8 Oct 2019

EY Ireland budget 2020

By

Kevin McLoughlin

Ernst & Young — Ireland (EY Ireland) Head of Tax

Lead of the EY Entrepreneur Of The Year programme.

8 Oct 2019
Related topics Tax

Minister for Finance Paschal Donohoe announced Budget 2020 on 8 October at 1pm.

As undesirable as Brexit might be for Government, it does provide a degree of cover for a more restrained budget. The public and business expectations of additional money being available to meet their long list of needs will be somewhat abated by the turbulent external conditions.

Find all the commentary and analysis in the lead up and throughout Budget day.

For all budget related documents refer to Department of Finance Budget 2020

On 17 October the Government published Finance Bill 2019 (as initiated). The Bill primarily seeks to implement the tax elements of the 2020 Budget measures announced on 8 October. However, its 124 pages, in addition to clarifying aspects of the Budget announcements, also contain many new measures.

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Reaction Commentaries

  • Entrepreneurial reliefs

    The budget has focused on measures to support businesses in the event of a no deal Brexit and with a particular focus on vulnerable regions. However, the Minister, resisted the temptation to improve entrepreneurs’ relief despite significant representation and consultation. This is a missed opportunity as entrepreneurs play a key role in the creation of employment especially in locations outside of the larger cities and could have played a strong lead role in helping guide businesses though the challenges of Brexit and help maintain and increase employment in those areas.

    Corporation tax

    The Minister once again reiterated the Government's commitment to maintaining our competitive corporation rate ‘which will not be changing.’  He has again highlighted the certainty and transparency of our tax regime to promote investment and committed the Government to take action to preserve its transparency, sustainability and legitimacy. This continued commitment is positive for Ireland Inc, and the Minister also reiterated that. He referred to Ireland's best interests being served by being party to the development of a stable and consensus-based tax reform, which seeks to ensure a global, robust tax architecture, and that works for all into the future. On continuing to deliver in line with current consensus-based tax reform and as signalled most recently within the Department of Finance’s Tax Strategy Group papers in July, the Government is introducing new anti-hybrid mismatch rules as required by the EU ATAD and updating Irish Transfer Pricing provisions in line with OECD standards with effect from 01 January 2020.  Both sets of provisions have been subject to significant levels of public consultation, for which Department of Finance feedback statements containing legislative intent were published in July and August respectively. We await the finer details of the proposed legislative provisions within the Finance Bill.

  • Economic Commentary

    Time to adjust Budget expectations, tax cuts are off the table

    ‘A cautious and restrained budget may seem at odds with an economy that is more than 50% larger in GNP terms than it was five years ago and is one of the world’s fastest-growing developed economies. But Minister Donohoe, as expected, pointed to the twin threats of a global slowdown and Brexit as reasons to avoid any large-scale giveaways. Regardless of the reasons cited, most economists would approve of restraint at the peak of the cycle, though it is worth remembering economists don’t have to get elected! The sobering reality is that despite all of Ireland’s well-documented growth it is just about balancing the books and with a net debt of close to €180bn there is very little capacity to deal with future slowdowns. If Ireland can’t pay off debt at the peak of the cycle what does that tell us about its economic foundations?

    ‘Public expenditure has risen strongly in line with revenue, despite the messages of restraint and welfare savings as the labour market has improved. A growing population, the legacy of underinvestment in infrastructure, well-documented shortfalls in health spending and a growing recognition of education’s relative spending deficit reduces the Minister’s ability to limit his adherence to so called ‘counter-cyclical’ economic policy. As a side note, the EU’s approach to the last crisis was far from counter cyclical, it will be interesting to see if the same approach is taken during the next slow-down? The harsh reality is that more tax will be required, or a renewed effort will be necessary to find efficiencies in what we currently spend. Neither will be popular. This is before we get to tackling the climate change and emissions crisis. Perhaps the cautious and restrained tone is therefore justified - giveaways will not be the reward for Ireland’s success.’

