Overview

Budget 2018 was announced by Minister Paschal Donohoe earlier today. Read our full analysis and its implications for you and your business.

Read EY’s reaction to Budget


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Briefings

  • Cork

    Cork Budget Briefing

    1O October
    6.30pm - 8:00pm
    Republic of Work, 12 South Mall, Cork.

    Speakers:

    EY - Seamus  Coffey

    Seamus Coffey
    Economist

    EY - Seamus Downey

    Seamus Downey
    Tax Partner

  • Dublin

    Dublin Budget Briefing

    11 October
    07.30am - 09.00am
    The Shelbourne Hotel, 27 St Stephen's Green, Dublin 2

    Speakers:

    EY - Ivan Yates

    Ivan Yates
    MC

    EY - Joe Bollard

    Joe Bollard
    Tax Partner – Head of International Tax Services

    EY - Sarah Connellan

    Sarah Connellan
    Tax Partner – People Advisory Services

    EY - Neil Gibson

    Professor Neil Gibson
    Chief Economist

EY reactions

EY - Ireland Budget Alert 2018

Budget Alert

EY Ireland Budget 2018 - Rates at a glance

Budget 2018: Rates at a glance

Kevin McLoughlin, Head of Tax

Budget 2018

Today Minister Paschal Donohoe stood up in the Dail to deliver his first Budget. The standard by which he will wish to be judged is that which he set for himself on his appointment:

  • Stable public finances
  • Fairness
  • Sustainable investment in the future

To understand the shape of the Budget it is important to acknowledge the domestic political context and global economic environment in which it has been framed. The Budget measures reflect Government priorities including the perspectives of the Independent members of Government and the Confidence and Supply Agreement with the main opposition party. The key terms of that Confidence and Supply Agreement are:

  • Maintain our commitment to meeting in full the domestic and EU Fiscal rules as enshrined in law.
  • Facilitate the passage of budgets presented by the Government within these rules and which are consistent with the policy principles contained in this document.
  • To address unmet needs, introduce budgets that will involve at least a 2:1 split between investment in public spending and tax reductions.
  • Base health expenditure on multi-year budgeting, supported by a 5 year HSE Service Plan based on realistic, verifiable projections. /li>
  • Introduce reductions in the Universal Social Charge (USC) on a fair basis with an emphasis on low and middle income earners.
  • Establish a “Rainy Day” Fund.
  • Maintain Ireland’s 12.5% corporation tax, and engage constructively with any measures to work towards international tax reform while critically analysing proposals that may not be in Ireland’s long term interests.

Budget 2018 is part of the implementation of each of the foregoing. The fiscal space available has been allocated to many spending and taxation measures. The taxation measures introduced in Budget 2018 are projected to be Exchequer accretive in 2018.

The Budget seeks to take account of the potential impact on the Irish economy from challenges in the international environment – Brexit, US trade policy, BEPS implementation etc. but provides for extra funding in key services including health, education and transport. Increases in social welfare and State pension are proposed which alongside reductions in income taxes will see the vast majority of citizens benefit directly from Budget 2018.

The Budget has an eye on risk, whilst recognising opportunity and building for the future. Additional spending in health and education sets out to ameliorate some of the hardship of the recession years and the Minister proposes that infrastructure spending is ramped up gradually so as not to overheat the construction sector.

Business Taxes

From the perspective of business, the main news is in the commercial property sector, with a significant increase in the rate of stamp duty on commercial property transfers, subject to a partial refund for property that is developed for residential use within a 3 year period. There are also a series of measures to bring more resources to bear to finance additional housing construction.

In the international sector, in addition to his re-commitment to the 12.5% rate of corporation tax, the Minister is acting on the recommendations of the Coffey Report by launching a consultation on the implementation of the law change required over the coming years to give effect to the BEPS project recommendations.

