As we reflect on Budget 2023, it’s a stark reminder of the dramatic changes we’ve experienced from a geo-political, energy supply and broader economic perspective. Budget 2022 was unveiled at a time when we were emerging from the worst of the pandemic, and a strong rebound in the economy was evident, with Government signalling it would be returning to more normal fiscal policies. Just 12 months on, the context for Budget 2023 couldn’t be more different, with the conflict in Ukraine continuing to negatively affect the EU economy and setting it on a path towards lower growth and higher inflation.
Increase in standard income tax band welcome development
There are now more people in employment than ever before, a rapid recovery from where we were two years ago as businesses grappled with public health restrictions on their activities. However, with increased cost of living pressures we are more focussed than ever on our net take-home pay. The announcement from the Minister on income tax bands, rates and credits will be a welcome development for many taxpayers.
Commenting on the announcements, Ian Prenty, Tax Partner, Deloitte commented: “The announcement from the Minister on the increase to the standard income tax band and the increase in the second USC rate band reflects the commitments made in the Programme for Government. Changing the top tax rate to apply to income above €40,000 rather than €36,800 could put up to €640 back in the pocket of a single person and €1,280 for a two-income household. The move to increase the standard income tax band will be a welcome development for many and is reflective of the comments made in the Summer Economic Statement that guarding against higher taxation on workers is to be a priority. While Ireland has one of the most progressive income tax systems in the developed world, policy makers need to be mindful of the negative impact which higher marginal rates of tax can have on business growth and economic development, and particularly on the need to guard against workers moving into higher tax brackets due purely to rising gross incomes as a result of inflationary pressures.”
Renters relief welcome and must be monitored closely as the housing market continues to struggle
Commenting on the measures announced, Shane Wallace, Tax Partner Deloitte said:
“Prior year Budgets have faced criticism for failure to provide assistance to renters. With the cost of rent continuing to rise, the introduction of a renters tax credit is a step in the right direction in assisting renters with the rising cost of living. Taxpayers were previously enabled to claim a tax credit on payments for private rented accommodation up to 31 December 2017. This included rent paid for flats, apartments or houses and was subject to specified limits. The €1,000 package announced today will see renters benefiting from a €500 tax relief this year and another next year and will bring some welcome relief to those in rental properties. It will be imperative that this relief be monitored closely as the housing market continues to struggle.”
R&D regime amendments and extension to KDB vital stimulus for investment and continuous reform should be considered
The Knowledge Development Box (KDB) provides for an effective rate of 6.25% rate of corporation tax on income arising from qualifying assets, the objective of which is to encourage the development of IP in Ireland. With a relatively low uptake to date, it is clear that reform is required to enhance the effectiveness of the regime while also future proofing the relief in light of international tax changes. Against this backdrop, the extension of the KDB by four years is a welcome development in ensuring the continued effectiveness and global attractiveness of the relief.
Commenting on the Minister’s Budget address, Cathal Noone, Tax Partner, Deloitte said: “Uptake of the KDB has been low to date in part due to the restrictive requirements for the relief. Public consultations on the relief have made it clear that reform is required, while recent Tax Strategy Group papers have noted that the relief is currently under review. A consultation process on the relief was held earlier this year, closing on 30 May 2022. While the extension announced by the Minister is a welcome step in the right direction, continuous reform will be required to the relief to ensure it remains fit for purpose.”
R&D regime
The R&D regime, which provides qualifying companies with a tax credit equal to 25% of qualifying expenditure, is an important stimulus for investment and in creating new and existing employment in Ireland. Ireland competes for foreign direct investment with multiple geographies, and we also compete for R&D activities performed by established multinationals. Against this backdrop, the amendments announced by the Minister to the regime to the repayable element of the credit are a welcome development in ensuring the continued effectiveness and global attractiveness of the Irish R&D credit regime.
Cathal Noone, Tax Partner, Deloitte said: “The R&D credit regime has been instrumental in incentivising the development of a knowledge economy in Ireland, but much needs to be done to future proof the regime for later years. This is particularly true when we consider the imminent introduction of a global minimum tax rate of 15% across the EU and OECD countries in the coming years. In addition, the existing regime would benefit from reform in its design and application to take into account new technologies and the relatively high costs encountered by smaller claimants. The R&D credit has proved immensely successful in recent years in incentivising increased spend and innovation by Irish companies. The changes announced by the Minister are welcome. However, the regime requires continuous reform, a view which is echoed by the Commission on Taxation report. A consultation process was held earlier this year, closing on 30 May 2022. We can expect to see future reform coming as the responses to the recent public consultation are considered in depth.”
