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:
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?
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.
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.
We would like to see other key tax measures relevant to Irish business provided for and enhanced in Budget 2021 including:
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.
For more information on any of the items on our Budget 2021 wishlist, please contact Olivia Lynch, Tax Partner.