Budget 2018 brings forward a number of recommendations in the Coffey Report. He has announced the re-introduction of the limit on use of capital allowances for intellectual property acquired after Budget day so as to smooth corporation tax receipts over a longer period. Government has also allocated further funding in 2018 to build high level technical capacity to tackle complex tax avoidance and transfer pricing cases and to support the Competent Authority role, including MAPs which is required to protect Ireland’s tax base and contribute to additional yield.

Tax on Work

The Minister is committed to lowering the tax cost on work and Budget 2018 proposes some modest changes in rate bands, which were well flagged.

The main new initiative in the personal tax sphere is the introduction of a favourable regime for share options issued by small and medium businesses. This will be welcomed by entrepreneurial business. However, it does little to allow Irish business to attract mobile talent from overseas which will remain an important element of resourcing for Irish businesses into the future. This is an area where innovation in our tax policy can assist the overall competitiveness of Ireland as a location of choice for sustainable investment.; There are no new proposals for entrepreneurs to improve on existing reliefs despite huge focus in this area in pre-Budget submissions.

Consultation on Key International Tax Matters

The Minister has also announced a public consultation, implementing recommendation in the Coffey Report, on Ireland’s implementation of the EC Anti-Tax Avoidance Directive and various transfer pricing matters including implementation of the 2017 OECD Transfer Pricing Guidelines. The consultation runs until the end of January 2018 which is not a lot of time considering the highly technical nature of the subjects involved. These changes have relevance to all international businesses and therefore EY looks forward to actively participating in that consultation.

New employee share scheme

“The new employee share scheme is welcomed in principle - though we have yet to see the detail - and offers the potential for indigenous business to compete more with larger business for talent. It is disappointing though that the current entrepreneurs relief from Capital Gains Tax has not been expanded to bring it more in line with international norms, particularly the UK.”

Professor Neil Gibson, Chief Economist

Forecasting

“Growth forecasts of 4.3% in 2017 and 3.5% in 2018 may prove conservative as increased government spending complements higher levels of business and consumer spending. Encouragingly, the favourable conditions did not detract from a focus on what is needed to keep Ireland at the top of the growth charts. Tellingly, housing and infrastructure spends were placed first in the speech, a recognition of the threats to global competitiveness presented by rising living costs.”

Rainy day fund

“Though badged as a ‘rainy day fund,’ the mention €1.5m pot was surrounded by so many Brexit references, that it appears in reality to be a Brexit mitigation fund. Given the lack of clarity surrounding the UK’s exit from the EU, there is merit in this approach. However, many interest groups would argue that this money should be spent now on challenges which are already known.”

Stamp Duty

‘History tells us that a fast growing Ireland can afford a higher rate of commercial Stamp Duty, the question is whether this was the right time to partially reverse previous cuts? Taken in tandem with other measures to accelerate the development of vacant land and looking at current demand levels the measure should not be too damaging to development levels in the most desirable markets. It is however going to present more of a challenge to areas outside of Dublin, some of which are not enjoying the same levels of commercial activity.”

Public Sector Investment

A commitment to increased spending across key public services of health, education and justice was a welcome feature of the budget and received second billing after housing in the speech. 1,800 more workers in health, 1,300 in education and 1,300 in justice (if citizens are included in the numbers) will go some-way to ease the increased pressures across these areas but the demographic pressures are such that true reform will need to sit alongside headcount increases.

Ireland tops the growth charts – Budget 2018 focussed on how to stay there

Minister Donohoe presented Budget 2018 against a backdrop of extremely positive economic data. Growth was projected to be 4.3% in 2017 and 3.5% in 2018 and reference was made to unemployment falling to its lowest level since 2008. Encouragingly, there was little grandstanding over these figures and the focus quickly turned to the need to tackle some of the risks to Ireland’s enviable position at the top of the European growth charts. It was telling that the sequencing of the budget was context, housing & infrastructure, public services, then tax. Though commitments were made to retaining the Corporation Tax headline rate and tweaks were made to personal tax bands it was interesting that these announcements had been demoted behind the need to invest more money to improve Ireland’s competitiveness.

