The Minister for Finance Paschal Donohoe presented his third Budget on Tuesday against the backdrop of continuing improved economic performance. Budget 2019 sees the distribution of the benefits of the improving economic conditions, mostly in the form of increased Government spending. Some of the key expenditure areas highlighted by the Minister included social and affordable housing, health and childcare, education, Brexit and climate change. On the tax front, there was a mixture of tax increases and modest tax reductions.
In the single biggest revenue raising measure announced in Budget 2019, the Minister confirmed that with effect from 1 January 2019 he is reinstating the 13.5% VAT rate for the tourism and hospitality sector. A reduced rate of 9% had been introduced in 2011 in an effort to help stimulate the creation of jobs within the sector. A Department of Finance study into this measure published in 2018 concluded that the benefits of the reduced rate no longer outweighed the cost of VAT receipts foregone.
Suppliers of these goods and services will need to consider the impact of the higher VAT rate on their pricing. In addition, as the VAT charged on hotels, restaurants and other entertainment is generally non-deductible, business purchasers of these services will also suffer an increased cost. The changes will also impact on certain other supplies including hairdressing and cinema tickets.
The excise duty on a packet of 20 cigarettes increased by 50 cent including VAT, with a pro-rata increase on other tobacco products, and an additional 25 cent on roll your own tobacco products. The Minister also announced that the minimum excise on tobacco products will rise so that all cigarettes sold below €11 will have the same excise applied as more expensive ones. These changes are effective from midnight on Budget day. There were no increases in excise on alcohol, diesel or petrol, and motor tax rates also remain unchanged.
The Minister announced an increase in the rate of betting duty from 1% to 2% for bets placed by customers in the State. In addition, betting duty on the commission earned by betting intermediaries and exchanges will increase from 15% to 25%. Both measures are to take effect from 1 January 2019.
As anticipated, from 1 January 2019 there will be a 0.1% increase in the National Training Fund levy payable by employers. This increase represents an additional cost for employers, given that it is collected as part of Employer’s PRSI. The current rate of Employer’s PRSI of 10.85% will increase to 10.95% from 1 January 2019 with a similar rate increase signalled for 2020.
While there was no increase in the excise rate on diesel, the Minister announced the introduction of a 1% VRT surcharge on all new diesel engine cars registered in the State from 1 January 2019.
Personal Tax Matters
Income Tax Bands – The standard income tax rate bands will increase by €750, from €34,550 to €35,300 for single individuals and from €43,550 to €44,300 in the case of married one earner couples. The maximum annual benefit of this increase amounts to €150 (€300 for a dual income household ).
Universal Social Charge (USC ) - The 2019 USC rates and bands have been changed as follows.
These USC changes should benefit the majority of taxpayers albeit the maximum benefit to any one individual is limited to €140 per annum. However, it is noteworthy that these adjustments in tandem with the aforementioned income tax rate band changes are the most costly fiscal measures announced in Budget 2019.
Home Carer Tax Credit – This credit has been increased from €1,200 to €1,500.
Earned Income Credit – This credit which was introduced in 2016 for self-employed individuals and those not eligible for the PAYE Tax Credit has been further increased from €1,150 to €1,350. However, the increased Earned Income Credit is still €300 lower than the corresponding PAYE credit available to most employees.
There were no other changes announced in connection with income tax rates or tax credits.
Social Welfare & Related Measures
All social welfare payments including State pensions will increase by €5 per week from March 2019. In addition, the Christmas bonus is being fully restored for all social welfare recipients this year.
The Minister also announced increases to qualified child allowances for parent’s dependant on social welfare of €2.20 per week for children up to 12 years of age and €5.20 for children over 12 years of age.
An increase in the back to school clothing and footwear allowance of €25 was also announced.
The hourly minimum wage rate has been increased by 25 cent to €9.80 with effect from 1 January 2019.
A new paid parental leave scheme is being introduced in November 2019 to provide two extra weeks leave to every parent of a child in their first year. The Minister announced his intention to increase this to seven weeks leave over time.
A €25 increase in the weekly income threshold for GP visit cards was announced. In addition, prescription charges for all medical card holders over 70 years of age have been reduced from €2.00 to €1.50 per item, with the monthly threshold for the Drugs Payment Scheme also being reduced from €134 to €124.
The thresholds for the Affordable Childcare Scheme are being increased for 2019.
The Minister reiterated the Government’s longstanding commitment to the 12.5% corporation tax rate.