    No giveaways, there is too much to do: ‘Today was proof that a booming economy no longer guarantees an upbeat and self-congratulatory Budget. Minister Donohoe, correctly, pointed to the risks facing the Irish economy and the fact that even after five years of impressive growth the economy is not running a surplus. Looking at the infrastructure and public policy needs and the challenge of tackling climate change it is reasonable to surmise that the era of wide spread tax cuts and giveaways is gone for good.’

    Me, my community or my planet? ‘Budget analysis often focusses on the individual. Who is better or worse off and by how much? Understandable, but there is growing recognition that money is not the only barometer of success. What of our healthcare and education systems, our safety and, increasingly, what of the health of our plant? We are being asked to think is a less inward way, to look at the bigger picture, the community and world around us. In that regard it is right to see an escalation in carbon taxation and investment in improving public service quality even if it means individuals will not have more money in their wallets at the end of the week’

    No-deal now the base case

    ‘The first 15 minutes of Minister Donohoe’s speech was dedicated to dealing with a no-deal Brexit, indicating how significant the Government expects the impact to be. The base case for the economic forecasts is now a ‘no-deal’ outcome, growth is expected to fall from 5.5% this year to just 0.7% in 2020. The intent to provide funding to mitigate adverse Brexit effects was prudent but it will be how quickly and effectively this is deployed that will determine its effectiveness. In the event of a no-deal outcome there will be businesses who will need very rapid support to solve cash-flow challenges but there can be no expectation that this becomes a long-term source of support. The money must be used to buy time and then help firms to adapt to the new trading conditions, assuming no-deal conditions persist. There will need to be flexibility in the deployment of support and it was slightly surprising how detailed the commitments were to different schemes and Departments. Amazingly, just three weeks out it remains unclear whether the UK will indeed leave on the 31st of October and what form of deal, if any, will be struck.’

    Tax for purpose the new norm

    ‘Tax increases, especially in a booming economy are always a tough political sell. The linking of tax to beneficial spending plans is becoming more common. The ring-fencing of carbon tax receipts to spending on climate change measures was a further example in Budget 2020. This is often easier for citizens to accept and tougher for businesses to argue with, but it does run the risk of creating a very fragmented tax and expenditure system. It can also reduce the flexibility needed to adjust to unforeseen circumstances.’ 

    Midlands

    The recognition of the economic hardship endured in the Midlands on the back of high-profile job losses was recognised with a basket of development measures totalling just over €30m. This will be welcomed in the area but there are risks with interventions of this nature. How do other areas qualify? What constitutes enough hardship to warrant support? Emergency measures can be justified but they do set a precedent for future Budgets.

    Brexit

    The cost of mitigating a no-deal Brexit is likely to outstrip what has been set aside, but the level of uncertainty and the political ramifications of placing a number on the total cost meant that the Budget was more a signalling of intent regarding intervention and support than a recognition of the true fiscal cost.

    EY’s own estimates of a no-deal impact on Ireland are slightly more modest than those presented in the Budget (1.3% in 2020 compared to 0.7%). The offsetting effects of a steady flow of migrants into Ireland, a likely government intervention package and some displaced activity from the UK provide partial insulation in an aggregate sense. This would be of little comfort, however, to the individual firms adversely affected. The Government will need to be nimble and flexible in the support it offers as there will be unexpected.

  • SMEs

    Budget - the package of more than €1.2bn to respond to a no-deal Brexit outcome is very welcome, especially for SMEs. SMEs are the backbone of the Irish economy, accounting for the overwhelming majority of enterprises: 69% of persons engaged, 50% of turnover and 42% of Gross Valued Added (GVA). The recent decline in consumer confidence to a six-year low does not augur well for SMEs, who are likely to face serious cash-flow pressures, particularly in the most vulnerable sectors, such as agri-food, manufacturing and tourism, over the coming weeks and months.  Thus these supports for SMEs, including for the beef and fishing sectors and for businesses in the most vulnerable regions, to get them through the difficult weeks and months ahead, are welcomed given the extent to which their performance is closely linked with the economy’s performance. 