Was it enough?

Budgets always bring to mind the textbook definition of economics – ‘unlimited wants and finite resources.’ Budget 2018 was no different. There were plenty of areas in which interested parties would wished to have seen the Government go further. However the Minister correctly pointed out that Ireland’s debt levels are still high and this means any future crisis cannot be resolved by loading up on more government debt, so a more cautious approach is required. Such is the demand in the Dublin market that the measures on housing and infrastructure are unlikely to quell the rise in prices but they are a step in the right direction. The ‘Ireland 2040’ plan becomes even more critical and there will be a need to encourage development and prosperity to be spread across the country to avoid spiralling costs in Dublin. Perhaps the most challenging of the tax rises, the commercial stamp duty hike, is the most concerning from a regional perspective with a number of markets likely to find this harder to cope with than the booming Dublin market.

Balanced budget the correct approach

It may have come as surprise to some that there were any tax rises at all in the Budget. Given the growth profile it could have been argued that Ireland could afford to spend more (or tax a little less). This is undoubtedly true; the markets trust Ireland again and would have supported a little more borrowing, but the caution was appropriate given the balance of risks ahead. The addition of sugar and sunbeds to the category of ‘sin taxes’ will gather significant attention but it was the rise in vacant site tax and commercial stamp duty that will have the greatest impact. The commitment to increased infrastructure funding and public service investment needed to be funded from somewhere and this balanced approach is to be commended. Lessons from the past and from Ireland’s near neighbours suggest that it is the choices you make when you have money that matter most in preparing for the times when you have not. A mix of tax rises and cuts was therefore appropriate in the current climate.

Public sector focus reflects public mood

That Budgets are set by an elected Government is a fact that should not be lost when analysing announced measures. Economists might have wished for a tighter focus on measures to boost competitiveness and productivity and perhaps less on tax changes to provide a few extra Euro for voters, but that ignores the political realities of a fast-growing economy and the imperative that places on giving something back to the voting public. The pressures on public services are however widely recognised and commitments to additional front-line staff will be welcome. It is perhaps important to bear those figures in mind when thinking of further tax cuts we might have wished to see. Increases in welfare payments and the fact that inflation is running below the average wage settlements means that there will be more money for consumers to spend and this should help a retail sector that is worrying about changing consumer behaviour and the threat from cross border shopping and imports.

A need for optimism

Presented with enviable growth rates many Governments would have spent much longer congratulating themselves and it was extremely encouraging that this was not the tone set. But the fear of Brexit was palpable with no fewer than 16 mentions in the speech and even the establishment of a rainy day fund that is to all intents and purposes a Brexit mitigation fund. Recognising the challenge presented by Brexit is of course necessary, but it is important the Government continues to focus on the known problems facing Ireland, in particular the challenges to its global competitiveness from rising prices. Heading into 2018 the government is spending more, business is spending more and with more consumers in work they too are spending more. This is a healthy position from which to face any challenge, even one as great as Brexit.

Sarah Connellan, Tax Partner – People Advisory Services

Share awards in the SME sector

“We welcome the Minister’s announcement to introduce the Key Employee Engagement Programme (KEEP), which is a tax efficient share-based incentive relevant to employees in SME unquoted companies. This new incentive should support the attraction and retention of key personnel to the SME sector. Gains arising to employees of share options awarded under KEEP will be subject to capital gains tax on sale, in place of the current liability to income tax, USC and employee PRSI. The incentive will be relevant for share options granted from 1 January 2018 to 31 December 2023.

By way of reminder, commitments were made by the Minister for Finance in Budget 2017 and as part of the Summer Economic Statement to enhance the tax efficiency of the provision of share awards to employees and directors in Ireland. Share awards are an attractive means of incentivising and retaining employees - they represent a PRSI saving to the employer and can act as a retention mechanism by aligning employees’ individual performances to those of the corporate.

