Watch out for Budget 2015 commentary from EY’s tax team.
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2015 Pre Budget Analysis
- Research & Development Ian Collins, Head of R&D Tax Services
Call for improvements to Ireland’s R&D regime in next month’s budget
The R&D tax credit scheme has become a key part of Ireland’s corporate tax incentive package in attracting R&D investment to Ireland and retaining that investment. The scheme has enabled a multitude of companies to reduce their payroll costs year on year, increase their cash flow, provide that extra budget required to recruit targeted hires, increase margins on qualifying R&D projects, and has also enabled multinationals to attract further R&D investment to Ireland.
There have been numerous announcements recently to support this – SAP is expanding its R&D investment in predictive analytics, HP is constructing a new state of the art R&D facility in Galway, and Microsoft continue to expand its data centre in Ireland, to name but a few. All of these are continuing to contribute to job growth in high value added areas.
As a nation, government and industry do not articulate the benefits that typically accrue from participation in the R&D regime, such as employment growth and retention, attracting future investment to Ireland, and improvement of general internal R&D processes within participating companies, all of which leads to an improved R&D environment. These spillover benefits are vital to help companies compete and win future R&D investments.
Readers may recall that the Department of Finance carried out a review of Ireland’s R&D tax credit regime last year, the results of which identified that the Irish regime is considered among the best in class internationally. On foot of this review there were measures introduced in last year’s budget to the Irish R&D regime which were very much welcomed, however we cannot become complacent with further measures required to stay ahead of competing jurisdictions.
R&D projects are extremely mobile in this day and age. As a result, many of our international competitors are enhancing their R&D incentive packages in an effort to attract high value added R&D investment to their shores. The global R&D arena is extremely competitive and this reinforces the need for Ireland to continue to enhance its overall offering. The following recommendations should be considered in the context of next month’s budget in October:
- Introduce more certainty in order to enhance the overall effectiveness of the R&D scheme and to ensure greater consistency both on audits and assessing qualifying criteria. There should be a specialist dedicated unit within Revenue to deal with specific R&D tax matters, as well as handling technical appeals in a more streamlined manner.
- Introduce a simplified R&D regime for the SME sector. There are many SME’s not availing of these R&D cash benefits due to administrative complexity. Many of our international competitor jurisdictions offer a simplified regime for SME’s to tackle this issue.
- Improve the employee reward scheme: the rules as they currently stand are too restrictive and should be broadened to enable loss making companies avail of the relief. Due to the cash refundable nature of the R&D regime, there should be no loss to the Exchequer by broadening the relief to enable loss making companies pass on the benefit of their R&D credits to their key R&D employees.
- Align with grant aid: in order to help attract additional R&D investment into Ireland, a pre-approval mechanism should be put in place to enable companies the ability to pre-agree the percentage of an R&D grant-aided project that qualifies for the R&D tax credit. This would afford companies the ability to factor in the benefits of both grant aid and R&D tax relief into their pricing model when competing with their international affiliates for R&D projects.
- Pay and File John Heffernan, Tax Partner, and Catriona Coady, Senior Tax Manager
Budget 2015 – Reduction in top rate of income tax or reduction in USC
There is much speculation that the Minister for Finance will announce a reduction to taxes on income in Budget 2015. This reduction could be implemented in a number of different ways, such as:
- A reduction in the top rate of income tax from 41% to 40%
- A reduction in the higher rate of Universal Social Charge (USC) of 7% to 6%
- A reduction in the standard rate of income tax from 20% to 19%
- An increase in the standard rate band by €100
- An increase to the personal tax credit by €100
- An increase in the PAYE tax credit by €100
Depending on how the reduction is made, the benefit of the reduction could be focused on reducing the income tax burden for those on lower incomes, but it is also possible that a greater benefit will be available to those on higher income.
Unlike income tax, the USC is applied to gross income with very limited deductions, so a reduction in the higher rate of USC by 1% to 6% will deliver a more substantial increase in net take home pay than a reduction in the top rate of income tax. Virtually all taxpayers would benefit more from a 1% reduction in the USC compared to a 1% reduction in the top income tax rate. For example, for a single person earning €30,000 per annum the increase in net pay would be €140 per annum from the 1% USC reduction. The same person would receive no benefit from a reduction in the top rate of income tax. For a single person earning €60,000 per annum, the USC reduction would increase net pay by €440 per annum. The same person would enjoy an increase in net pay of €272 per annum from a reduction of 1% in the top tax rate, so the additional benefit from a reduction in the USC is €168.
A 1% cut in the top tax rate or a 1% cut in USC heavily favours the higher paid. For example, compared to a single person earning €30,000 per annum, a single person earning €100,000 per annum would receive a greater benefit from a cut of 1% in the USC or a 1% cut in the top rate of income tax by an amount of €700 and €672 respectively. To limit the extent to which these changes would benefit the higher paid, the benefit of a reduction in the USC could be more focused on lower paid workers by retaining the 7% rate of USC for those at higher income levels, and applying lower rates of USC to those earning less than a cap of, say, €50,000 per annum.
A 1% reduction in the top rate of income tax will only benefit mid and higher earners. For the low earner, whose income is not sufficient to bring the individual into the higher tax rate, any such reduction in the rate would not produce any additional tax saving. This would be the case for lower paid single workers. It would also be the position for married couples where earnings do not fall into the 41% rate, whether or not both have earnings chargeable to income tax and USC. This would also be the case for those aged 70 or over, assuming in this case that the higher rate of USC reduces from 4% to 3% for those aged 70 or over with aggregate income of not more than €60,000 per annum. For these categories of earners, a reduction in the rates of USC would produce a more beneficial saving.
These changes can be illustrated by the following tables.
Reduction in top rate of income tax from 41% to 40% v reduction in USC
Single person – aged under 65
Salary €30,000 €40,000 €60,000 €100,000 Increase in net take home pay reduction in top rate of income rate €0 €72 €272 €672 Increase in net take home pay reduction in USC €140 €240 €440 €840
Married person – one income couple aged under 65
Salary €40,000 €45,000 €60,000 €100,000 Increase in net take home pay reduction in tax rate €0 €32 €182 €582 Increase in net take home pay reduction in USC €240 €290 €440 €840
Married person – two income couple aged under 65
Salary €60,000 €70,000 €85,000 €100,000 Increase in net take home pay reduction in tax rate €0 €44 €194 €344 Increase in net take home pay reduction in USC €580 €380 €530 €680
Married person – two income couple aged 70
Salary €60,000 €70,000 €85,000 €100,000 Increase in net take home pay reduction in tax rate €0 €44 €194 €344 Increase in net take home pay reduction in USC €399 €499 €649 €739
All figures are per annum. Calculations assume earnings are salary or from occupational pension, that there is entitlement to single and married personal tax credits, the PAYE tax credit and home carer credit and that joint assessment applies. Calculations also assume full rate PRSI where it would apply and do not include the pensions related deduction.
The other options that could be considered, such as a reduction in the lower rate of income tax from 20% to 19%, will deliver the same increase in net take home pay regardless of income level for those with earnings liable at the 41% rate, while an increase in the standard rate band by €100 is unlikely to address any perceived inequity in tax rates between low and high earners. An increase in the personal tax credit or PAYE tax credit of €100 is also unlikely to address this perceived imbalance. Of course it is always possible that there could be a combination of the options outlined in order to reduce the income tax burden for all taxpayers, but the most equitable approach would appear to be a reduction in the rate of USC capped at a reasonable level of income.
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Tax Matters 2014
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UK Budget 2014
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