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What to expect in Budget 2006 Back  
The Social Partners have aided the Minister with advice for his budget, which will be presented this Wednesday, December 7th. As usual, some advice is conflicting, some hopefully won’t be implemented, but some areas of common concern can be identified, writes Pat McDaid in this month's KPMG tax monitor.
The common themes
Childcare, pensions, tax bands and credits, property breaks, Local Authority charges, and research and development tax credits are the concerns that are most frequently raised in the pre-budget submissions made by various bodies to the Minister for Finance.

The first three listed items, childcare, pensions, and tax bands, are three topics which the Minister must almost certainly address in his budget.
Pat McDaid

The Minister has received several suggestions as to how to relieve the burden of childcare costs on parents. The most popular suggestion, made in one form or another by ISME, IBEC, the Small Firms Association, the Chambers of Commerce in Ireland, the CCAVI and ICTU, it that income tax should not be imposed, whether as a benefit in kind or otherwise, on subsidies paid by employers to employees in respect of childcare costs.

At present there is some relief in that employers who are actively involved in the financing and management of a cr?che can provide the cr?che facilities to their employees without the employees paying income tax on the cost to the employer. That scheme has proved unattractive to the private sector and seems more designed to meet the needs of the public sector. It remains to be seen whether the Minister will heed the calls coming both from trade union and employer bodies for a really effective system of relief.

One of the issues here is whether childcare should be viewed solely in the context of employment, or in a social context. Where both parents need to work, childcare is in reality a cost of going out to work and it is easy to make an argument for a tax break in such a case. However arguments are also made about ‘recognising the contribution of the mother in the home’ so as to subsidise childcare costs even for non-working mothers, or to make additional payments from the State to such mothers.

Tax relief for pension contributions features in the submissions from ISME, IBEC, Small Firms Association, Chambers of Commerce in Ireland, and in ICTU. The Minister has already received an unpublished report from the Pensions Board on the topic of tax relief for pensions. He is awaiting comments from the Tax Incentives Review Group on, amongst other items, pensions.

There are two areas of concern within pensions. One is that moneys in SSIAs should be transferred into pension funds. The other is that tax incentives for pensions should be improved so as to widen the level of private pension provision. IBEC, the Small Firms Association, and the Chambers of Commerce in Ireland, all favour a form of tax relief for pension contributions by individuals, calculated at the 42p.c. top rate of income tax regardless of whether or not the individual is liable to tax at that rate. This would ensure that there is no dilution of tax incentives for the higher paid, while at the same time the value of the incentive is proportionately greater for the lower paid. Recent comment by the Minister led to fears that he may cap pension relief for the higher paid.

The increasing burden on business of Local Authority charges, and the lack of pressure on Local Authorities to improve efficiency, lie behind submissions by ISME, and the Irish Tourism Federation. These suggestions find something of an echo in the Chambers of Commerce where Chambers boldly recommend a new property tax to replace Local Authority rates. The new tax would extend to all property other than principal private residences, and therefore would be levied on holiday homes, amongst others. The proposal is part of a complex trade-off involving also recommendations on rationalising VAT rates.

There is widespread support for the view that personal tax credits and the standard rate band should be inflation-proofed.

Research and development tax credits were introduced in 2004. At the time they were first announced, it was pointed out to the Minister that they were not likely to succeed, since the credits granted are based solely on increases in research and development expenditure over levels in 2003, rather than on total expenditure. The submissions made to the Minister repeat this and point out that there has been a disappointing uptake on the credits for this very reason. The main obstacle to a change here may well be the difficulty in admitting that a mistake was made in the first place.

Conflicting advice
IBEC and the Chambers of Commerce both urge the Minister to increase reliefs under the Business Expansion Scheme. In contrast ICTU calls for its abolition.

VAT has attracted a lot of attention in submissions. ISME, the Irish Tourism Federation, the Chambers of Commerce and the CCABI all urge increases in the thresholds before businesses become liable to VAT, and in the threshold up to which VAT can be accounted for on a cash receipts basis. This point is not unrelated to the advice to the Minister to expand BES. Anybody wishing to set up a business in Ireland can be confronted by a daunting administrative burden in terms of tax regulation in the area of VAT, PAYE, PRSI, preliminary tax payments, registration for tax, etc. The thinking behind the submissions is to lessen the burden at the commencement of a new business. These suggestions are eminently sensible and would not have a great cost.

However conflicting advice on VAT is coming to the Minister in the area of VAT rates. Whereas the Irish Tourism Federation, the Irish Hotels Federation, and the Small Firms Association all call for reductions in VAT rates and in particular in the lower 131⁄2p.c. VAT rate, the Chambers of Commerce in Ireland propose a much more radical reform of VAT that would involve the abolition of the lower rate, and the reduction of the standard rate from 21p.c. to 18p.c.. The 18p.c. suggested is higher than is needed to render the move tax neutral. It would generate additional resources for the government, which the Chambers suggest should be used to ease the burden of Local Authority charges and rates on business. The two tourism bodies also urge that the restrictive rules on reclaiming VAT on hotel services should be liberalised for conferences and other business functions.

Surprise consensus
The Chambers of Commerce in Ireland and ICTU recommend tax breaks for gain sharing. Gain sharing is a form of profit sharing which could be thought of as share options without any shares. In effect the recommendation is that productivity related bonuses should be exempt from tax within certain limits. Both ICTU and the Chambers favour increased tax breaks for training costs and for adult education. There are limited reliefs in this area at present but they fall short of being wholehearted encouragement to employees to take on additional skills at their own cost, or at their employer’s cost.

There is widespread consensus that property tax breaks should be either entirely abolished or significantly restricted. A media campaign against these tax breaks has had its effect and nobody seems very anxious to come out in their defence in a wholehearted way.

The solo runs
The CCABI would like to see an end to professional services surcharge in companies, and a rebasing of CGT values from 1974 to 1991. The professional services surcharge in companies is an antiquated piece of nonsense that penalises professional service providers who operate with limited liability. It is becoming increasingly difficult to sensibly discuss the value of assets at 5 April 1974 where assets held at that date are now being disposed of. It is difficult enough to agree current values of property but discussions of values 31 years ago takes on an air of theology.

ICTU would like to see the corporation tax rate phased up to 20p.c., and a surcharge imposed on bank profits. It would like an end to all business tax shelters, the rates of CGT and CAT increased.

They nostalgically remind the Minister that the CGT rate was once 60p.c. and most startlingly, call for support for the harmonisation of the tax base in the European Union. The harmonisation of the tax base is widely recognised as the thin edge of the wedge for tax harmonisation across the board. ICTU also urge the introduction of royalties on oil and gas extraction in relation to new exploration licenses.

They call for the placing of a limit on artists exemption so that it will encourage a greater output by less well-off artists. From an artistic viewpoint, it seems paradoxical to encourage increased output from unsuccessful artists, rather than from successful artists.

The Chambers of Commerce recommend a 100p.c. year one write-off for the cost of acquisition of all forms of intellectual property, including goodwill.

What will the Minister say?
Some of the themes taken up in the submissions, such as pensions, child-care, tax bands and possibly VAT rates are likely to feature in the Minister’s budget. Most of the others will not. The more important question is, what advice is the Minister getting from the Public Sector?

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