    Carbon tax

    The €6 per tonne increase in carbon tax, deemed to be a bold and new decision falls a way short in the context of moving towards €80 per tonne by 2030 from €20 per tonne currently. We need to be brave in dealing with climate change.

    Help to Buy

    The retention of the Help to Buy (HTB) scheme for another two years will provide much-needed certainty to buyers and builders. It is three years since the Help to Buy Scheme was introduced and to date there have been 14,722 claims by first-time buyers totalling €217 million. With 55% of claims for properties priced above €300,000 and given average property prices of €302,000 in July 2019, the decision not to lower the threshold at this point in time is welcomed. With one-third of HTB claims to date in Dublin and 70% in the Greater Dublin Area, the retention of the scheme in its current format will alleviate current affordability constraints for buyers in the main urban locations.

    Living City Initiative

    Notwithstanding the retention of the Living City Initiative to end 2022, the Minister missed an opportunity to introduce measures to support the ambitions of Project Ireland 2040 and encourage compact sustainable growth in urban areas outside of Dublin. The scheme is narrowly focused on the historic centres of our six main cities and represents a missed opportunity to broaden this scheme to encourage urban living.

  • Today’s announcement of further financial support for Brexit-impacted sectors is a welcome development. Companies should familiarise themselves with these new supports in the coming weeks, and engage with relevant state agencies. Overall, businesses should continue to plan for a worst-case scenario of a no-deal by October 31st

    Carbon tax

    A higher carbon tax is an important price signal as we move towards net-zero emissions by 2050. However, with the stick must come the carrot of investment which enables the transition. In this context, the announcement that the additional tax raised will be ring-fenced to fund new initiatives such as a just-transition fund and supports for vulnerable sectors and households, is a welcome development. A re-commitment to steadily raise the carbon tax to €80/tonne by 2030 also gives certainty to household and businesses planning. 

  • Investments of €3m for new agriculture environmental schemes, €9m for sustainable mobility, greenways and urban cycling, and €3m investment in improving electric vehicle infrastructure is not quite at the level of investment we would have expected for those sectors that represent the greatest emissions for Ireland. To meet our Climate Action Target to have 950,000 electric vehicles on the roads by 2030, this investment in Electric Vehicle infrastructure is well below expectations of where we need to be.

    Climate

    In support of the Climate Action Plan, the Government has given plenty of forewarning that the carbon tax will be increased from €20 per tonne of carbon today, to €80 per tonne in 2030. As such, today’s carbon tax hike to €26 per tonne of carbon, is conservative; however, provisions have been made to ring-fence the additional revenue which will be invested in low-carbon technologies and protecting the vulnerable. The onus will be on the Government to be transparent over its spend on this revenue and communicate the impacts back to the public. Business needs to be prepared for rising fuel costs, through the increasing cost of carbon out to 2030, and as such undertake measures to ensure total carbon emissions are measured, monitored and reduced to decrease energy costs and consequent carbon emissions. 

    Carbon tax

    As a result of the carbon tax hike to €26 per tonne of carbon, petrol and diesel prices are increasing at the pumps from midnight tonight, whilst the cost of home heating fuels will rise in May 2020 after the winter period. The impact on both businesses and home owners will be felt immediately, and in the spirit of changing behaviours, undoubtedly people will be looking to new and innovative ways to lower energy consumption, lower costs and ultimately reduce greenhouse gas emissions. 

  • Carbon tax 

    Carbon tax is a regressive tax and therefore, while most people understand the need for the tax and it has been proven in other countries to help incentives improved behaviours in the energy space, it is imperative that the Government redistribute some of the tax take to those most severely impacted so that the net impact is a more fair and equitable result.

    Electricity tax

    The equalisation of the business and non-business electricity tax rates should not have a significant impact on businesses, even at the higher equalised rate (€1 per megawatt). It is still one of the lowest electricity tax rates in the EU and it has a narrow yield due to reliefs such that domestic use is exempt. 

