Annette Hughes, Economist & Director, EY DKM Economic Advisory said:
“Let’s hope that the Minister does not stray from the core objectives set out last year in his 2019 Budget speech, namely to safeguard our national public finances, promote fairness and make sensible investments for our long-term future. There is no room for surprises, unpleasant or otherwise. If we are to sustain our position at the top of the European growth league, we need a budget which is grounded in good budgetary practice and avoids any overruns on spending. We also need to ensure we are better able to predict spending plans, especially in health and social welfare, to avoid any spending creep, which can have unintended consequences for our finances in the future.”
The rainy day fund
“The announcement of Rainy Day Fund commitments are welcome, but they are similar to last year with €1.5bn from the Ireland Strategic Investment Fund and an annual contribution of €500m thereafter which represents a missed opportunity to bank corporation tax receipts.”
“It’s good to see capital spending prioritised. The additional investment in education is very welcome and should be allocated to sensible long-term investments for our future, adding to the productive potential of the economy. The 24% increase in capital investment to €7.3bn is significant for our construction sector but it will be important to ensure the industry has the capacity and skills to deliver on this and that value for money is achieved. This should be one of the tasks of the Construction Consultative Group established on foot of the National Development Plan.”
Tourism VAT rate
“We understand the rationale for the restoration of the higher VAT rate on tourism. This is a good example of using policy instruments when they are needed during difficult times. With an additional 64,000 jobs created in the food and accommodation sector over the past seven years and tourism numbers at record levels, perhaps this subsidy is no longer justifiable. Whilst acknowledging that tourism may not have fully recovered in some locations, there are better ways of spending the money to support businesses and boost tourism in those locations. The regional initiatives the Minister announced are such measures. This will provide €466 million in 2019 for other areas of the economy where it is most needed, notably housing and childcare.”
“The decision not to increase the carbon tax is disappointing given Ireland’s failure to meet its ongoing greenhouse gas reduction targets, and more particularly in the context of Monday’s report from the IPCC, which sets out in the starkest terms yet, the global consequences of failure to tackle climate change.”
Rural Regeneration and Development Fund
“As part of Project Ireland 2040, the Government has already committed to providing initial funding of €315 million over the period 2019—2022 or €78.75m per annum under the new Rural Regeneration and Development Fund to support rural renewal projects in towns and villages with a population of less than 10,000, and outlying areas. The additional allocation of €53m in Budget 2019 for the Fund in order to strengthen our rural economies and communities will go some way to support micro and small construction businesses in regions outside of the urban areas.”
Residential accommodation measures
“Given the crisis in the residential accommodation market, the measure to bring forward the full removal of the restriction on the amount of interest that may be deducted by landlords in respect of loans used to purchase, improve or repair their residential property, is welcome. It will hopefully encourage landlords to increase maintenance of the existing stock of rental property and may even increase supply, as vacant properties are brought back into use. Protecting the existing stock of accommodation is as important as providing new supply.”
“The time of the Budget is a good opportunity to stand back and seriously consider the kind of economy and society we wish to have in the future. This is why the Budget needs to go beyond any sectoral need and deliver for the collective needs of society. Do we want to secure a better quality of life and a more sustainable future for the population? The reality is that we have big choices to make and more tax will be needed. The missed opportunity to broaden the tax base, reduce our reliance on income taxes and increase the carbon tax is disappointing. One objective of taxes should be to change behaviour and therefore improve quality of life, and policy makers need to have the courage to do the right thing even if not the most popular.”
Shane MacSweeney, Partner & Head of Government & Infrastructure, EY Ireland
“The additional €1.4bn in infrastructure expenditure is welcome, but the hard work starts now. We need to ensure that additional infrastructure projects are prioritised in a manner that maximises the long-term sustainable economic benefits available. Furthermore, capital investment is usually the tap that is turned on and off in response to the economic cycle. There needs to be a commitment to avoid this happening in the future. There will be economic cycles on the road to Ireland 2040, infrastructure investment needs to be considered alongside all other current spending commitments when responding to the national fiscal position.”
Housing, Infrastructure and the National Development Plan
“Accelerating the delivery of ‘homes for our people’ – powerful and welcomed words by Minister Pascal Donohoe. We need to ensure that each of the initiatives announced are prioritised in a manner that accelerates the delivery of permanent homes. But it should not just be about the delivery of houses, the rhetoric needs to change to be about the delivery of sustainable communities. Therefore, we need to consider our infrastructure requirements holistically – permanent homes need schools, hospitals, public transport, water connections. Otherwise, we are just waiting for the next problem.
