Read the taxback.com breakdown and analysis of Budget 2012 courtesy of our Irish tax team.
In a break from tradition, Budget 2012 was delivered over 2 days with Part One delivered on Monday by Minister for Public Expenditure Brendan Howlin and Part 2 delivered by Minister for Finance Michael Noonan on a very significant day for Irish people – 6 December i.e. the 90th anniversary of the signing of the Anglo-Irish Treaty.
Budget 2012 is the first Budget to be announced by this Government and has been described by some as a tough but fair budget while many remain fearful as to the impact of the changes on their daily lives. Both ministers also paid tribute to the late Brian Lenihan who delivered last year’s Budget speech.
The Government has certainly made a strong statement in the restructuring of the delivery of the budget as the decision to separate the changes into 2 categories i.e. to look on one hand at what is coming in and on the other at what is going out would appear to most of us a sensible approach and not unlike how most businesses and homes are run.
As usual, we have examined the Budget measures in depth and provided below a short summary of the key areas of interest.
The Good News
Today’s budget has been much anticipated and talked about with some leaks in respect of the content and much speculation with regard to how the huge deficit target could be met. The Government has remained true to its promise in relation to no increases in income or corporate tax. Some predicted items such as an increase in the NPPR charge, a removal of mortgage interest relief and the introduction of PRSI on passive income did not happen.
We also escaped cuts in other reliefs. Once again, the Government has not touched relief on medical expenses. A removal of tax relief on tuition fees has not been mentioned. The minister did not mention a further reduction in the rent credit and said a number of times that employees should expect no change to their net pay in January.
As predicted, there was no change to income tax rates, bands or credits which means that net salaries will be the same in January as in December. This is much welcomed and will give people a feeling of security over the coming weeks and will limit uncertainty heading into the New Year. This also means that, to an extent, the impact of the tax changes will be under people’s control i.e. it will be based on the choices they make with regards to how they use their net income. However, the impact on net income as a result of the introduction of the household charge, increase in motor tax, VAT and excise increases cannot be dismissed.
The Universal Social Charge which was introduced in 2011 pulled low income earners into the tax net where they would not have paid tax before. This was seen as an unfair blow and the Minister addressed this in the Budget by increasing the threshold from €4,004 to €10,036 meaning those earning under €10,036 will escape the tax net in 2012 relieving some financial pressure on the lower paid. The impact of the USC will remain the same for those earning over €10,036.
The much talked about household charge has been introduced with a charge of €100 per household. The charge will not apply to those in receipt of mortgage interest supplement and those residing in certain unfinished housing estates. The charge will be an extra burden on those already struggling to meet mortgage repayments and get by on a daily basis. In addition, many people obtaining relief from the USC reduction above will be hit by this charge as there has been no mention of an exemption for those on low incomes.
Landlords are subject to this charge on their rental properties, greatly impacting financially strained landlords who have already been hit with the NPPR charge.
A point worth noting is that many people who bought properties at the peak of the boom were locked into paying crippling annual management charges for the upkeep of their area and now face paying this additional annual charge to their local authority.
The domicile levy has not made a significant impact to date. It has been reported that it has affected merely a dozen high earners so far. In the budget, the Government has tightened the rules, and the requirement that the levy can only apply to Irish citizens has been removed in the hope that a higher percentage of tax exiles will not dodge the levy. It remains to be seen how much revenue such a rule will generate but it was mentioned that there will be continuous review of tax exiles going forward.
SARP and FED
In a bid to incentivise employment and attract key people into Ireland, the Government has introduced Special Assignee Relief and brought back foreign earnings deduction.
Additional information will be released in the Finance Bill.
However, it is hoped that these initiatives will be less complex and more user friendly than the current SARP which applies to a small minority of assignees. In addition, the
idea of a remittance basis (on which the current SARP is structured) is now really a contradiction as it discourages people from spending in Ireland.
The announcement of the above two measures are much welcomed and are viewed as a very positive step by the Government to encourage inward investment in the country by multinational companies and to support companies seeking to expand into emerging markets.
An increase in the DIRT rate from 27% to 30% from January 2012 was announced. This is a tax on savings and while such an increase may have encouraged people to start spending, the hike in the VAT rate will now curb such spending as either way people are hit.
Therefore, while people may see no impact on their net pay in January it would appear that they will be caught for additional taxes no matter how they choose to utilise their money.
