Overview of 4 Year Recovery Plan Taxation Impact
* An extra €1.875 billion sought via income tax changes
* Tax bands and credits to be reduced by 16.5% by 2014, with frontloading in 2011
* Significant reforms of Capital Acquisitions Tax (CAT) and Capital Gains Tax (CGT)
* Pension related changes totaling €700 million
* Abolition and restriction of many reliefs
* Introduction of a site value tax in 2012
* A 1% increase in the standard VAT rate in 2013 and 2014 i.e a rate of 23% in 2014
“All sectors of Irish society are being asked to share the burden of these revenue generating measures, which must restore growth and create jobs if the reforms are to have been worthwhile.”
Increased Personal Taxes
Rates of Income Tax Remain Unchanged
There have been no changes to the standard or marginal rates of income tax. The Plan notes that the structural problems of the income tax system need to be confronted and that excessively high marginal tax rates “damage economic activity.”
Bands and Credits to be Reduced by 16.5% by 2014
The report highlights that the overall burden and incidence of income tax has fallen increasingly on a relatively small number of taxpayers. For 2010 they estimate that just 8% of taxpayers are paying 60% of all income tax. The Plan proposes to rebase the income tax system at approximately 2006 levels through a reduction of 16.5% in the value of the tax credits and bands by 2014.
A 10% reduction in the standard rate band and the tax credits is proposed for 2011. This will be followed by a 2.5% reduction in 2012 and further 2% for 2013 and 2014.
An example of how the changes impact on net pay is included on page 102 of the Plan. Net pay for a single person on income of €55,000 will be reduced by €1,860 per annum by 2014. The net pay for a married one-income family on €55,000 will be reduced by €2,310 per annum.
Move to a Standard Rate for Pension Relief and Abolition of PRSI and Health Levy Relief
A number of significant changes have been proposed in relation to pension relief.
* Relief for employee PRSI and Health Levy for pension contributions is to be eliminated for contributions in 2011
* The annual earnings cap for employee/personal pension contributions is to be reduced from €150,000 to €115,000
* The maximum allowable lifetime limit for a tax-relieved pension fund i.e. the Standard Fund Threshold is to be reduced.
For 2012 to 2014 the rate of income tax relief will be reduced significantly to 34% in 2012, 27% in 2013 and 20% in 2014.
The Plan notes that the Government is committed to raising €700 million from the pension area over the term of the Plan and that they are willing to engage with the industry to examine alternatives to their proposals to deliver this outcome.
Abolition of 10 Tax Expenditures
The following expenditures are to be abolished in 2011:
* Tax exemption for patent royalties
* Investment allowance for machinery and plant and for exploration expenditure
* Approved Share Option Schemes
* BIK exemption on employer provided childcare
* The accelerated allowance for capital expenditure on farm buildings for pollution control
* The tax exemption for payments to National Co-operative Farm Relief Services Ltd
* Income tax relief for trade union subscriptions
The income tax Age Credit and Age exemptions are to be phased out over 4 years. Income tax relief for rent paid for private accommodation is to be phased out also. The timeline for phasing out the relief is to be in line with the abolition of Mortgage Interest Relief which is to be abolished completely from 2018 on.
Significant Restrictions to Share Schemes and Artists Exemption
A number of other expenditures will be curtailed or restricted as follows:
* Artist’s exemption for Income Tax (Exemption restricted to €40,000 earnings)
* PRSI, Health and Income Levy charge on Approved Profit Sharing Schemes
* PRSI, Health and Income Levy charge on Approved Save-As-You-Earn Schemes
* PRSI, Health Levy charges for Unapproved Share Options
* PRSI, Health Levy charge for Share Awards
* Ex-gratia termination and pension lump sum payments in excess of €200,000 to be taxed.
Legacy Property Based Reliefs to be Phased Out
The Government stated its commitment to phase out legacy property based reliefs, costing €400 million, over the period of the Plan. It is not clear from the Plan as to how this is to be achieved.
No Changes to Mortgage Interest Relief
No changes were introduced to mortgage interest relief for principal or rented residential properties.
Proposals for Child Benefit to be Replaced by One Single Payment Rate per Child
It has been proposed to develop a rebalanced and integrated child income support payment system. The current child benefit would be replaced with one single payment rate per child in contrast to the current system with graduated rates for third or further children. Supplemental payments are to be provided for children in low income families.
No Change to the 12.5% Corporation Tax Rate
The Government’s commitment to the 12.5% rate of tax on trading profits remains.
Proposals for Reform of BES
The Plan recognises the importance of the role of SMEs in Ireland’s economy and proposes some positive changes to the current BES Scheme. A better-focussed “Business Investments Targeting Employment Scheme” (BITES), which will have a simple and efficient certification process, is to be developed. The maximum amount that can be raised by companies in a 12 month period is to be increased significantly as will the lifetime amount that can be raised per company. The proposals reflect a number of points which the Institute has raised through our representations to the Department of Finance
Employer Exemption from PRSI
Scheme for Exemption to be Extended to 2011
A scheme to exempt employers from Employers’ PRSI on the engagement of unemployed individuals was introduced in July 2010. This scheme, details of which are available on the website of the Department of Social Protection www.welfare.ie , is to be extended to those recruited in 2011.
Structural Reforms to CGT to be Rolled Out in 2012
The base for CGT is to be broadened and the levels of reliefs and exemptions will be reduced. In place of the single rate of CGT, a new system with differing rates for different level of gains will be introduced from 2012.
Structural Reforms and Review of Thresholds for CAT
The base for CAT is to also to be broadened and the level of reliefs and exemptions applicable to be reduced. As for CGT, the current single rate of 25% is to be changed to a system with different rates for different levels of asset values. The current tax-free thresholds are to be reduced.
Stamp Duty Reliefs and Exemptions to be Abolished or Reduced
Reliefs and exemptions from Stamp Duty are to be abolished or greatly reduced. No specific details are available at this point.
Water Metering to be introduced by 2014
Water Metering is to be introduced by 2014. The Plan notes that part of the expenditure savings package will arise from a scheme for the metering and charging for domestic water. It is intended that the domestic water charges will cover local authorities’ operational costs and a proportion of the capital costs of providing water. No specific revenue yield has been attributed to water charges.
Site Value Tax to be Introduced
A value–based Site Tax is to be rolled out in 2013 to fund local Government. As an interim measure a fixed Site Tax of €100 is to be introduced in 2012. It will be applicable to all land other than agricultural land and land subject to commercial rates. Establishing a reliable and understandable valuation base is not an insignificant task.
VAT Rate to Increase to 23% by 2014
The standard rate of VAT is to be increased by 1% in 2013 to 22%.
The rate will be further increased to 23% in 2014. VAT rates generally are on the rise in the EU at the moment, 7 member states have a rate above our 21% rate.
Carbon Tax to Double by 2014
A carbon tax of €15 per tonne was introduced in the 2010 Budget. It is proposed that over the period of the Plan that the price of carbon will be doubled to €30 per tonne by way of a €10 increase in 2012 and €5 increase in 2014.
VRT and Motor Tax
The Government revised the VRT and Motor Tax systems to be based on CO2 emissions rather than engine size, with effect from 1 July 2008. During the term of the plan the current CO2 and bands and rates structures will be examined with a view to adjusting the bands in line with technological advances on 1 January 2013.
A number of changes are to be made to excise duties and licences in 2011 to the value of €110 million.