Historically, the award of shares as a mechanism of reward were less favourable to SMEs in the private sector given the fact that there is no market for a share in an unquoted company, with employees often having to self-fund an upfront tax cost.”

Employed versus self employed

“It is disappointing that there is still a significant discrepancy between the taxation treatment of those who are self-employed and employed. Whilst it is welcome that the earned income credit has been increased to €1,150, it is still behind the PAYE credit of €1,650, which represents an annual net benefit of €500 to the employed individual.”

“Coupled with this difference, the self- employed are further disadvantaged by not being entitled to certain social welfare benefits. They are subject to a USC surcharge of 3% on income over €100,000, and the entry level for self-employed PRSI is still lower than for those who are employed.”

Shane MacSweeney, Head of Government and Infrastructure

Infrastructure Investment

“EY welcomes Budget 2018, and in particular its focus upon infrastructure and capital investment – including the commitment to build an additional 3,800 social homes next year. The positive connection between investing in productive infrastructure and economic growth is well established and globally recognised. Expenditure in Infrastructure is a direct means of stimulating an economy, driving job growth and economic activity while simultaneously encouraging inward investment. ”.

John Heffernan, EY Tax Partner and Head of Private Client Services

Stamp Duty

“The hike in stamp duty on commercial property from 2% to 6% is significant and takes effect from midnight tonight. However, no transition measures were announced which is disappointing and would have been expected to provide certainty for those purchasers who have already exchanged contracts but not taken title. It is hoped that this will be immediately addressed with Revenue guidance in line with Revenue practice when changes were introduced to stamp duty rates previously.

The Minister is of the view that the Dublin Commercial Real Estate market is in danger of overheating with a 75% recovery in values and rental costs back to 2007 peaks. He hopes the increase in Stamp Duty (back to pre-December 2011 levels) will help reduce the risk of overheating without affecting supply.

The government also introduced a stamp duty refund scheme where the non-residential stamp duty rate was charged and subsequently the land is applied for residential development. This shows the Government’s commitment to addressing the housing crisis and indicates a willingness to ensure the Stamp Duty changes do not adversely impact the supply of residential property”.

Joe Bollard, Head of International Tax

International Tax Measures

“In Budget 2018 the Minister has restated his commitment to the competitiveness of Ireland’s tax regime built on key principles of stability and certainty.

EY welcomes the launch by Minister Donohoe of consultation on Ireland’s implementation of the EC Anti-Tax Avoidance Directive and the transfer pricing recommendations set down in the Coffey Review. This includes implementation of BEPS Actions 8 -10 and the documentation requirements of BEPS Action 13. We look forward to participating in that consultation. These highly technical areas have implications for every Irish business operating internationally and therefore the outcome of the consultation is important to maintaining competitiveness of Ireland’s regime.

EY also welcomes the Minister’s statements in the “Update on Ireland’s International Tax Strategy,” published alongside the Budget, including his confirming Ireland’s insistence on unanimity on tax measures at an EU level as a key Member State competence. In that document the Minister has also reiterated that Ireland does not support proposals concerning the digitalisation of the economy which move away from consensus at an OECD level which could result in double tax and significant uncertainty.

The Minister also announced the reintroduction of the annual cap on capital allowances on intangible assets for expenditure incurred after today. EY has written to the Minister suggesting complementary improvements to that regime aimed at maintaining its overall competitiveness aligned with the core principles of stability and certainty.”

Ireland’s 12.5% Corporate Tax Rate

“In Budget 2018, Minister Donohoe reiterates commitment to Ireland’s core offering – maintaining an open, transparent and stable corporation tax regime built on the cornerstone of the 12.5% corporate tax rate.

EY believes Ireland’s strategy should continue to strive to deliver tax stability and certainty to domestic and international investors. This will be a key part of maintaining Ireland’s competiveness.

