Budget 2018 – Steady as she goes?

11 October 2017

Paschal Donoghue delivered his first budget yesterday, 10 October 2017. In a budget which proposes to balance Ireland Inc.’s books in 2018, his stated aims are: safeguard the national finances and help re-balance the economy; promote fairness and provide for sustained improvements in people’s lives and make sensible and long-term investments.

Some key budget commitments:

Future proofing – the establishment of “a rainy-day fund” with an initial transfer from the strategic investment fund of €1.5 billion.

  • • Brexit – the allocation for additional capital expenditure €4.3 billion over the next four years to respond to Brexit and allow agencies to properly plan major infrastructure projects. The Minister has also announced a Brexit Loan Scheme of up to €300 million to be made available at competitive rates to SME’s, including food businesses, helping them with their short term working capital needs. A further €25 million has been provided to the Minister for Agriculture, Food and the Marine, to provide for the development of further Brexit Response Loan Schemes to the agri-food sector.
  • Housing Crises – €1.83 billion allocated for housing in 2018 including commitments to accelerate the delivery of social housing in 2018 and 2019, an increase to the housing assistance payment scheme by €149 million, and increased funding for homeless services by €18 million.
  • €750 million investment from the Ireland Strategic Investment Fund to be made available to a new vehicle, the Home Build and Finance Ireland, which will increase the availability of debt funding for commercial investment and housing finance.
  • Additional funding for healthcare including an additional allocation for the National Treatment Purchase Fund, reduction in prescription charges for medical card holders and a reduction in the threshold for the drugs payment scheme, continued investment in primary care and critical infrastructure including the delivery of the national children’s hospital project and other investments.
  • Education spending increases for 2018 of over €10 billion and a commitment to reduce the teacher ratio at primary levels to 26:1.

Taxation changes to Property transactions

A carrot and stick approach has been adopted to encourage residential housing whilst trying to stop other building and construction from overheating.

Carrots:

  • The 7-year period required to retain qualifying assets to enjoy full relief from Capital Gains Tax under Section 604A reduced to 4 years – to encourage land to be freed up for development.
  • Pre-letting expenses – rented residential property – a new deduction of up to €5,000 per property to be introduced in respect of pre-letting expenses of a revenue nature incurred on a property that has been vacant for a period of 12 months or more, provided the property is available on the rental market for 4 years. This document is intended to provide a general overview and guidance on a particular topic. It is provided wholly without any liability or responsibility on the part of Eugene F. Collins and does not replace the necessity to obtain specific legal advice. © Eugene F. Collins 2017
  • Commercial land purchased for the development of housing will be eligible for a stamp duty refund scheme to address the housing supply challenge and one of the conditions for refunds will be the commencement of development within 30 months of the land purchase.

Sticks:

  • Stamp duty on commercial property transactions has been increased from 2% to 6% with effect from midnight, 10 October 2017. However, a refund scheme will apply for commercial land used for residential development.
  • The vacant site levy is being increased from 3% in the first year to 7% in the second and subsequent years.

Employee Benefits

  • Various increases in bands and small reductions in the percentage of USC chargeable at certain bands have been introduced with the aim of insuring that those earning an average wage are not charged the higher rate of tax. The top marginal rate of tax and income up to €70,044 has come down to 48.75%.
  • The earned income credit (for self-employed) has increased by €200 to €1,150 a year, still €500 less than the PAYE tax credit.
  • Key employee engagement programme (KEEP)– a new share remuneration incentive to enable unquoted SME companies to incentivise and retain key employees is to be introduced. The incentive will allow employees pay capital gains tax on the disposal of shares acquired in the exercise of KEEP share options instead of the current liability to income tax, USC and PRSI on the exercise of share options. This incentive will be available for qualifying share options granted between 1 January 2018 and 31 December 2023.
  • An interesting incentive to encourage the take up of electric vehicles proposes a 0% rate of benefit in kind to be introduced in 2018 for electric vehicles. Similarly, the provision of electric charging stations for use by employees in the work place will be exempt from benefit in kind.

VAT

  • the VAT rate for the tourism and services sector remains unchanged.
  • VAT on sunbed services is being increased to 23% from 13.5%.
  • a scheme will be introduced in 2019 to compensate charities for input VAT incurred based on the level of non-public funding they receive.

Miscellaneous

  • Excise duty has been increased on tobacco products with an additional duty of 50 cent per pack of 20 cigarettes.
  • A new tax on sugar, sweets and drinks is being introduced at a rate of 30 cent per litre on drinks with over 8 grams of sugar per 100 ml and 20 cent per litre on drinks with between 5 and 8 grams of sugar per 100 ml.
  • The leasing of no more than 50% of total farm holdings for solar panels shall now be classified as qualifying agricultural activity for purposes of Capital Acquisitions Tax and Capital Gains Tax.
  • Capital allowances for intangible assets and related interest expense will be limited to 80% of the relevant income arising from the intangible asset in the accounting period.

Comment

The proposed new Key Employee Engagement Programme (“KEEP”) could be an exciting opportunity for employers in SMEs to reward and incentivise staff. It remains to be seen what conditions will need to be met before a share option qualifies as a KEEP share option. Previous share remuneration schemes were usually directed at employee-wide participation schemes rather than “key employees”. SME’s will frequently want to provide share options to consultants and non-executive directors who often take on greater roles and responsibilities in an SME context for less remuneration than they might get elsewhere. It is to be hoped that the conditions for qualification for employee share options will not be so restrictive as to prevent companies from being able to implement flexible incentive schemes suitable to their situation to avail of the tax relief.

The increase in stamp duty on commercial property transactions is a significant hike and whilst an increase was expected (having come down from 9% at the peak) a tripling of the rate is severe and is greater than the 5% rate in the UK. EFC will be concerned to see whether “grandfathering” provisions will be applied to ensure that people who entered into contracts before budget dates are not exposed to higher rates on closing transactions they are bound into. On the other hand, some clients may welcome the opportunity to dispose of land now rather than hold onto it for a further three years.

It remains to be seen whether the carrot and stick approach to property taxes will have the desired effect of increasing housing supply. The 5% difference between stamp duty on share transfers (1%) and the new 6% duty may also transacting in land deals through corporate structures.

For further information on this topic please contact:

Nicola McGrath
Partner Corporate & Banking
Direct +353 1 202 6459
Email: nmcgrath@efc.ie

Maura Connolly
Partner Employment & Employee Benefits
Direct +353 1 202 6505
Email: mconnolly@efc.ie

Mark Walsh
Partner Property & Construction
Direct +353 1 202 6414
Email: mwalsh@efc.ie

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