This year the Minister for Finance faces an extremely difficult task in framing Budget 2021. This Budget will be like no other with a key priority being to formulate a budget to provide support for areas most in need, but with a clear shift in budgetary and fiscal policy towards supporting economic recovery and away from the damage limitation phase, writes Olivia Lynch, Tax Partner.

This Budget is being formulated against the backdrop of two key ongoing challenges for Irish businesses:

  1. The unprecedented economic damage and societal shock being caused by the pandemic, and
  2. The increasing prospect of a no deal Brexit

Importantly, the Government has already delivered circa €24.5 billion of support measures to date, with the July Stimulus Package totalling €7.4 billion alone, the largest single economic stimulus in the history of the State.

There has never been a more critical time to use all the tools of fiscal policy to support economic activity and innovation in Irish businesses to stimulate growth and employment.

So - what will this mean for Irish businesses?

Entrepreneur relief

Irish entrepreneurs take serious financial risk on a daily basis in running their business, and we would again call for the Irish tax regime to recognise and reward this. There should be no question that the Entrepreneur relief, which is a 10% CGT rate on the first €1m of gain, should be retained and enhanced from its current limit, and that the same rate should be extended to apply to dividend payments from Irish companies in certain circumstances.

The rumoured reduction in the main CGT rate from 33% would be a welcome move and should hopefully stimulate more investment into Irish businesses. However, such a reduction in the rate of CGT, which is among the highest in Europe, cannot come at the cost of existing tax reliefs, particularly those targeted at the transfer of businesses from one generation to another. In fact, we would see the need for certain reliefs to be enhanced to support intergenerational transfers, for example the CGT relief on transferring to the next generation only applies up to age 66, resulting in either businesses being transferred prematurely to avail of the relief, or worse still, the key milestone being missed and the business sitting with the older generation for too long as the tax cost on transfer would be prohibitive.         

Universal Social Charge (USC) & Pay Related Social Insurance (PRSI)

The good news is that the Minister for Finance is firm in his commitment that there will be no increase to income tax in this Budget. There was also a welcome recognition in the Programme for Government that the income tax rate differential between employees and the self-employed of 3% should be reduced over time.

But, there is concern about the proposed increase in PRSI for the self-employed from 4% to 5.75% (ultimately rising to 11.05% by Budget 2024). This would impact for example farmers, self-employed individuals and professionals like doctors, dentists, solicitors, proprietary directors. In addition, the Minister has signalled a potential increase to all classes of PRSI in the near future, to be used to help replenish the Social Insurance Fund.

What would we like to see?

We would like to see other key tax measures relevant to Irish business provided for and enhanced in Budget 2021 including:

  1. Further developments and improvements to the R&D tax credit, which will allow for it to become more accessible to businesses of all sizes. We would also like to see an interim extension of the current Knowledge Development Box regime, which is due to expire on 31 December 2020. This would allow more data to be gathered on the operation of the regime currently in place, which would help when considering if and how the regime could be amended to improve uptake.
  2. Supports on the people front at a time when businesses will be leaning heavily on their staff - to help build new markets abroad through innovation and to help digitise their business - all against the back drop of us navigating this great remote working experiment we have found ourselves in. Therefore, enhancing measures for employers such as the share incentive scheme for SMEs called KEEP and introducing tax reliefs for investment in remote working would be welcome.
  3. Equally important would be measures to encourage funding into Irish businesses, for example looking at ways to improve the existing EIIS relief to allow founders and other connected parties invest in Irish businesses. 
  4. Tax policy also plays its role in the Green agenda. With a Government that is the greenest in our history, and the buy in from Irish businesses keen to play their part, it is important that this Budget is creative with measures to encourage investment in green energy.
  5. We would encourage the further targeted reduction of the VAT rates, which has been temporarily introduced as part of the July Stimulus Package. We welcome the Tax Strategy Group consideration of the option to reduce the VAT rate to 9% on food, accommodation and similar goods and services. We believe that this would be a significant stimulus to demand in this sector, in particular for consumers looking to avail of this saving in conjunction with the new “staycation” tax credit announced as part of the July Stimulus Package.
  6. The Budget 2021 Tax Strategy Group papers analyse the potential revenue raised on increasing the current CAT rate of 33%, and also on reducing the group thresholds available to individuals. We would caution against such measures, given the already much decreased thresholds from their height in 2009 (for example Group A - €542,544 versus €335,000 at present) and the corresponding increase in the CAT rate from 20% in 2008 to 33% now. The tax regime should encourage the passing of value to the next generation and further potential changes as outlined above would inevitably act as a deterrent to such transfers.
  7.  The July Stimulus Package also introduced welcome provisions for the carry back of loss reliefs for the self-employed. We would suggest that this should not simply be a COVID-19 specific measure, and instead should be a permanent feature of Ireland’s income tax regime, as is already the case for corporation tax.
  8.  To remind people of several other key measures announced in July:
    1.  The Temporary Wage Subsidy Scheme (TWSS) was replaced with the Employment Wage Subsidy scheme in September and it will run to 31 March 2021. So far in excess of 36,000 employers have registered for this latest scheme, and as a welcome enhancement it has been extended to proprietary directors.
    2. Debt warehousing provisions have been introduced for PAYE/PRSI and VAT labilities to allow the debt associated with the COVID-19 crisis be deferred interest free for at least one year after the business resumes trading, with a reduced 3% interest rate thereafter.
  9. We would caution though that transitional measures to phase businesses from these supports also need to be introduced to avoid the potential damaging cliff effect when TWSS falls away, employers need to revert to paying full rate employer PRSI of 11% and then warehoused debts become payable.
  10. We would strongly advise Irish businesses to be fully aware of all of the various COVID-related tax and funding measures that have been introduced over the last 6 months. These will be essential lifelines for many businesses that are at present struggling not because of being unviable or any drop in market demand, but rather as a result of significant economic challenges arising from restrained trading conditions such as social distancing rules, limitations on travel to and around the country, and temporary forced shuttering of businesses. 

Creativity required

This Budget needs to deliver on a fine balancing act between being creative with tax policy to support Irish businesses in the near term, while also laying out the path to collecting more revenues in the long term. It also needs to identify measures to tap into the significant savings that some taxpayers have accumulated through the crisis and encourage spending and investment.

By doing so, it should also help Irish businesses to continue to innovate and find ways to succeed, despite the challenging circumstances. We view this continuing dedication to innovation as the key path to recovery for many Irish businesses, including those who are willing and able to invest in R&D and technology, while keeping in touch with the market to identify emerging trends and opportunities for growth.

We really hope that the Minister recognises the breadth and depth of challenges facing Irish businesses and introduces a range of measures to encourage investment, innovation, growth and employment by Irish businesses as they are the backbone of the Irish economy and a critical part of our road to recovery. 

Get in touch

For more information on any of the items on our Budget 2021 wishlist, please contact Olivia Lynch, Tax Partner.