Long term strategic planning needed to avoid energy crises in future years
Commenting on the EU regulation on energy prices in the Minister’s Budget address, Karen Frawley, Tax Partner, Deloitte said: “The proposed EU regulation includes two tax related measures, targeting companies in the energy sector. These measures would cap revenue at a maximum of €180 per MWH on low-cost electricity generating companies whose costs are unrelated to high gas prices – primarily impacting on wind, solar and nuclear producers. In addition, the proposal would introduce an EU wide temporary windfall tax at a rate of 33% over the “surplus taxable profits” of companies in the oil, gas and refinery sectors. While the Minister’s speech noted while Ireland aims to be part of the EU wide response, where this is not possible the Government may look to introduce domestic measures. In our pre budget submission, Deloitte had identified a range of tax measures to support the renewable energy sector including relief for investment in energy generation, VAT measures to enable better cash flow for renewable energy businesses and enhanced vehicles for solar investment. All of these measures should be considered in earnest as part a longer-term energy plan for Ireland to mitigate against future crises.”
Decision not to extend 9% VAT rate on hospitality will put increased pressure on businesses facing steep competition across the industry as inflationary pressures mount
While the Minister did not extend the 9% rate of VAT for the Tourism and Hospitality sector will be disappointing to that sector, it is reflective of the recent recommendations made by the Commission on Taxation.
Commenting on the Minister’s speech, Conor Walsh, Tax Partner, Deloitte said “The 9% rate of VAT for the Tourism and Hospitality industries was reintroduced in Budget 2021, with effect from 1 November 2020 to 31 December 2021. This measure was initially extended in last year’s Budget and again in May 2022, with the effect that the 9% rate of VAT will remain for these sectors until 28 February 2023. An extension of the 9% rate was not recommended by the Tax Strategy Group papers released during the summer, while the Commission on Taxation report has noted a preference for moving away from the reduced rates in an effort to broaden the VAT base. The decision by the Minister to not extend this 9% rate beyond 28 February 2023 will of course be disappointing to businesses in an industry where price competitiveness is a core concern. Many businesses operating in this industry are facing steep competition, with inflationary pressures mounting. Where future changes are envisaged, these should be balanced against the likely impact to small and medium sized businesses in the coming years.”
Measures to encourage smaller landlords to enter and remain in rental market vital in ensuring rental property meets demand
Landlords will be disappointed to see that today’s Budget provided no significant changes to the current regime. While the enhancement of deductible pre-letting expenditure in respect of certain vacant rented residential units is welcome the measure is unlikely deter the exodus of “mom and pop” landlords from the market.
Commenting on the measures announced, Shane Wallace, Tax Partner, Deloitte said: “Ireland’s rental market is under increasing pressure due to a surge in the numbers of households renting, coupled with fewer new rental properties coming to the market. Around 25,000 landlords have left the rental market since 2016, according to the Department of Housing officials, while the number of households renting in Ireland has increased almost 30% since the turn of the century.
The changes announced by the Minister to the tax treatment of pre letting expenses double the amount that may be claimed per premises to €10,000 and reduce the period for which a premises must be vacant from 12 to 6 months. These measures are hoped to enable landlords to make property suitable for prospective tenants in a tax efficient way. The measures announced by the Minister are an acknowledgment that the costs of bringing a vacant premises into use have significantly increased from the time the relief was originally introduced. This change is line with comments made previously by the Tax Strategy Group.”
The purpose of introducing a Vacant Homes Tax is to increase the supply of homes for rent or purchase i.e. to change behaviours as oppose to revenue generation. Commenting on the measures, Shane Wallace said: “This tax will apply to residential properties which are occupied for less than 30 days in a twelve-month period. The tax is to be levied at a rate which is three times that of the property’s existing basic local property tax rate. The impact of the Vacant Homes Tax on increasing supply may be modest as existing vacancy levels in Ireland are considered to be low. As with all new measures, we will await the final detail in this year’s Finance Bill. It is positive however that exemptions are to be provided for to ensure that owners are not unfairly charged where a property is vacant for a genuine reason.”
Budget 2023: Extension of Help to Buy scheme welcome development – but usefulness must continue to be reviewed in light of housing supply challenges
The extension of the Help to Buy scheme will be a welcome development for prospective purchasers, but amendment may be required to further enhance its usefulness in light of the current housing supply challenges in Ireland.
Commenting on the extension of the scheme outlined in the Minister’s speech, Shane Wallace, Tax Partner, Deloitte said: “The Help to Buy scheme offers first time purchasers of a new house or apartment the opportunity to avail of a refund on Income Tax and DIRT paid over the previous four years. The scheme therefore provided useful relief to first time purchasers looking to get on the property ladder, and prospective purchasers will undoubtedly welcome its extension beyond its expected end date of 31 December. We would, however, have welcomed a more extensive reform of the scheme to allow for its application to second-hand homes and apartments, to further assist with affordability concerns in the housing market. We know from the papers issued by the Tax Strategy Group that an external review has been carried out on the scheme, with the report yet to be made public. Based on the outcome of this review, we may see further changes proposed to the scheme in due course.”
