| Business and the Budget |
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| Apart from business measures dealt with in other articles in this issue, what the Minister did not say in the budget may be more relevant to business than what he did say. SSIAs were not mentioned. Research and development credits, Local Authority efficiency, VAT impact on tourism, professional service retention tax, sub-contractors withholding tax, and CGT rebasing are amongst business topics that did not feature. |
SSIA and Pensions
The dog that didn’t bark (at least on this occasion) is undoubtedly the SSIA dog. The Minister had been widely lobbied to provide an incentive to SSIA holders to convert their investment, on maturity, into a form of pension rather than spending it. He neither rejected the lobbying, nor gave in to it, so perhaps there is still hope? SSIAs will begin to mature in 2006. If something is to be done, then it must be done in the Finance Act 2006.  | | Mr Pat McDaid |
The measures taken on the pension area could be improved.
There are arguments which can be put forward in support of the proposal to effectively force payouts from approved retirement funds. But the manner in which it is being done is open to objection. The regime, once it is fully introduced, will have application from the moment an approved retirement fund is created. Many such funds, on creation, will be inadequate in size to provide a reasonable retirement income. One of the reasons why the taxpayer might wish to defer drawing from the fund for some years would be to enable the fund to build up after his retirement, and while he may be working in some new sphere of activity from which he would currently get income. It seems wrong in principle that compulsory payouts, (or rather a taxation system that assumes the payout to have occurred) should apply regardless of the adequacy or otherwise of the ARF. If it is the view of the Minister that a pension fund of up to €5 million (indexed) is appropriate and tolerable, would it not be more consistent to apply the new regime only to funds which have reached that amount of value?
There is a general trend towards encouraging people to work longer, and in particular later than traditional retirement dates of 60 years of age and 65 years of age. Many talented people, on retirement from their principal occupation, take up new careers whether as directors, consultants, or entrepreneurs. They may have no practical need to draw on their ARF for income in the years immediately following their official retirement. Would it not be more consistent with the policy of encouraging people to work longer if the taxation system based on assumed draw downs from the ARF were not applied until the ARF holder reached the age of (say) 70 years?
It seems very strange that we offer increased tax incentives to people aged 50 or over, to contribute to a pension fund, yet we have a system of penalties which will apply if, having retired at (say) the age of 60, they do not immediately begin to run down the pension fund. There seems to be a lack of “joined up thinking” in this area and perhaps the Minister has paid undue attention to Revenue officials with obsessions about tax avoidance.
The draw down rate of 3p.c., is one which appears to be designed to ensure that the capital of the pension fund will be eroded. There is a certain logic of course in a regime that assumes that over the life of the taxpayer and his spouse the ARF would be exhausted. But one of the changes made by Mr McCreevy when Minister, which transformed taxpayers’ attitudes to pensions provision, was the prospect that it opened that the pension fund might contain some element of a capital sum that would survive the pensioner and which could be inherited by the pensioner’s family. The present approach in the budget seems to be based on a view of the ARF which denies this prospect. It may be well founded theoretically, but has adequate consideration been given to the impact it will have on the incentive to fund for pensions, and on popular attitudes to pensions?
Research and development
Despite widespread dissatisfaction with research and development credits, the Minister did not refer to them in his budget speech. He has however proposed very significant expenditure on third level education. This may echo representations made to the Minister by the Irish Congress of Trade Unions, and by the Chambers of Commerce, which emphasised the importance of education and of training.
Local Authorities
Local Authority service charges and rates are becoming an increasingly important burden on businesses. Several bodies which made representations to the Minister before the budget emphasised the need for restraint and reform in this area. Other than a general commitment to seeking efficiency in the public service, and value for money, the Minister does not appear to have responded to these representations. Businesses might very reasonably feel that they have neither control nor influence over either the spending plans, efficiency of delivery, or financing of the Local Authorities which impose rates and charges on them.
Withholding taxes
The Minister has failed to take any action on professional service retention tax or on relevant contract tax. Neither has he responded to representations regarding the surcharge on professional service companies.
There is no justification for discriminating against service providers by imposing professional service withholding tax on the provision of services to the State and State Bodies. It is no more than a bureaucratic cash flow manipulation tool rather than a legitimate part of a self-assessment tax system. The surcharge on professional service companies which do not distribute their income, but retain it to finance working capital etc is a thoroughly outmoded tax which inhibits the growth of strong professional service companies in what is meant to be a knowledge based economy. How can the Minister expect knowledge based firms in the services area to develop against this antiquated background?
Relevant contract tax may have a legitimate role to play in countering tax evasion in the construction industry. But the rate at which the tax is levied, the bureaucracy associated with it, and the unreasonable nature of the risks which it imposes on firms employing sub-contractors, should they in any way inadvertently break the regulations, make it a tax which is difficult to justify. Its retention would seem to be due more to trade union pressure than sound fiscal reasons.
Representations had been made to the Minister regarding VAT rates as they impact on the tourism industry. These have been ignored. There is a traditional reluctance on the part of Ministers to make changes in the area of VAT because of the extent of EU control in the area. |
Pat McDaid is a tax partner at KPMG.
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| Article appeared in the December 2005 issue.
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