Currently, employees that are in receipt of investment income are not subject to PRSI on such income. It was anticipated that the employee PRSI would be extended to apply to rental income, dividend income and other investment income, however, this was not introduced for the year 2012 but the additional charge is likely to be introduced in 2013.
The Government targeted employers in the budget by removing the 50% relief on the employer PRSI charge which existed in respect of employee pension contributions. This will have a significant impact on employers who have been hit hard over the past number of budgets. Prior to 2011 full relief from employer PRSI was available in respect these contributions.
A positive move has been announced for certain first time buyers, whereby they will see an increase in their mortgage interest relief from 20% to 30% if they purchased their properties between 2004 and 2008. Individuals who purchased properties during the boom years are being heavily hit with repaying large mortgages on properties that are swimming in negative equity. It is somewhat comforting that the Government is addressing this, even in a small way, and giving mortgage holders that little extra room to breathe.
Where a property is purchased in the year 2012 the following applies:
- First time buyers can avail of relief of 25% on mortgage interest and
- Relief for other purchasers will be at 15%.
This keeps the relief in place as it would apply in 2011. However, we had been expecting a reduction in these rates based on the last Budget. Therefore, this is a welcome surprise for many and will serve as an encouragement for people to purchase property.
Property purchased from 2013 onwards will not qualify for the relief. Such measures have been made to kick-start the property market in 2012.
There was speculation that the Government would restrict the utilisation of Section 23 relief whereby the relief could only be used to reduce the rental profit of the Section 23 property to which the relief pertains. The introduction of such a measure would have been quite penal and so it was certainly welcoming for landlords that no such restriction was imposed.
In a move to tax the wealthy, the Government did however introduce a 5% surcharge on landlords with a gross annual income of over €100,000. Those with income under this level will not be caught for the surcharge. This is good news for many who chose to invest in the property market during the boom and are now struggling due to changes in personal circumstances.
Farming Taxation and Retirement Relief
In his speech, Minister Noonan said that he wants to encourage the timely transfer of farms and other family businesses to the next generation. In order to facilitate this and assist farmers in general, the following was announced:
- Enhanced stock relief of 50% (100% for young trained farmers) will apply until December 2015. This is subject to EU approval.
- Retirement relief will be maintained in full for individuals from 55 to 66 years of age for intra-family transfers allowing relief from Capital Gains tax on such transfers. An upper limit of €3m will be put in place for those over 66 years of age.
- The upper limit for transfers outside the family will be maintained also where the transferor is between 55 and 66
- Where the transferor is over 66 the €750,000 limit will be reduced to €500,000
- Transitional relief will apply in respect of the above changes
No changes were made to marginal tax relief for pension contributions, meaning that pension contributions continue to be a good option for people to reduce their tax liability and save for their retirement. This is much welcomed as there had been fears of the impact of the reductions to the relief suggested by the last Government not only in respect of the employees concerned but also the impact on the entire pension industry.
An increase from 5% to 6% in the annual imputed distribution was introduced for ARFs where the ARF asset values exceed €2 million.
The same annual increase will apply to vested PRSAs.
In an effort to stimulate the commercial property market the following was introduced:
- Stamp duty on commercial property transfers will be reduced from 6% to a single flat rate of 2%. This reduction also relates to farmland.
- Consanguinity relief will remain in place for commercial property intra-property transfers until 2014.
The above changes are very much welcomed as it is hoped that the stimulation of the property market will finally lead us back to growth. Michael Noonan has accepted that the impact of his strategy is not certain saying “They may not all work. But some certainly will”. However, he has certainly made many efforts in this budget to introduce measures to increase confidence across the country in relation to investment in property.
Capital Gains Tax
The Capital Gains tax rate has been increased from 25% to 30%. In a time where a significant number of people are not making any Capital Gains and if they are they have Capital losses to shelter such gains, it remains to be seen if the hike in this rate will generate the revenue projected by the Government.
Capital Acquisitions Tax
The Capital Acquisitions tax rate has been increased from 25% to 30%. In addition, the Group A threshold is being reduced from €332,084 to €250,000. This will affect gifts and inheritances from a parent to a child bringing a larger amount of such transactions into the tax net.
The introduction of the 30% rate across CAT, CGT and DIRT has meant that planning opportunities to reduce tax liabilities will be lesser. It is also worth noting that the 30% rate is also in line with the current effective tax rate for individuals affected by the high earners restriction.
