Budget 2018 – the expert view

KPMG’s experts give their analysis of Budget 2018 and what it means for you

Budget overview

The Minister for Finance introduced the 2018 Budget on 10 October 2017. Further detailed measures will be included in the Finance Bill to be published on 19 October 2017.

Budget 2018 is the third post-austerity budget in a row. Ireland’s economic recovery has been remarkably impressive. The economy is now enjoying robust economic growth with almost full employment and an end to Government borrowing is in sight.

This year’s Budget is cautious in nature. The policy of maintaining discipline in the management of the national finances is to be welcomed. Recent history has shown that Government revenues can evaporate during economic bad times, and if spending is built to unsustainable levels during good times the State will be left bereft when the economic tide goes out.

The minister once again reaffirmed Ireland’s enduring commitment to an attractive corporation tax regime for business – a policy that is supported by the vast majority of members of the Irish parliament and which has endured for six decades. In a fickle world, Ireland’s remarkable consistency in its taxation policy towards business is unsurpassed. A great deal of credit is due to Irish policymakers for their consistency and intelligence over this period.

The minister made clear in his speech that he was very conscious of the dangers for the Irish economy arising from Brexit. This was reflected in his decision to retain the 9% VAT rate for tourism – a decision that is most welcome.

Personal Taxation

Personal taxation is the second front in the war of tax competition and it is a front that is becoming increasingly important due to the way in which international tax law is evolving. There were a number of welcome personal tax relief measures in the Budget including:

• The 2.5%rate of USC is reduced to 2%

• The 5%rate of USC is reduced to 4.75%

An increase of €750 in the income tax standard rate band

• An increase of €200 in the earned income credit

An increase in the home carer tax credit of €100

Capital gains tax treatment to apply to gains on share options granted by unquoted Small and Medium-sized Enterprises (SME) companies to key employees where the conditions of a new Key Employee Engagement Programme (KEEP) incentive are met

The ongoing policy of denying any tax relief on incomes over €70,000 is to be regretted and is compounded this year by the announced 0.3% phased increase in employer’s PRSI. The top 1% of income earners already pay substantially more personal taxes than the bottom 74% of income earners combined. The top 6% of income earners pay about half of all personal taxes in Ireland. There is a wealth of independent economic research that indicates the dangers of uncompetitive taxation of this relatively mobile sector, particularly in a small open economy. Care needs to be taken not to kill the golden goose.

The minister also announced a number of measures designed to alleviate the shortage in residential accommodation. The reduction from seven to four years of the holding period to qualify for the capital gains tax exemption on certain property assets should be of assistance in freeing up supply. The increase in the stamp duty rate on the sale commercial property from 2% to 6% is considerably less welcome.

It had been hoped that the Budget might contain some improvements to the entrepreneur’s capital gains tax relief and the tax relief for foreign assignees to Ireland. In our view, improvements in these two reliefs could have a very positive impact on jobs and growth in Ireland. It is to be hoped that such measures might be included either in the Finance Bill or in future Budgets so that Ireland can face its future economic challenges in the most competitive shape possible.

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Small and Medium Enterprises

“The introduction of an SME friendly share option scheme (entitled “KEEP”) is a welcome measure to help smaller companies compete with larger enterprises to recruit and retain key employees. For qualifying share options granted from 1 January 2018, the scheme provides that no income tax, USC or PRSI arises on the exercise of share options by an employee of an SME ; instead the employee is liable to CGT at a rate of 33% on the ultimate disposal of the shares – a saving of up to 19%."

"Unfortunately, the threshold for the 10% CGT rate for entrepreneurs remains unchanged at EUR 1 million. The equivalent UK tax relief provides for a £10 million threshold and we would hope to see this threshold increased in future Budgets with a view to maintaining our competitiveness with the UK.”

Olivia Lynch, Partner, Private Enterprise, KPMG in Ireland

PAYE and the Self-employed

“Building on improvements in Budget 2017, the Budget has reduced the gap between self-employed individuals and PAYE workers in relation to the earned Income/PAYE tax credit differential. Whilst PAYE and Self Employed workers earning up to €70,000 will each benefit from the reduced USC rates, self-employed individuals will also get the benefit of the increase of €200 in the earned income credit which has been increased to €1,150. Nevertheless, the self-employed credit still remains some €500 below the equivalent PAYE credit."

"While the Government had stated a target of increasing the tax-free thresholds for children inheriting property and other assets from their parents to €500,000 (to be achieved over the lifetime of the Government) no changes were announced in this year’s Budget and the threshold remains €190,000 short of the target.”

Robert Dowley, Partner, Private Clients, KPMG in Ireland

The residential property sector

“Last year’s Budget introduced some measures to assist first-time buyers. The Budget 2018 measures encourage the supply side. It is positive to see the move to release property into the market by shortening the CGT exemption holding period to a minimum of 4 years for those properties that qualified for the original scheme. Owners are also being encouraged to bring vacant residential property into the rental market with the introduction of a new deduction for certain pre-letting expenses."

"The stamp duty rate on non-residential property is being trebled from 2% to 6%. This is a very radical change which will surely significantly reduce the number of transactions next year. The estimated additional yield of €375m from this measure appears highly ambitious given the c €9bn of transactions needed to generate it."

Jim Clery, Partner and Head of Real Estate, KPMG in Ireland

"It is a surprise to see that there are not clear measures to cover contracts already in place and we can only assume that this will be remedied shortly. The proposed introduction of a stamp duty refund scheme should help reduce the cost for developers who purchase commercial land for housing development and meet the relevant conditions.”

Renewable energy

Mike Hayes, Renewable Energy lead in KPMG welcomes the climate change announcements in the budget today including CAT relief for land used for solar panels, the renewable heat incentive and most importantly the recognition given to the fast-approaching electric car revolution by removing BIK for, at least one year. For example, the solar-related changes will be welcomed by many of the leading solar development companies who needed this change to free up land which had heretofore not been used economically. This will also benefit the farming community who can now share in the economic potential arising from the deployment of solar farms across the country.

"While these are small steps and much more will be required in future years, these changes will accelerate Ireland’s transition to a green economy and help realise the substantial economic benefits that this will generate."

Mike Hayes, Renewable Energy Head, KPMG in Ireland

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