“The additional capital expenditure is welcome but we all have a role in turning our National Development Plan into a reality. The NDP is not solely Government’s responsibility, it is Ireland’s – we all need to help, be creative, brave, inspired and determined.”
David McNamara, Economist & Director at EY-DKM Advisory Services
“The plan to balance the Budget in 2019 is welcome, but the Government could have gone further as we face into the uncertainty of Brexit. At €42,000 person, our national debt is still among the highest in the world. Our growth rates remain enviable, but now is the time to be building up substantial buffers for the next downturn. That means setting aside future corporate tax surprises to the rainy day fund or towards paying down debt. In the last few years, most of the unexpected corporate tax receipts have flowed into higher current spending - largely funding budget overruns in Health.”
“As we lower tax rates on income, other revenue streams such as carbon tax are important to keep our tax base as broad as possible. The carbon tax is also the most efficient way to affect behavioural change as we attempt to meet our climate change goals.”
Overall comment on budget speech
“Overall, a cautiously optimistic tone to today’s speech – the considered tone is no surprise with Brexit looming. However, the focus on investing in our future, and the commitment from the Minister to “prioritise” the National Development Plan is vital. Ireland’s greatest natural resource is our skilled workforce, and the plan to ramp up investment in our third level sector and R&D is vital to maintain our international competiveness and plug the emerging skills gap.”
“Targeted measures to support the most exposed sectors in the economy in the transition to Brexit are welcome and necessary. The focus on Brexit in the Budget is important, and the announcement of further supports for SMEs and the agri sector through the Future Growth Loan Scheme and extension of start-up tax relief, will aid the adjustment to the post Brexit landscape.”
“At a broader level, the best way to Brexit proof the public finances is to run a larger budget surplus during the good times, building up buffers to guard against any Brexit related shocks to the economy.”
Sarah Connellan, Tax Partner, People Advisory Services, EY Ireland
“While the increase to standard rate band and reduction in USC is as forecast, the change doesn’t meaningfully address the fact that people on moderate incomes are hitting high rates far too early.”
Darragh McCarthy, Associate Partner & Head of Private Client Services, EY Ireland
Taxation of the self-employed
“Although the earned income tax credit was increased by €200 for the self-employed, the Minister unfortunately failed to remove the higher tax burden faced by the self-employed as against employees. The self-employed continue to face a higher universal social charge of 3% for those with higher income levels.”
“The increase in the gift/inheritance tax family threshold to €320,000 is welcome; however, it remains 41% below the threshold of €542,544 which applied in 2009. The overall effect has been to increase the real burden of inheritance tax on the family home given the significant increase in house prices during that period.”
“We were disappointed not to see any measures to improve the tax environment for indigenous Irish entrepreneurs. In particular we had hoped to see an increase in the exemption limit applicable to entrepreneurial relief which has not been increased since it was first introduced in 2015. The tax environment in Ireland applicable to entrepreneurs is not competitive when compared to our nearest competitor the UK.”
Breen Cassidy, Tax Partner, EY Ireland
9% VAT rate
“The lower 9% VAT rate was introduced during the economic crisis to encourage tourism and to boost the hospitality sector. The cost of the rate to the Exchequer since its introduction is estimated to be €2.7 billion. Other industries also benefitted from the lower rate, e.g. greyhound and horse-racing industries, publishing, and cinemas. The Department of Finance’s review of the 9% rate identified that all industries have experienced growth during the period 2011 – 2016 with the exception of publishing and cinemas.”
“The Minister has announced that the 13.5% VAT rate will be applied to goods and services supplied by all businesses in the tourism sector. The resurgence in the tourism sector combined with a lack of competitiveness in the sector are cited as the rationale for the change in the VAT rate.”
“Specifically excluded from the 13.5% VAT rate, and thereby retaining the lower 9% rate, are sporting facilities and newspapers. The 9% rate has been retained on newspapers as the industry has struggled with decreased print sales. Currently online newspapers are subject to the standard VAT rate (23%) but this is subject to change following agreement by the EU Council last week that electronic publications can be subject to the same VAT rate as their printed equivalent. The Minister has announced that the 9% VAT rate will also be applied to online newspapers. The Minister made no mention of the reduction in VAT rate of other on-line reading material, such as magazines and books therefore we await further details in the Finance Bill.”