It remains to be seen whether or not any additional taxes will be gained from these changes and it may be the case that the Government will need to further increase these rates in the future and consider some form of tiered rate basis in relation to the value of the gain.
With regard to the lowering of the Group A threshold, given the fact that many transfer to children are property transfers and the value of property has been dropping constantly it would seem like a reasonable move to make this change.
The 12.5% corporation tax rate remains untouched. It is important that Ireland remain competitive on an international level and continue to attract foreign direct investment and create jobs. Our low corporation tax rate is vital to our recovery and the Minister is adamant that it will not be increased.
In addition, the 3 Year Tax Relief for Start-up Companies has been extended to include start-up companies which commence a new trade in 2012, 2013 or 2014.
The expected increase in the standard VAT rate from 21% to 23% was announced. This increase was implemented by the Government as part of major austerity measures to meet the EU/IMF bailout criteria. It is not surprising that the Irish Government has taken this step when considering the fact that many EU countries are increasing their VAT rates as a means of raising capital to reduce budget deficits. Nonetheless, it is positive to see the new VAT rate capped at 23% in light of the fact that a number of EU Member States are seeking VAT rate increases up to as high as 27%.
The increase in the standard VAT rate will come into effect from 1st January 2012 and will immediately impact day-to-day expenditure such as fuel, phone charges, convenience food, confectionery products and alcohol. It will also impact on household goods such as TVs, laptops and furniture. However, essential food items such as milk, bread, meat and vegetables will not be affected by this increase. Whether or not the retailer passes on the VAT rate increase remains to be seen but given that margins may be very low, job losses may occur where retailers feel they are unable to pass on such costs to consumers.
The VAT rate deficit between the UK and Ireland will be raised to 3% due to the above increase and may encourage consumers cross the border to save on their shopping costs. However, the impact may not be as significant as it was a few years ago when specific conditions including a stronger Euro against the Pound and a higher VAT rate deficit of 6% (15% in UK to 21% in Ireland) resulted in a large cost difference between north and south.
Although it is unfortunate to see a substantial hike in the standard VAT rate, it could be argued that such a move is the lesser of two evils when considering the alternative of increasing the income tax rate. We cannot deny that the VAT rate increase will undoubtedly affect consumers and retailers alike but it will be an increase that is much easier to bear than the alternative.
Commencing 1 January 2012, motorists will be subject to increases in motor tax. This is a heavy hit, especially for those who purchased cleaner and greener cars with the promise of lower motor tax.
A betting duty of 1% is to be introduced for online betting.
Cigarettes and alcohol
A pack of cigarettes currently cost €8.65 and will now set you back €8.90 with an increase of 25c per box. No surprise here, a hike in the price of cigarettes is an easy target for the Government.
The price of alcohol will be subject to the VAT rate increase. An additional excise has not been implemented although the Minister did mention that low cost alcohol will be reviewed shortly.
Department of Social Protection Measures 1.4 billion euro worth of savings has been announced with the biggest cuts in the areas of Health, Social Welfare and Education. The Minister has not made cuts to the weekly social welfare payments. However, a number of measures were announced to include:
- Child benefit - the entitlement to the higher rate of payment for the 3rd and subsequent child is to be phased out over 2 years. Therefore, by 2014 the monthly payment per child will be the same regardless of the size of the family. For 2012 the monthly payment for the 3rd child has been reduced from €167 to €148 and the monthly payment for the 4th child has been reduced from €177 to €160.
- Back to School Clothing Allowance for 2 and 3 year olds is abolished and the payment rates for the over 4s has been reduced from €305 to €250 and €200 to €150
- The payment for jobseekers will be based on a five-day week rather than the existing six-day week basis where an individual is working for part of a week and from 2013 employment on a Sunday is to be taken into account when determining the level of entitlement
- The disability allowance for claimants aged 18 to 24 are to be reduced and aligned to the Jobseeker’s Allowance
- For new claimants of disability benefit the entitlement will be removed where the level of disability is classified as less than 15%
- The one-parent family payment will undergo a number of changes to include a restriction in the entitlement in cases where the youngest child is under 7 and a reduction in the earnings disregard from €146.50 to €60 per week
- The employer rebate in cases of redundancy will be reduced from 60% to 15%
- The fuel season will be reduced from 32 to 26 weeks meaning that anyone who currently qualifies for a fuel allowance will get it for 26 weeks, not 32 weeks
- The rent supplement and mortgage interest supplement will be restricted
The above changes are significant to many families and will no doubt hurt. The impact of the cuts in respect of child benefit and the back to school allowance will have a severe impact on those in receipt of such payments, in some cases pushing those on the edge of society into poverty. The changes in respect of disability allowance and fuel allowance will be viewed by many as harsh and hitting the most vulnerable in society. Following the outrage that arose as a result of the cuts to disability benefit there are, suggestions, today that this cut may be reversed.
