The days of budget-day surprises are well behind us. Multi-annual budgeting and a far more transparent, or leaky if you would prefer, estimates process mean the latitude for a minister for finance to produce rabbits out of the hat in the manner of Charlie McCreevy has all but disappeared.
Instead, it now appears the best way to familiarise oneself with the contents of the budget is by reading the previous day’s newspapers.
That may be taking it a little too far, but when it comes to the headline tax and spending measures, Budget 2019 was all too predictable. The increased spending on health and housing were well-flagged, welcome but still predictable, while the personal tax adjustments which yielded about a €5 decrease per individual were also telegraphed well in advance.
Tweaks to tax bands and USC rates were in line with expectations, the deficit in the health budget was widely publicised and had to be filled, and the €5 across-the-board increase in social-welfare and pension payments had been locked in for some time.
Also well-publicised was the abolition of the reduced 9 per cent VAT rate for the hospitality sector, with the rate increasing to 13.5 per cent for all areas, with the exception of newspapers and sporting facilities. Indeed, it has been extended to the online publication of print newspapers and magazines.
From a business perspective, that left the devil in the detail. Most welcome here was the announcement of €710 million in new budgetary measures to protect this country against the worst impacts of Brexit.
That included €300 million in financial support to the National Training Fund for a Human Capital Initiative that will increase investment in higher education from 2020 to 2024. Also announced was the launch of the Future Growth Loan Scheme, which will provide an additional €300 million in loans to SMEs and the agriculture and food sector to assist in Brexit preparations. This is widely seen as an extension of the Brexit loan scheme announced in the last budget.
The remainder of the provision is to be made up of €110 million in funding for Government departments to contribute to their Brexit-readiness. This will also include what Minister for Finance Paschal Donohoe described as “essential customs requirements”.
Brexit
Still on the Brexit theme, an additional €60 million was provided to improve resilience in the farming sector and to provide additional staffing and ICT support in relation to the regulatory requirements of Brexit. There will also be increased funding for the PEACE programme, which supports the highly-exposed border region.
On Brexit-related infrastructure, the DAA is investing €320 million to enhance capacity in Dublin Airport and €587 million will be spent on improvements to the ports of Dublin, Cork and Shannon-Foynes.
The Minister also announced the establishment of the Disruptive Technologies Innovation Fund, which will make €500 million available for co-funded projects involving industry and research partners which take place in the period up to 2027.
Tax-based support and incentive schemes aimed at the SME sector and entrepreneurs fared less well, however. While announcing changes to the Key Employee Engagement Programme (KEEP) and promising adjustments to the Enterprise and Investment Incentive Scheme (EIIS) the Minister made no reference at all to entrepreneur relief, which remains well out of line with similar schemes in the UK and other competitor jurisdictions.
The KEEP scheme is a share-option scheme which allows SMEs to supplement key employees’ pay with share options in the company. Capital gains tax at a current rate of 33 per cent applies to the disposal of the shares rather than income tax at effective rates of up to 52 per cent. Unfortunately, the take-up of the scheme since its introduction in 2017 has been negligible, with many commentators describing it as “dead in the water”.
The problem lies in the restrictions which apply to the type of companies that can qualify as well as around the proportion of share options to salary which can be offered.
Mr Donohoe acknowledged these difficulties in his budget speech, saying: “I am aware that take-up has been less than expected and I have decided to take early action now.”
That action took the form of a doubling of the cap on the value of share options to 100 per cent of salary, the scrapping of the three-year limit on the scheme, and an increase in the overall value of share options to an individual employee from €250,000 to €300,000.
Dublin Chamber welcomed these proposals, saying they will help Irish firms to attract and retain key staff.
The EIIS allows investors in SMEs to qualify for tax relief on the amount invested at their top rate of income tax, subject to certain limits, of course. This relief has the potential to offer a very valuable source of funding to businesses seeking to expand into new markets post-Brexit.
Far from straightforward
Unfortunately, the terms and conditions are far from straightforward. Family and friends and other connected parties are effectively excluded from relief on investment. The relief is split in two, with three-quarters available immediately and the final portion held back. There are also limitations in terms of the type of company which can receive investment.
The Minister has promised to bring forward a package of measures to address deficiencies in the scheme in the Finance Bill. It remains to be seen whether these will deal with the shortcomings which have blunted its effectiveness up until now.