Vehicle Registration Tax (VRT)
“Climate Change was a significant theme of the Budget today with a number of “Climate Change” measurements being introduced in the Budget. Vehicle Registration Tax (“VRT”) is a tax charged when one registers a new or imported used vehicle in Ireland and it is charged based on the Open Market Selling Price (OMSP) of the vehicle as determined by the Revenue Commissioners. The rate at which it is charged depends on the type of vehicle being registered with the tax rate of standard passengers cars based on the CO2 emissions of the car. The 1% increase in VRT on new diesel cars across all tax bands introduced in the Budget today is going to increase the costs of motoring in Ireland and likely to bring into sharper focus the significant increased number of imported cars from the UK.”
“Furthermore the introduction of a new fuel economy system across Europe called Worldwide Harmonised Light Vehicles Test (“WLTP”) (introduced on a transitional basis in September 2018 until wide scale implementation in 2020) was highlighted by the Minister for Finance as likely leading to further increased VRT costs for motorists. This has led to calls for changes in the tax bands for CO2 emissions but this has yet to take place as the Budget focused on a widespread 1% increase in VRT.”
“The VRT relief on electric hybrid vehicles has also been extended to the end of 2019 with the relief to be reviewed in the context of the changes that WLTP will bring to VRT.”
“Ireland will also no longer acquire “diesel-only” buses for the urban public service’s obligation from July 2019 in another move towards a more environmentally friendly policy so that Ireland can work towards meeting its emissions targets.”
“From both a revenue raising and health perspective it was no surprise that the Minister followed the trend of previous years and announced an increase of 50c per packet of 20 cigarettes (bringing the price of the most popular brands up to €12.70), with a pro-rata increase on other tobacco products. There will also be an increase of 25c on roll your own tobacco. Both increases to take effect from midnight.”
“These increases are expected to generate €59.4m million of revenue in 2019.”
“There was also an increase in the minimum excise duty on tobacco so that all cigarettes sold below €11 will have the same excise applied as cigarettes sold at €11.”
“The hospitality sector affected by the VAT rate increase will be relieved that at least there was no increase in excise on alcohol announced.”
“The Minister announced an increase in betting duty on bets placed by customers in State which will yield €51.6m in a full year.”
“The duty increases from 1% to 2% for all bookmakers and from 15% to 25% on the commission earned by betting intermediaries and exchanges.”
“It has been confirmed that carbon tax will remain unchanged for the forthcoming year. Instead, there is a long-term trajectory for the tax increases out from 2020 to 2030 in line with the recommendations of the Climate Change Advisory Council and the special Oireachtas Committee which are examining climate changes.”
Other climate changes to be introduced include a new accelerated capital allowances scheme for gas-propelled vehicles and refuelling, designed to encourage the uptake of gas-propelled commercial vehicles as an economic and environmentally friendly alternative to diesel. In addition, diesel only buses will no longer be purchased into Ireland from July 2019 and there will be a 1% surcharge from diesel motors across all VRT bands.”
Corporation and international tax
“The well flagged introduction of controlled foreign corporation rules in line Ireland’s requirement to transpose such ATAD rules within national law have been confirmed in the Minister’s speech. The Minister provided clarity with respect to the effective timing of such measures which will apply to accounting periods beginning on or after 1 January 2019. We await the finer details of the proposed provisions within the Finance Bill.”
“The Minister also referred to the introduction of an ATAD compliant exit tax of 12.5% applicable from midnight tonight (9 October) on any unrealised gains where a company migrates or transfers assets (including IP assets) offshore out of the Irish tax net. Whilst the corporation tax roadmap signalled introduction to an ATAD exit tax no later than 1 January 2020, the early adoption of the measures effective from midnight tonight has come earlier than expected.”
“The well flagged introduction of controlled foreign corporation rules in line with Ireland’s requirement to transpose such ATAD rules within national law have been confirmed in the Minister’s speech. The Minister provided clarity with respect to the effective timing of such measures which will apply to accounting periods beginning on or after 1 January 2019. This is in line with the ATAD timeline and we await the finer details of the proposed provisions within the Finance Bill.”
“The Minister also referred to the introduction of an ATAD compliant exit tax of 12.5%, applicable from midnight tonight (9 October) on any unrealised gains where a company migrates or transfers assets (including IP assets) offshore out of the Irish tax net. Whilst the corporation tax roadmap signalled introduction to an ATAD exit tax no later than 1 January 2020, the early adoption of the measures effective from midnight tonight has come earlier than expected. Further detail with respect to the measures should be disclosed within the financial resolution.”
“Referencing the corporation tax roadmap, the Minister confirmed that within the sphere of corporate tax reform, he is committed to a review of Ireland’s Transfer Pricing rules to align Ireland’s rules with international best practice, which may be viewed as an indication of an extension of the rules to incorporate the OECD 2017 TP guidelines.”