    Fuel prices

    Diesel and petrol prices will increase as of midnight tonight due to an increase in Carbon tax from €20 to €26 per tonne. In addition, new car owners as of 2020 will face a new Nitrogen Oxide tax in lieu of the diesel surcharge. This new NOx tax will impact new and imported cars. It is aimed at encouraging buyers to move away from diesel cars, towards initially more emission-friendly hybrid cars and ultimately electric cars. Specific details of the NOx tax are yet to revealed but between this new tax and the increased Carbon tax the costs of being a car owner and in particular a high emission car have become considerably more expensive.

    Motor tax

    Rather than reducing the motor vehicles that qualify for VAT recovery, the Minister could have increased the VAT recovery for environmentally friendly vehicles to further incentivise acquisitions and growth in the market.  

    Construction VAT

    While we understand the nature of the Budget in light of Brexit, and certainly there have been measures announced to address the homelessness and housing crises, a reduction in the VAT rate on construction costs related to the affordable housing costs would have been a welcome consideration. Additionally, given the important role charities play in helping the vulnerable in our society, an increase in the refund threshold for charities over the current cap of €5 million was a missed opportunity to enhance their abilities to act.

  • R&D

    EY welcomes the improvements to the R&D tax regime for SMEs which is aligned with our recommendations as part of the recent Dept. of Finance consultation process.  In particular, improving the regime for SMEs by increasing the rate to 30% for micro and small businesses, and increasing the 5% restriction to 15% for outsourcing R&D to universities is a positive move that looks to foster greater collaboration between academia and industry. While these are welcomed improvements, ideally we would have liked to have seen more.  We have previously called for accelerating R&D refunds over a shorter time span, reducing the level of administration, and providing greater certainty on the levels and types of documentation needed to support claims.  These are critical areas to encourage greater engagement by the SME sector and help to maintain Ireland’s competitiveness in this space.

  • KEEP

    KEEP was introduced with the primary purpose of enabling start-ups and SMEs to compete with larger organisations and multinationals in attracting and retaining key talent. Unfortunately, due to the many restrictive and burdensome conditions attached to the programme, it has failed to deliver.  This is evidenced by recent figures suggesting that less than 60 employees nationwide have availed of KEEP since its introduction in 2018.  The changes announced today, especially in terms of making it available to part time workers, address some of the concerns with KEEP, but more needs to be done to remove the barriers that are deterring start-ups and SMEs from availing of the programme. 

    SARP

    The extension of SARP until 2022 brings certainty to our FDI community that they can recruit and attract overseas workers to come and work in Ireland.  However, the condition that they must be employed by a group employer for more than 6 months is not compatible with the growing Irish tech and pharma industries, who recruit new hires from all over the world to come and work in Ireland, rather than source them from their own overseas companies.  In the Netherlands and France, similar expat regimes are available to new hires and Ireland is competing with these countries to attract talent. We are continually hearing from our clients that they are losing out on key talent by not making SARP available for new hires.

    SARP for medical workers

    While it is encouraging to see SARP being extended to 2022, it would have been great to see the Government extend this relief to persons with key skills, especially our diaspora of doctors and nurses who have trained in Ireland but cannot return home as they would find it difficult to make ends meet under the current Irish tax rules and the high cost of accommodation.  The population of Ireland is expected to grow to 6 million within the next 20 years and we need more hospitals staffed with essential workers to cater for a growing population.

    Earned Income Tax Credit

    The self-employed, who are our entrepreneurs, have been dealt a bad hand since the economic crash. It is really positive news to see that the Government has increased the tax credits for the self-employed to close the gap to €200 to those of the PAYE worker.  The self-employed are the demographic that we need to incentivise as they are the ones that are taking risks, using their own money to invest in the business, often working long hours to keep afloat and paying themselves a small wage so they can reinvest in the business. There have to be incentives in the tax system to adequately reward them for producing employment and bringing vital economic life to rural areas especially.  I really welcome the tax credit but now we need to move on to getting the 11% USC rate abolished.  However, as it affects only 25,000 workers/voters I don’t think it’s a main priority, especially when we are likely to have an election within the next eight months.

