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Saturday, 20th April 2024 |
| This was primarily an income tax budget rather than a business budget. On the business side its most significant attribute was stability achieved by its lack of major changes, and the proposals for consultation on VRT and VAT. Its commitment to reducing the compliance burden on business and changes in preliminary tax, BES and R&D were in principle good but too limited in scale, and the opportunity to reduce the marginal tax burden on high achievers and personal tax contributors was fudged, writes Brian Daly. |
Stability, simplification and consultation welcome
The retention of a broadly stable corporate tax environment is crucial for business, provided it is combined with well-flagged indications of improvements in areas where improvements are needed. | | Brian Daly |
The Minister's proposals to lighten the VAT administrative burden on smaller businesses are welcome although it would have been preferable if they had broader application. Hopefully his request to the Revenue Commissioners to explore opportunities to reduce the tax compliance burden on all firms, large and small, will be fruitful. The administrative cost of tax collection has been moved from the State to the productive sector progressively since the report of the commission on taxation more than 20 years ago. There is no doubt that the broad thrust of that policy was wise. But it may have gone too far in some cases.
The right way forward must surely involve a cooperative effort between the Revenue, business and the Irish Institute of Tax. A review by the Revenue alone might not be the most satisfactory approach, as, while it would be done most expertly and in good faith, there is some conflict of interest involved as some reduction of the burden on business of tax administration may involve some increased costs for the Revenue, or reduced requirements by them for all sorts of returns and record keeping.
The decision of the Minister to engage in wide consultation before introducing fundamental changes in vehicle registration tax and in vat on property transactions is most welcome. Prior consultation is the best way to avoid errors in tax legislation which can damage the economy. It has sometimes been lacking in the past which makes the Minister's decision all the more significant and welcome. The property regime is now so complicated that it is beyond many tax advisors and revenue officials and has record keeping requirements that beggar belief. It also impacts on financial services companies in a harsh way that arguably distorts the property market and imposes cash flow disadvantages on exempt businesses. An overhaul is most welcome.
BES
The renewal of the Business Expansion Scheme was a good move. It is especially important in persuading budding entrepreneurs to move from employments to becoming employers themselves. The increase in the limit to personal relief for investor to E150,000 helps reduce the number of investors needed to provide any given amount of capital and thus helps reduce the costs involved. But the increase in the limit on BES capital that can be raised to E2 million was disappointing. It is still at too low a level to make the costs of any widespread fund raising viable. A level of E5 million would have made more sense.
The income tax payer
This was flagged as a give away budget for the personal taxpayer. It did give a little to many. But it failed to sufficiently reduce the high marginal tax burden on high achievers. The overly modest 1% reduction in the top rate of income tax was largely neutralised by the half % increase in the health levy for those earning over E100,000 pa. The top rate taxpayer has borne a heavy burden for many years and is the mainstay of the income tax system. A large proportion of all income tax receipts come from this group, a fact some politicians seek to conceal with media campaigns concerning a handful of high earners who use reliefs to eliminate tax. This tax payer group face the reality of seeing almost half of their earnings go to the State every year. This is too high a proportion if incentives to extra effort and risk taking are to be maintained.
Surely also it is both unfair and unhelpful to democracy to have a policy of eliminating income tax for a significant chunk of the electorate, unless of course the policy is in due course to eliminate income tax for all.
The expatriate group of high earners are critical to foreign inward investment. They, in common with other high earners, not only got no effective relief, but saw no mention of moves to restore the remittance basis of taxation in some form, or to reform the capital acquisitions tax system onto a remittance basis also.
Preliminary tax for corporates
There has been an unanswerable criticism of the present preliminary tax payment rules. They require a company to compute their tax liability for a period prior to the end of the period and penalise them if they get it wrong. The system is unfair – let us repeat that since the message did not seem to get through before – UNFAIR. The response has been to permit smaller companies to compute their preliminary tax payment by reference to the prior periods results. That is sensible. But this sensible move was not extended to the almost 3% of largest companies. Those are the companies who employ the bulk of our labour force and pay a major part of all corporation tax. They represent the multinationals we seek to attract into Ireland to drive our economy – at a time of unprecedented competition for such inward investment.
Such companies may have better forecasting and budgeting systems than smaller companies but they don't employ crystal ball gazers normally. They still cannot say what their taxable profits will be prior to the end of a period so it is unjust to expose them to penal interest payments for exceeding their budgeted profits. And it is wasteful to force them to do detailed tax computations twice – once prior to year end on forecasted figures and again after year end on actual outcome. Cash flow cannot be the excuse for not dealing fairly with the larger companies – there is a budget surplus. Someone is not looking at the bigger picture here.
Research and development
The R+D tax credit system was widely and rightly criticised when introduced for limiting the credits to incremental expenditure and requiring a company to be on a treadmill of escalating expenditure, in order to benefit.
Three years later, the truth has been recognised but a full solution has been baulked at. The budget provides for a credit for expenditure in excess of that incurred in 2003 and does not seek to move the base year forward each year as originally proposed. Furthermore this partial solution is put in place for 3 years only, thus creating uncertainty as to the long term rules, in a sector where expenditure may be planned for a decade ahead. It is a half measure which will incur cost and achieve little.
The relatively small scale of indigenous Irish business makes subcontracting essential as part of an R+D program by such companies. The original credit scheme denied credits to such subcontracting save for not more than 5% of the total which could be placed with universities. This flaw was highlighted at the time. Now an attempt is made to correct this – but too little, too late again. Credits will now extend to subcontracted expenditure up to a limit of 10% of the total, in addition to the subcontracting to universities. This limit is too low for indigenous companies and not very sensible for larger ones either.
The position of clinical trial costs for pharma, biotech and medical device companies has not been clarified. The need to make the credits refundable to loss making start up companies has not been addressed.
UK contrast
By a coincidence, the UK chancellor chose the Minister's budget day to make his pre budget report to parliament. This is commented on elsewhere in this issue of KPMG's Tax Monitor. Perhaps the greatest contrast between the two speeches was the focus in the UK speech on outcomes i.e. on the results that the chancellor sought to achieve over a wide range of UK society and economy. There are a number of commitments and proposals in the UK report that are glaringly absent from the Irish budget statement. The UK chancellor proposed:
• further surplus government assets to be sold
• real reductions in the budgets of several government departments
• efficiency savings across all departments of 3% pa in overall budgets and a reduction of 5% pa in administration budgets up to 2011.
We seem to be mainly concerned with additions to spending, without challenges to the cost/benefits of existing programs of spending or the benefits of holding assets.
The Chancellor also had an imaginative proposal to relate stamp duty reliefs on housing to energy efficiency of the houses. That is an idea that could really make a quick difference here in Ireland.
The references by the Chancellor to making the UK an attractive location for financial services activity emphasises the need for the Irish Government and the Minister for Finance to continue to make sure it acts in ways which maintain and indeed improve the attractiveness of Ireland for the financial services sector. International competition continues to be very significant in this sector and we must constantly be vigilant and responsive.
Specific proposals have been lobbied for by the financial services industry – their appearance in the Finance Bill would be most welcome. |
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| Article appeared in the January 2007 issue.
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