From 1 January 2019, the weekly income threshold for the higher rate of Employer’s PRSI will increase from €376 to €386. This measure should partially offset the increase in the hourly minimum wage costs payable by employers.
The Minister in recognising the importance of SMEs to the economy, announced;
Modifications to the Key Employee Engagement Programme (KEEP ) share option scheme which had been introduced last year. In his Budget speech the Minister acknowledged that the level of interest in the KEEP incentive had been less than expected, and announced a number of changes which he hoped would improve the take-up of the incentive. The main measures announced included;
An increase in the ceiling on the maximum annual market value of share options that may be awarded to 100% of the annual emoluments of the employee in the year in which the option is granted (up from 50% ).
In addition, the overall value of share options that may be awarded to each employee will increase from €250,000 to €300,000, while also changing the time period in which this limit applies from three consecutive years to a lifetime limit.
We understand that a number of stakeholders, including KPMG, had made pre-Budget submissions recommending further amendments aimed at making the KEEP incentive more workable in practice.
The intention to introduce a priority package of measures in the Finance Bill to improve the operation of the Employment and Investment Incentive Scheme (EIIS ) was announced. This follows a recent review of this incentive.
An extension of the three year relief for certain start-up companies until the end of 2021.
In recognising the increasing importance of crowdfunding, an intention, in conjunction with the Central Bank, of considering the introduction of relieving measures from withholding tax obligations for peer to peer lending activities. Existing legislation requires the deduction of income tax at the standard rate, currently 20% unless an exemption applies.
As signalled in Budget 2018, the Minister confirmed the introduction of new Controlled Foreign Company (CFC ) rules in line with the Anti-Tax Avoidance Directive (ATAD ). These measures will come into effect for accounting periods commencing on or after 1 January 2019.
Furthermore, from midnight on Budget day, a new ATAD compliant exit tax regime was introduced. The exit tax applies at a rate of 12.5%. The regime will tax unrealised capital gains on capital assets where there is a migration of residency or a transfer of Irish Branch assets offshore.
Separately, the Minister announced that he is retaining the 9% rate of VAT for newspapers and sporting facilities. In addition, and notably, the VAT rate for electronic publications such as e-books and digitally supplied newspapers will be reduced from 23% to 9%. This follows a recent agreement in the EU Council to allow Member States apply reduced VAT rates on digital publications.
Climate Change Measures
New measures announced included;
The extension of VRT relief for hybrid and plug-in hybrid vehicles for a period of one year until the end of 2019.
The extension of a 0% benefit-in-kind rate for electric vehicles for a period of three years on vehicles costing up to €50,000.
There will be a new accelerated capital allowances scheme for gas-propelled vehicles and refueling equipment. This is designed to encourage the uptake of gas-propelled commercial vehicles as an economic and environmentally friendly alternative to diesel.
The introduction of a Beef Environmental Efficiency Pilot to further improve the carbon efficiency of beef production.
Despite speculation, there was no increase in the rate of carbon tax announced in the Budget. However, the Minister stated his intention to set out a long term trajectory for carbon tax increases out to 2030.
The Minister acknowledged the difficulties posed for the sector by Brexit and also recognised that 2018 had been a difficult year for farmers. In that context, the Minister announced an extension of the stock relief provisions for a further three years until the end of 2021. Improvements to income averaging provisions and a three-year extension of the ‘Young Trained Farmer’ stamp duty relief were also announced.
Capital Taxes & Housing
Capital Acquisitions Tax - The current tax-free threshold which applies to gifts and inheritances from parents to children was increased by €10,000 to €320,000 with effect from 10 October 2018. This increase is small and there is a long way to go in restoring the threshold to previous levels which were in excess of €500,000 before the financial crisis.
The Minister announced an acceleration in the amount of interest that may be deductible by landlords in respect of loans used to purchase, improve or repair a rented residential property. As a result of these changes, relief of 100% of the interest can be deductible in calculating taxable rental income with effect from 1 January 2019.
Rainy Day Fund
The Minister in commenting on
the open nature of the Irish economy, combined with the potential disproportionate impact on Ireland of international economic and political shocks, announced the initial seeding of a Rainy Day Fund. The fund will be capitalised with €1.5bn and supplemented thereafter with a €500m annual exchequer contribution.
This article was compiled by Terri Treacy, Paul Macken and Leah Kerr of KPMG, Dockgate, Dock Road, Galway. Tel: 091-534600. For further information on Budget 2019 log on to: kpmg.ie/budget2019