Ireland has a proven track record of success as an investment location, leveraging our highly qualified workforce, infrastructure and tax regime. As business wrestles with the unprecedented breadth and pace of change in the international tax environment, Ireland’s long-term stability in our tax regime can be a significant differentiator in winning investment both from domestic business and FDI.

“We welcome Government’s absolute commitment to the 12.5% corporate tax rate and continued delivery on Government’s policy of reducing the tax cost of employment. With significant risks for the Irish economy it will be important that Ireland continues to innovate through tax policy to maintain Ireland’s competitiveness in the face of increasing competition. This includes enhancements to our corporation tax regime and helping Irish business attract the best talent and key skills to sustain growth and success.”

Ian Collins, Tax Partner and Head of R&D Tax Services

R&D

“Given that Ireland’s expenditure on R&D falls short of the EU average, it was disappointing that the Minister for Finance did not look to improve the R&D or Knowledge Development Box (KDB) regimes given his comments regarding the need for the economy to innovate, attract investment and be competitive in a post Brexit world. 

“For example, as other countries introduce OECD compliant patent box regimes, in order to live up to its billing as ‘best in class’, the Irish KDB regime could have been extended to include capital gains on qualifying IP assets in order to remain competitive.  The Minister introduced additional investment for the Higher and Further Education Sectors.  One change to the R&D regime to further encourage collaboration between the private sector and third level institutions could have been a review of the 5% subcontractor restriction which is currently in place on R&D activities outsourced to third level institutions.”

John Heffernan, Tax Partner and Head of Private Client Services

Entrepreneurial Reliefs

“It is disappointing that the Minister did not announce any changes to entrepreneurs’ relief today. Budget 2017 reduced the entrepreneurs special Capital Gains Tax rate of 20% to 10% but the overall limit of €1m remained unchanged. The Minister announced in Budget 2017 that he would review the €1m lifetime limit in future budgets, so an increased limit was hoped for in this year’s budget. The Programme for a Partnership Government also outlined that the Government would provide a supportive tax regime for entrepreneurs.  The equivalent UK entrepreneurs relief currently remains significantly more attractive offering a 10% rate with a lifetime limit of £10m. In order to encourage entrepreneurial activity in Ireland we urge the Minister to consider an increase in the lifetime cap to compete more effectively with the UK.”

Capital Acquisitions Tax Thresholds

“It is disappointing that there was no change to the tax-free threshold for gifts and inheritances from parents to their children. The programme for a partnership Government commits the administration to increase the tax-free threshold for gifts and inheritances from parents to their children to €500,000, yet no timeline was provided. Budget 2017 made a modest 10% increase. The fact that it wasn’t addressed today is particularly disappointing in light of the closing off of dwelling-house exemption last year, which has resulted in significant inheritance tax liabilities.”

Budget 2018 – Government documents

Videos

Professor Neil Gibson – Chief Economist

Sarah Connellan – Tax Partner

Joe Bollard – Head of International tax

Scenarios

EY - Scenario 1
EY - Scenario 2
EY - Scenario 3
EY - Scenario 4
EY - Scenario51
EY - Scenario 6

Contacts

EY - Kevin McLoughlin

Kevin McLoughlin

Head of Tax Ireland
+353 1 2212 478
EY - Joe Bollard

Joe Bollard

Tax Partner – International Tax Services
+353 1 2212 457
EY - Breen Cassidy

Breen Cassidy

Tax Partner – Indirect Tax VAT
+353 1 2212 413
EY - Sarah Connellan

Sarah Connellan

Tax Partner – People Advisory Services
+353 1 221 1514
EY - John Heffernan

John Heffernan

Tax Partner – Private Client Services
+353 61 317 784
EY - Aidan Walsh

Aidan Walsh

Tax Partner – Business Tax Advisory
+353 1 2212 578