Dublin Chamber chief executive Mary Rose Burke lamented the Government’s failure to follow through on its promise to upgrade entrepreneur relief to its nominal UK equivalent.
“Improved capital gains tax relief is key to fostering an entrepreneurial environment, but it currently stands at just €1 million, way off the UK threshold of €11 million,” she said. “Ahead of the budget, Dublin Chamber argued that the Government should keep its commitment in the Programme for Government and also make a further increase in the limit to €15 million, which would have incurred an added annual cost to the exchequer of just €2 million, while positioning Ireland at a very clear advantage against the UK.”
KPMG partner Brian Brennan agrees: “The strong reaffirmation of our 12.5 per cent corporation tax rate and maintaining our attractiveness as a location for inward investment remains a cornerstone of economic policy,” he said. “However, if there was one thing that business would like to have seen more of is a greater recognition of the role of entrepreneurs. We still have a relatively high rate of capital gains tax for domestic entrepreneurs.
“Notwithstanding the challenges faced by Government in framing the budget, there remains room for improvement in enhancing the tax environment for Irish SMEs,” Brennan added.
“Indeed, the Minister recognises that such businesses provide most of our employment. In this context, there was significant hope that he would take the opportunity to act on the commitment in the Programme for Government to improve the capital gains tax relief for entrepreneurs. The measures announced to the Key Employee Engagement Programme, the Enterprise and Investment Incentive Scheme and the extension to the corporation tax exemption for start-ups are welcome but are to some extent offset by continued increases in the employer levy for the National Training Fund,” he continued.
“In summary, whilst various sectors will assess the budget differently, most businesses will recognise the budget as a measured response to circumstances. Strong growth is tempered by the obvious challenge of Brexit and a potential slowdown in the world economy and a cautious approach makes common sense.”
Hospitality sector
While the hospitality sector is dealing with the effects of the VAT increase, the budget was seen as positive for sport, with €126 million committed to support a range of initiatives in 2019, an increase of €14.69 million. Federation of Irish Sport chief executive Mary O’Connor said: “While we look forward to hearing the detail regarding the breakdown of the increased investment across people and programmes and capital projects, our initial reaction and that of our members is positive.
"The publication of Ireland's National Sports Policy in July this year was a significant first step in recognition of the important contribution sport can and should make to Ireland. It is great to see Government begin to commit the necessary funds to allow for the implementation of that plan."
In other welcome announcements, tax relief for start-up companies, which was due to expire at the end of 2018, has been extended for certain companies until the end of 2021, and steps are to be taken to regulate the crowdfunding industry. In addition, a review of some of the tax implications of crowdfunding will be undertaken and will include the application of withholding tax on peer-to-peer lending.
Film relief, which was due to end in 2020, will be extended until December 2024.
One slight surprise in the budget came in the form of the introduction of the exit tax. The Government had indicated earlier that this would not be introduced any sooner than January 1st, 2020 – which is the deadline under the EU Anti-Tax Avoidance Directive (ATAD). The new regime will tax unrealised capital gains at a rate of 12.5 per cent where companies migrate or transfer assets offshore in a fashion which means they leave the scope of the Irish tax system.
The other mild surprise was the failure to implement the anticipated increase in the carbon tax. Most observers put this down to election jitters, while those in the transport and energy sectors claim it was the failure to establish a clear link between an increase and a change in behaviour which caused the change of heart. That said, the Government is committed to announcing a progressive ramping-up of the tax over the next decade to meet its climate-change commitments.
‘Rainy Day Fund’
The other key economic measure announced by Mr Donohoe was the establishment of a “Rainy Day Fund” of €1.5 billion, with a commitment to add a further €500 million annually. Announcing the measure, the Minister said: “The State’s ability to withstand economic shocks in the future needs to be rebuilt.”
The new fund was warmly welcomed by Fianna Fáil finance spokesman Michael McGrath. “Some future minister for finance in a future government will be glad this initiative was taken because it might allow our country to avoid the type of tax increases and spending cuts that had to be implemented when the last crisis struck,” he said.
No real surprises, a few disappointments, no actual shocks either. RBK Chartered Accountants tax partner Mairead O’Grady, probably spoke for many when she summed up Budget 2019 thus: “The budget leaves many people, in particular businesses, wanting more, as there has been no significant measures or initiatives to promote business or entrepreneurship. It is, however, a safe and conservative budget and is putting a cushion in place for us in the event of potentially harsh economic times ahead.”