The changes to the one parent family payment will be especially difficult if they are not coupled with back to work supports such as affordable childcare and education for those who have been out of the workforce for many years.
The changes to employer rebate in relation to statutory redundancy payments will undoubtedly have a negative impact on many employers who are already struggling.
Department of Health:
Cuts in expenditure have featured strongly in this budget and the Department of Health has taken its fair share of this burden. Some of the main items of interest are detailed below:
- The Drug Payment Scheme threshold will be increased from €120 to €132 per month
- Additional charges will be applied in respect of private beds in public hospitals
- Measures will be introduced to reduce the price of drugs and services
- Improvements in efficiencies in procurement will result in further savings
- Cuts in disability, mental health and children’s services will achieve further savings
- There will be cuts in staffing levels in the health service coupled with cuts in expenditure on agency staff and overtime payments
- The Long Stay Repayment scheme will come to an end
Minister Howlin was clear in advising of the need to reduce public spending. However, he said the Government couldn’t simply “abandon people who are dependent, sometimes critically, on public services”.
When we talk about health cuts, we usually find that these only really only affect people reliant on the public health system. However, in this instance this is not the case as the knock-on effect of the charges for beds in public hospitals will be an increase in the cost of private health insurance. We have already seen health insurances increases over the last year and circa 111,000 people have opted to cease their policies since the end of 2008 as they have been forced to take their chances with the public system.
With further increases of up to 50% anticipated it is likely that many more people will simply be unable to afford this cost as private health insurance for the average family will no longer be an option.
An influx of people into a public health system which is expected to incur €800m of cuts is not a pleasant thought. Hospitals experiencing staff cuts will be expected to cope with the increased demand. Will this force some excellent staff in the health sector to consider emigration as a means to fulfil their dreams?
The increase in the monthly threshold for prescription drugs will result in an additional annual cost of up to €144 for some families. While in isolation this figure does not appear significant, if we look at this alongside the child benefit cuts, medical insurance increases and VAT increases, it will undoubtedly have an effect on the average family.
One piece of good news in respect of health in the Budget was the introduction of free GP care for individuals on term illness schemes. This will not be introduced until March.
Department of Education and Skills:
Again, we see an additional burden being placed on the average family as a result of the cuts in education. While difficult times require harsh measures it would appear that the brunt of this is being borne by families, many of whom may already be struggling due to redundancy and/or pay cuts. The following is a summary of the proposed changes in respect of education
- The student contribution of €2,000 is to be increased by €250
- The primary school transport charge will be doubled from €50 to €100 with the maximum family payment increased to €220
- Post-primary schools will be required to manage guidance provision from within their existing pupil-teacher ratio
- Pupil-teacher ratio for fee charging post-primary schools will be increased
- The minimum number of pupils required for allocation of teaching posts will be increased in primary schools
- New post graduate students will experience changes in respect of fees and maintenance grants
- Core funding for higher education bodies will be reduced by 2%
- Funding in schools will be reduced in relation to the capitation grants, the supervision/substitution scheme and the abolishment of the modern languages in primary schools initiative
- Reduction to apprenticeship and training scheme costs
Families are being presented with additional costs in respect of transport for primary schools, higher level student contribution and in some cases loss of maintenance grants. In some cases difficult decisions may need to be made as to whether or not offspring can complete their courses. Many families are already struggling to pay the existing student contribution and are today fearful as to how they will find the additional money.
In these difficult times, finding employment with qualifications is difficult enough. Are many young people now being asked to find jobs without having the opportunity to complete their qualification?
When times were good we did see some investment into education which allowed many from less privileged backgrounds to avail of further education. While we are all aware that cuts need to be made there is a feeling that the Government is suggesting that those from less privileged backgrounds should be excluded from further education? This is not something that we would expect given the fact that we have a Labour Party in Government.