“The Minister once again reiterated the Government’s commitment to the 12.5% rate and indicated that an element of the 2018 growth in corporation tax receipts due to changes in international accounting standards are being treated as one off receipts not expected to repeat in 2019 and would be allocated to the Government’s Rainy Day Fund.”
“The Minister indicated that the corporation tax roadmap represented an opportunity to take stock and recognise changes in Ireland’s environment and at a time of global change for business Ireland’s focus is on maintaining a competitive and outward focussed, transparent, sustainable and legitimate corporation tax regime.”
“Over recent years Ireland has carefully cultivated its image as a beacon of stability and certainty in an international tax environment that undergoing rapid change, some of it quite sudden. The Minister referred to the Corporation Tax Roadmap that was published last month as an example of Ireland’s approach of a measured approach to law change.”
“The corporation tax measures announced in the Budget are all consistent with the programme of Irish tax reform set out in the Roadmap. The main item that caught the eye was the announcement of the exit tax. The deadline for Ireland to implement this tax was 31 December 2019, so the accelerated implementation may come as some surprise. Set against that is the welcome confirmation that the rate of tax on unrealised gains will be 12.5% rather than the 33% capital gains tax rate.”
“As expected, this Budget speech focused largely on people and services, with the bulk of the speech devoted to an outline of detailed spending plans. The Minister set his stall very clearly on prudent budgeting, outlining his plans to balance the books and then run surpluses which would be used to pay down our national debt, although it is clear that a part of the Corporation tax windfall was used to bring the anticipated deficit to 0.2% for 2018.”
“Some of the measures for domestic business are to be welcomed such as the extension of the start-up relief for new companies, and the commitment to look at improving the Employee Incentive and Investment Scheme. The investment in ‘human capital’ to help bridge current and potential future skills gaps is also positive. Improvements to the KEEP employee share scheme appear promising, however they are unlikely to result in substantial take up as the administration requirements remain onerous. Entrepreneurs will be disappointed that there has been no enhancement to entrepreneurs relief, to at a minimum bring us into line with the UK, but more importantly to help unlock further capital to reinvest in funding sustainable employment generating further economic activity”
“There was some progress towards parity of tax treatment of self-employed versus the employed with the announced increase of the earned income credit by €200, however substantial gaps remain between marginal rates of 52% for employees and 55% for self-employed, and respective social entitlements.”
Investment in health
“But one number stands out to me and that is the health budget – €17bn in funding in 2019 which is a 6% increase on 2018. The economy will have to be going at some rate to keep up with spending in that area. Set that alongside data on mental health and life expectancy, and we need to have a much bigger conversation in the future about funding health and how improved outcomes for patients should follow the significant increase in funding in recent years.”
Reliefs for the film industry
“The extension of the relief to 2021 provides more certainty to the sector. Given the recent announcement of additional investment in Troy Studios in Limerick, this additional certainty for the tax relief is most welcome.”
Local Property Tax
“Unsurprisingly, the Minister has deferred any announcement on what will happen in relation to Local Property Tax (LPT) against the backdrop of the revaluation issue looming in 2019, merely restating that any increase in the amount payable will be “modest and affordable”. We will have to wait to see therefore if there will be a reduction in the rate of LPT, as anticipated, to at least partially offset the significant increases in property values since 2013.”
Acceleration of removal of interest restriction for residential letting
“Landlords of residential property will be glad to hear that the partial restriction of interest deductibility for mortgage interest payments, which was due to taper out in phases up to 2021, has been abolished completely from 1 January 2019. This concession, which should in theory provide an increase in net after tax returns for landlords, is aimed at moderating rent increases in the private residential sector and eliminating a lack of symmetry with landlords of commercial property.”
Social and affordable housing
“Housing was always going to be a major focus of this budget, and the announcement of significant additional funding for social and affordable housing was well flagged beforehand in this context. Measures such as these will necessarily be incremental, but the enhanced contribution towards a serviced sites fund for local authorities to facilitate the provision of 6,000 affordable houses over the next three years at up to 40% discount to market prices, will likely be seen as a step in the right direction if there is appropriate buy-in. The additional funding will increase the fund size to €310m over three years and eligibility criteria will apply in respect of the affordable housing, with income limits of €50,000 for single applicants and €75,000 for dual applicant households”.
