Tuesday 16 July 2019

Liam Lynch: Brexit meant ‘business as usual’ was not an option for the Finance Minister

Minister Of Finance Paschal Donohoe addresses the media at Budget 2019 is launched. Photo: Garrett White/Collins Photo Agency
Minister Of Finance Paschal Donohoe addresses the media at Budget 2019 is launched. Photo: Garrett White/Collins Photo Agency

Liam Lynch

When it comes to talking about this Budget, context is all important. This is not business-as-usual, even ignoring any talk of elections or political manoeuvrings.

We are approaching a nexus in history. Our relationship with our closest trading party lies in the balance. Next March, Brexit will land one way or another.

The pace of change in the international tax landscape is unprecedented. There is significant EU tax law that must be implemented in Ireland over the next few years.

The trade and tax policies of the US, still the largest economy on the face of the planet, are reverberating worldwide.

Economic growth figures for Ireland appear extremely healthy and unemployment continues to reduce.

However, there is anecdotal evidence of increased manufacturing, lengthening supply chains and build-up of stock as a hedge in case of a hard Brexit. This increase in activity brings with it a risk of reduced activity after next March, which would have a knock-on impact on Budget 2020.

At the same time, we face significant infrastructure challenges, not least in housing, transport and climate change. All of these attracted significant spending commitments, and significant focus on Brexit, especially for the SME and agri-business sectors, was evident in the growth loans and human capital initiatives.

It is also welcome in facing these challenges to see the NTMA issue Ireland's first sovereign green bonds, and interest relief for landlords being restored to 100pc.

As a nation we are all too familiar with volatility in uncertain tax revenues, and at the moment the sustainability of corporation tax receipts is a key fiscal judgment.

Finance Minister Paschal Donohoe acknowledged this, and the main reason for the recent €1bn bump in corporation tax receipts is a timing difference caused by a change in accounting standards.

Much of this windfall is therefore to be used to capitalise a "rainy day fund", with promised annual top ups from now on.

There is some small income tax and USC return to people who see the positive economic indicators but need to feel the reality of this in their pockets. However, as always there is a pay-for and this year the hospitality and tourist industry takes the burden.

The Government is calculating this sector will be resilient in the face of an increase in the VAT rate from 9pc to 13.5pc, and the projected receipts from this increase do not envisage any negative impact. Given the number of small businesses in the sector, any emerging impact should be carefully and continuously monitored.

As the international landscape continues to develop and morph, our reputation as a stable, secure and ethical jurisdiction, rooted in the rule of law, is more important than ever.

The immediate implementation of an exit tax regime and the introduction of controlled foreign company (CFC) rules in 2019 further cement Ireland's place in the vanguard of respected and compliant tax regimes globally.

The extensive consultation on the recommendations contained in the Coffey Report help focus implementation on ensuring our continued international competitiveness.

For entrepreneurs and small businesses, improvements to the Key Employee Engagement Programme (KEEP), promised improvements to the Enterprise and Investment Incentive Scheme (EIIS) and the extension to the corporation tax exemption for start-ups are welcome.

However, these are somewhat offset by continued creeping increases in the employer levy for the National Training Fund and a background concern about funding pension auto-enrolment.

Easy access to the Brexit supports announced by the minister will be important for this cohort.

Overall, a relatively cautious Budget, rooted in its time and its context. There is more to be done to help, encourage and value Irish entrepreneurs and Irish businesses. A family can still be paying more than 50pc of their earnings to the State on income of just over €70,000. Once the current uncertainties are resolved, these are areas that will need imaginative thinking.

Liam Lynch is a partner at KPMG, Ireland

Irish Independent

Also in Business