Budget 2012 is unique in that the proposed expenditure cuts were announced a day ahead of the tax changes and also many of its provisions were well flagged ahead of Budget Day. The financial adjustment was set at €3.8bn with €2.2bn coming from expenditure cuts and €1.6bn coming from increased taxation. Despite all the advance leaks and speculation the Minister managed to keep a number of the changes secret until the Budget Speech especially in the area of incentives to business and measures to kick start the property market.
Commenting on the tax changes in Budget 2012 Mairead O’Grady, taxation partner of Russell Brennan Keane said that “the Minister has repeated his stated policy of not increasing the rates of income tax but instead he focused on indirect taxes and on broadening the tax base. He was very reassuring in terms of maintaining the 12.5 per cent Corporation Tax rate. He surprised many with the changes designed to help companies to export; the special assignee relief and the measures to try to assist the property market. The expected increases in VAT (but no further increases during the term of the Government ) and the increased rate of 30 per cent on capital taxes were confirmed.”
Speaking at the briefing, Simon Barry, chief economist, Republic of Ireland, Ulster Bank, said: “Budget 2012 was the first instalment in a planned total correction of €10.4bn over the 2012 to 2014 period - slightly more than, but very close to, the €9.8bn outlined in last year’s National Recovery Plan. Following the €21 billion in corrective measures, which have already been implemented over the past three and a half years, there were no easy targets left on either the tax or spending sides for Budget 2012. As pre-announced, Mr Noonan achieved over half of his package of new tax measures via a two-point hike in the top rate of VAT, while Mr Howlin provided some protection to the social welfare budget, in a relative sense at least, partly at the expense of a disproportionate reduction in health spending.
“While it is just over four weeks since the Department of Finance provided a comprehensive assessment of the economic outlook, the Budget contained a downgrade to the Department’s view on the economic outlook for next year. The economy is now projected to expand by 1.3 per cent in real GDP terms, down from the estimated 1.6per cent in early November.
A slightly weaker international economic outlook is resulting in weaker export growth which is now seen at 3.6 per cent, down from 3.8 per cent. However, the biggest changes in the forecast come in consumer spending which is expected to post a fifth consecutive annual decline. The forecast drop is now put at 1.3 per cent for next year, down from a fall of 1 per cent pencilled in last month, partly reflecting the negative impact on purchasing power of the budgetary changes in indirect taxation, including the two-point hike in the top rate of VAT,” Simon Barry concluded.
The Minister said that Budget changes the economic strategy to put a much greater focus on growth and employment. It balances the need to restore confidence in Ireland's fiscal position with the key objective of supporting economic growth that delivers jobs.
Commenting further on these measures Mairead O’Grady said “The changes to the property reliefs signalled in last year’s Budget have effectively been abandoned by the Minister and the current position will remain unchanged until 2014. This is to be welcomed as those who are in negative equity will have time to assess the impact for them and plan accordingly. The incentives to export-orientated companies; the changes to encourage earlier transfer of businesses and confirmation that there will be no further changes to VAT are also to be welcomed. However it will be some time before we can assess whether the efforts of the Minster are enough to bring about growth leading to increases in employment.”
A summary of the major changes introduced by the Minister are as follows:
The first €100,000 of R&D expenditure of all companies will be allowed on a volume basis for the purpose of the R&D Tax Credit.
The outsourcing arrangements for R&D purposes to be improved.
There will be an option to use some portion of the R&D credit to reward key employees who have been involved in the development of R&D.
The corporate tax exemption for new start-up companies is being extended for the next three years.
The introduction of a Special Assignee Relief Programme.
Smaller companies will also be able to avail of the planned foreign earnings deduction where they plan to expand their export markets into the BRICS countries.
No change in the 12.5 per cent Corporate Tax Rate.
No changes in the rates; credits or allowances for income tax.
IFSC - new package of incentives to be introduced.
First time buyers will get mortgage interest relief at a rate of 25 per cent with non-first time buyers will benefit from relief at 15 per cent.
A surcharge of 5 per cent (essentially a higher rate of USC ) to apply from 1 January 2012 to income in excess of €100,000. This will only apply to individuals and to income which has been sheltered by property reliefs.
Investors in accelerated schemes will no longer be able to use any allowances beyond the tax life of the scheme where the tax life ends after 1 Jan 2015.
Stamp duty on commercial property reduced to 2 per cent with effect from December 6, 2012.
The household charge to be introduced for 2012 with some limited exemptions.
Capital Acquisitions Tax increased to 30 per cent and exempt thresholds reduced from €332,084 to €250,000 and proportionate reductions in other threshold exemptions.
Capital Gains Tax rate to increase from 25 per cent to 30 per cent from December 6, 2012.
There will be a special new exemption from Capital Gains Tax (CGT ) on properties bought ffrom December 6, 2011 to the end of 2013. Where such properties are held for seven years the gains accrued in that period will not attract CGT.
Deposit Interest Retention Tax (DIRT ) to increase to 30 per cent.
VAT to increase from 21 per cent to 23 per cent effective from January 1 2012.
New incentives to encourage the transfer of businesses and farms earlier.
The Government has seemed to abandon the proposed legislation on the upward only rent reviews and instead NAMA will provide certain reliefs for the properties that it controls.
For more information please contact Mairead O’Grady on (01 ) 6440100/ (090 ) 6480600 or email [email protected].