Tax measures for entrepreneurs
“Measures introduced today to help entrepreneurs compete for talent (insert measures) reinforces recognises the critical role that Entrepreneurs play in supporting jobs creation in the Irish economy. However, we need to do more to more around the emphasis we put on entrepreneurship in the education system. In a recent budget submission by the EY Entrepreneur Of The Year Alumni a number of measures were set out to address this – below and it is disappointing that this has not been reflected in today’s announcement:
- 1. A significant increase in entrepreneurial subjects and courses throughout our second and third level education system would significantly move this attitude over time. It is not a subject to be taught in a classroom setting alone, so it would ensure young people to have direct access to Entrepreneurial companies through learning in action initiatives. The transition year in the education cycle is a perfect opportunity for our young people – across all abilities and backgrounds - to be exposed to the exciting, creative and potentially financially-rewarding world of entrepreneurship. Third level needs more places on entrepreneur-related courses.
- 2. A very practical and useful initiative that could prove highly effective, is to consider an entrepreneur “apprenticeship programme”. Entrepreneurs hire many people to work in their businesses. In fact, the war for talent is very challenging for Irish entrepreneurs as they compete for skilled talent across several in-demand disciplines. Encouraging people to consider joining an indigenous company as an (entrepreneur) apprentice would be a very practical and positive incentive to indigenous employers. It could also go some way towards addressing the challenge of some underrepresented groups gaining exposure to a career in self-employment.
- 3. The next generation(s) are already exposed to the world of entrepreneurial opportunity in all their online interactions – many of their “heroes” these days are overseas Entrepreneurs. The energy, pace and scale of exposure to entrepreneurship needs to be substantially accelerated and dialled up if it is to have an impact in the coming decade. The key question is will the next generation(s) prevailing attitude be that they have to re-locate abroad to be successful? The real key to creating our entrepreneurial future is to ensure they associate Ireland and successful entrepreneurship as we educate their entrepreneurial minds.”
Reaction to Budget 2019 from EY's Head of Tax Services, Kevin McLoughlin
Finance Minister Paschal Donohoe’s Budget 2019 speech focused largely on people and services, with the bulk of the speech devoted to an outline of detailed spending plans.
The tax measures introduced in Budget 2019 involve a variety of adjustments spread across the taxpayerpopulation. The Minister set out his stall very clearly on prudent budgeting, outlining his plans to balance thebooks and then run surpluses which would be used to pay down our national debt.
The Government’s commitment to the 12.5% rate was once again reiterated. An element of the 2018 growthin corporation tax receipts due to changes in international accounting standards are being treated as one off receipts not expected to repeat in 2019 and will be allocated to the Government’s Rainy Day Fund.
The Minister indicated that the corporation tax roadmap represented an opportunity to take stock andrecognise changes in Ireland’s environment and at a time of global change for business. Ireland will continueto maintain a competitive and outward focussed, transparent, sustainable and legitimate corporation taxregime.
Some measures introduced for domestic business, such as the extension of the start-up relief for newcompanies, and the commitment to look at improving the Employee Incentive and Investment Scheme are tobe welcomed.
The investment in ‘human capital’ to help bridge current and potential future skills gaps is also positive.Improvements to the KEEP employee share scheme appear promising. However, they are unlikely to result in substantial take up as the administration requirements remain onerous.
Self-employed versus the employed
While there was some progress towards parity of tax treatment of self-employed versus the employed withthe announced increase of the earned income credit by €200, substantial gaps remain between marginal rates of 52% for employees and 55% for self-employed, and respective social entitlements.
The business community will be disappointed that there has been no enhancement to entrepreneur’s relief,to at least bring Ireland into line with the UK. More importantly these measures will help unlock further capital to fund sustainable employment generating further economic activity.
The well flagged introduction of controlled foreign corporation rules in line with Ireland’s requirement totranspose ATAD rules into national law has been confirmed. The Minister provided clarity with respect to theeffective timing of such measures which will apply to accounting periods beginning on or after 1 January 2019. We await the finer details of the proposed provisions in the Finance Bill.
The Minister also referred to the introduction of an ATAD compliant exit tax of 12.5% applicable frommidnight tonight (9 October) on any unrealised gains where a company migrates or transfers assets (including IP assets) offshore out of the Irish tax net.
Whilst the corporation tax roadmap signalled the introduction of an ATAD exit tax no later than 1 January 2020, the measures have been adopted earlier than expected.
Referencing the corporation tax roadmap, the Minister confirmed that within the sphere of corporate taxreform, he is committed to a review of Ireland’s Transfer Pricing (TP) rules to align Ireland’s rules withinternational best practice. This may be viewed as an indication of an extension of the rules to incorporatethe OECD 2017 TP guidelines