    USC rate of 11%

    The self-employed have paid a bigger price than anyone under the USC regime. It was introduced following the economic crash and those earning more than €100,000 were hit with a supplemental USC rate of 11%.  This means that the top marginal rate of 55% was applied to self-employed workers, while PAYE workers earning a similar amount pay 52%.  According to Revenue sources, this additional tax is paid by more than 25,000 self-employed persons, who are more likely to be serial entrepreneurs that invest in a number of businesses in Ireland. It’s disappointing that this unfair treatment was not addressed in the Budget and we will continue to support the entrepreneurial community as they seek to have this unfair additional tax burden reduced.

  • EII

    The changes announced by the Minister to the Employment and Investment Incentive Scheme (“EII”) will support growing Irish businesses to attract funding to support growth and job creation in the economy.  Relief will now be available for investors in full in the year of investment (as compared to ¾ in year 1 and ¼ in year 4) and the maximum investment p.a. has been increased from €150,000 to €250,000.  Key will be the details in the Finance Bill as accessing EII has proven difficult in practice.

    Home carer credit

    An increase in the home carer credit by €100 does nothing to help those families where both parents work. This effectively further dis-incentivises parents in returning to work - particularly those looking to return on a part-time basis as the benefit of this relief is clawed back through the rate bands.

    Dividend withholding tax

    We look forward to seeing the details of the proposed change to the application of dividend withholding tax to close an identified gap in unreported dividend income – hopefully this will not in practice increase the administrative burden imposed on compliant taxpayers. 

    Gift/inheritance tax threshold

    The increase in the gift/inheritance tax threshold for lifetime gifts or inheritances from parents to a child by €15,000 to €335,000 goes only marginally towards restoring the threshold to €542,544 which prevailed in 2009.

     The low threshold can unfortunately require the sale of family homes instead of inheritance, where significant tax liabilities would arise on the inheritance.

    Family business

    While there were some marginally positive measures announced in the Budget, which will impact on Irish domestic businesses, particularly in the area of research and development credits and improvements to the EIIS scheme, it is important to see these in the wider context. The key concerns facing these businesses are access to financing to fund growth, recruitment, staffing costs (linked to property prices) and managing significant currency volatility. Nothing in the Budget will have any impact on these key issues.  

  • Corporation tax

    While Budget 2020 contained little new in the area of corporation tax aside from some targeted anti-avoidance measures, the Finance Bill will contain many significant changes arising from international tax reform, which will affect businesses, including updated transfer pricing rules, anti-hybrid provisions and mandatory disclosure rules.  Businesses will need to consider the impact of these changes on their tax rate, alternative strategies available and related compliance obligations.

    The Minister’s reiterated commitment to the 12.5% corporation tax rate is welcome.  EY will continue to advocate for assertive action through the tax system to maintain Ireland’s overall international competitiveness on a sustainable basis.

  • Agri-food

    The planned supports for a no-deal Brexit are substantial with an overall planned package of measures of €1.2bn.  Much of the detail of how these funds are to be deployed is to be worked out. The currently disclosed supports for the Agri Food sector are €85m for beef farmers and €14m for fisheries. These supports may need to be enhanced as, in particular beef farmers, will be hard hit. Interestingly, there was no mention of the dairy industry and dairy farmers, who also face serious no-deal Brexit risks. Further detail is needed on the intended allocation to the Agri Food sector of the overall €1.2bn fund to have a view of the adequacy of the allocation to manage no-deal Brexit risks in the sector.

  • Transfer Pricing

    We welcome the introduction of the 2017 OECD Transfer Pricing Guidelines, and the commitment this shows to aligning Ireland’s transfer pricing regime with that of international best practice. However, it is disappointing to see the Minister’s intention to extend transfer pricing to small and medium-sized enterprises subject to a ministerial commencement order. The associated documentation requirement – while simplified – will create an excessive administrative burden on taxpayers for what will likely be minimal benefit in the way of additional tax revenue yield.

