introduction should be available to employees.
Increases in PRSI are likely but will not be implemented until next year. It remains to be seen if the increase will be borne at the employee or employer level. If it is at the employee level, this will mean less take-home pay for workers—the opposite of what the proposed 30% tax band was intended to achieve.
The cost-of-living package, which is expected to include billions of euros in support to households and businesses, has not been finalised. It is expected that these supports will try to limit the impact of the energy crisis on viable businesses. However, the impact of the revenue debt warehousing scheme has yet to fully play out, with warehoused debt not becoming collectible until 2023. The impact of these revenue liabilities crystalising, combined with intensifying inflation and energy costs will test the viability of many Irish businesses.
Current rules around the tax treatment of travel expenses are difficult to interpret because of changes in work patterns and remote working. These fundamental changes mean that an employee’s “normal place of work” is difficult to determine for compensating employees for travel expenses. Existing rules on travel expenses are outdated and in need of modernisation.
Capital Taxes
Ireland’s high rate of Capital Gains Tax (CGT) of 33% makes reliefs such as Entrepreneur Relief even more important as the relief is targeted at reducing the high CGT burden on the sale of a business. The relief allows for a 10% CGT rate but is subject to a lifetime limit of €1 million. The lifetime limit of €1 million is of little incentive to grow a business beyond that limit and generate more employment, which was one of the policy intentions of the relief. Conversely, the €1 million limit acts only as an incentive to grow a business to that threshold before “cashing out.”
Furthermore, Entrepreneur Relief requires that an individual spend at least 50% of their time continuously working for the company for three out of five years. This requirement disincentivises potential external investors, who invest money and provide experience and industry expertise. If the conditions attached to Entrepreneur Relief were changed, it could make the difference between potential investors deciding to take the risk of investing in indigenous companies and growing Ireland’s SME sector.
Proposals from the Commission on Taxation and Welfare to substantially reduce inheritance tax thresholds appear to have been side-lined. Under current rules, a child can inherit or receive a gift from their parents up to €335,000 tax-free. In 2009, a total of €542,544 could be inherited or gifted before paying tax at 22%.
Corporation Tax
The international tax system is about to change, and Ireland’s reliance on large global firms is a significant vulnerability which is why our indigenous SME sector will become increasingly important. Current tax law penalises indigenous professional service firms that retain profits in their companies rather than drawing them down as salaries or dividends. The policy justification for this was that professional service providers (i.e., accountants, doctors, dentists, solicitors, etc.) who provide their services through a company pay 12.5% corporation tax on profits that they would otherwise pay a higher rate of income tax. That logic fails to acknowledge that professional service providers are businesses just like any other. They have employees, pay rent, have rates, and incur the same costs as any other business. It is not feasible to expect a business to draw down all its profits and leave nothing in reserves for running the business. This leaves professional service firms at a disadvantage when trying to scale their business. At a time when Ireland’s international tax position is looking more precarious than any time in the last 30 years, we must support our SME sector, which is why the close company surcharge should be abolished.
Housing
There has been a long-standing assumption that the solution to Ireland’s housing problems has been through taxation, either by taxing landlords on rental income or by providing tax breaks to developers to increase market supply. The high rates of personal taxes are driving small landlords out of the market. If tax breaks for property developers were the answer to our housing problem, Ireland would already have an affordable home for every man, woman, and child in the country.
Any proposed introduction of a Site Value Tax (SVT) to address supply issues should also weigh the longer-term impact of the intervention in the market. Changes to planning regulations would be a more appropriate intervention than tax measures.
VAT
The hospitality industry will welcome the retention of the 9% VAT rate. However, any reduction in the cost of goods or services will be offset by intensifying inflation crises, the cost of energy, and macroeconomic worries. A small comfort to the industry, with expectations of a return of tourism to pre-pandemic numbers, has stalled over worries of a European recession.