    Furthermore, the extension of Irish transfer pricing rules to non-trading and capital transactions will increase the compliance burden on taxpayers. Without further guidance from Irish Revenue, providing clarity and certainty on how transfer pricing should apply to such transactions, there is potential for taxpayers to face increased and unnecessary complexity when pricing capital and non-trading transactions.

    We look forward to receiving further clarity on the upcoming changes when the Finance Bill is released on 17 October.

  • Carbon Tax

    The Government laid out a clear strategy in the Climate Action Plan it announced earlier this year.  The increase in the carbon tax in this year’s Budget, from €20 per tonne to €26 per tonne, is the next step in achieving a target carbon tax of €80 per tonne by 2030. This increased carbon tax rate is expected to raise €90 million in 2020.  The announcement that revenue received from the carbon tax will be ring-fenced to deliver on the Climate Action Plan had already been acknowledged in advance of today’s Budget. It is welcome that these monies will be used to aid our transition to a low carbon future whilst protecting some of the most vulnerable from the associated increase in living costs.

    Help to Buy

    The announcement of the extension of the Help to Buy Scheme for a further two years and an additional €17.5 million to the Land Development Agency to promote affordable housing are welcome – this news will provide certainty to new home buyers and the construction sector alike and should see a step towards the delivery of permanent homes.  

    Infrastructure Investment

    The on-going commitment to Project Ireland 2040 and infrastructure development is welcome and the additional 22% capital spend this year is evidence of the Government’s commitment.  Often, in times of economic uncertainty, which Brexit presents us with, infrastructure investment is curtailed or switched off completely – so we welcome the Government’s commitment to sticking to the script on Project Ireland 2040 ambitions for the country. The material and increased amounts being invested in transport, education, housing and health is tangible evidence of the government’s commitment.  We need to ensure that this investment continues in line with the aims of the National Development Plan and investment is made both in our cities and regional areas to ensure we are sustainably preparing for future growth across the country.

  • Increase in rate for non-residential property

    Targeting an additional yield of €141m, the Minister has announced an increase in the stamp duty rate for non-residential property from 6% to 7.5% effective from midnight tonight, with a transitional period for binding contracts entered into by midnight and closed by the end of the year.    Whilst the speculation was that some level of increase in the rate was possible, and the Minister has expressed a view that that the increase can be absorbed, it will be interesting to see what impact, if any, it has on transactional activity in the commercial property sector.   

    IREF anti-avoidance measures 

    Targeted anti-avoidance measures have been announced in relation to Irish Real Estate Funds (IREFs), ostensibly in light of lower-than-anticipated yields from the IREF withholding tax since its introduction in 2016.  In the main, the new measures are aimed at limiting the deductibility of interest within these funds by imposing a direct tax charge at 20% on interest that is deemed excessive. The sudden introduction of these provisions and their scope will likely be a matter of concern to funds holding Irish property that are impacted by the Irish Real Estate Fund rules, which rely on borrowing to fund their operations, particularly as there is no carve-out for normal third-party bank debt. 

Our budget case studies provide more information based on specific scenarios

Scenario 1

0.00%

Marie is 29 and a single mother with a 3 year old daughter. She is a marketing consultant and earns €70,000 per annum. She lives in a house in Cork.

Scenario 2

0.38%

Peter and Fiona are married. Peter is an accountant and Fiona is a homemaker. Peter earns €90,000 per annum as a self-employed person from his own accountancy practice. They have three children aged four, seven and nine.

Scenario 3

0.00%

James and Marie are married. James is a supervisor and earns €36,000 per annum. Mary is a part-time hairdresser and earns €12,500 per annum. They have two children aged nineteen and twenty one. Both children are attending third level college full-time and live at home.

Summary

Find here the analysis and implications of this year’s Budget for you and your business.

 

About this article

By

Kevin McLoughlin

Ernst & Young — Ireland (EY Ireland) Head of Tax

Lead of the EY Entrepreneur Of The Year programme.

Related topics Tax