Lenihan Announces Irish Interim Budget

by Jason Gorringe, Tax-News.com, London

10 April 2009

The Irish government has released details of its long-awaited interim budget. The budget will generate an additional EUR3.6bn in 2009 and EUR4.8bn annually thereafter through several punitive tax hikes on Ireland’s middle and higher-earners. It is hoped that the package of measures will help finance Ireland’s spiralling national debt, which has surpassed 9.5% of GDP.

The tax measures included within Ireland’s budget are as follows:

Changes to Income Levy, Health Levy and PRSI.

The income levy rates will be doubled to 2%, 4% and 6%. The exemption threshold will be EUR15,028. The 4% rate will apply to income in excess of EUR75,036 and the 6% rate to income in excess of EUR174,980.

The health levy rates will double to 4% and 5%. The entry point to the higher rate will be EUR75,036.

The PRSI ceiling will be increased from EUR52,000 to EUR75,036.

Income Tax

Mortgage interest relief will be discontinued for any mortgage over 7 years from May 1.

The level at which interest re-payments can be claimed against tax for residential rental properties is being reduced from the existing 100% to 75%. This measure will apply to both new and existing mortgages. Commercial properties are not affected.

Taxation on Savings

The rates of retention tax that apply to deposit interest, together with the rates of tax that apply to (a) life assurance policies and (b) investment funds, are being increased by 2% in each case and will now be 25% and 28% respectively. The increased rates will apply to payments, including deemed payments, made from midnight on April 7, 2009.

Stamp Duty

A new levy on life assurance is being introduced at the rate of 1% on premiums. This new levy will apply to premiums received by an insurer on or after June 1, 2009.

The current non-life insurance levy of 2% is being increased by 1%. The new rate of 3% will apply to renewals and offers of insurance issued by an insurer on and from midnight on April 7, 2009 where premiums are received by the insurer on or after June 1, 2009.

Establishment of a Stamp Duty ‘trade-in’ scheme, under which no stamp duty is payable by a person who accepts a traded-in property in exchange or part exchange for a new house/apartment. Stamp Duty will apply when the person subsequently sells on the ‘swapped’/traded-in house. Full details will appear in the Finance Bill.

Capital Gains Tax

The capital gains tax rate is being increased from 22% to 25% in respect of disposals made from midnight on April 7, 2009.

Capital Acquisitions Tax

The capital acquisitions tax rate is being increased from 22% to 25% in respect of gifts or inheritances made from midnight on April 7, 2009.

The current thresholds of EUR542,544 (Group A: parents to child), EUR54,254 (Group B: between related persons), and EUR27,127 (Group C: between non-related persons) are being reduced by 20% to EUR434,000, EUR43,400 and EUR21,700 respectively. This reduction applies in respect of gifts or inheritances taken from midnight on April 7, 2009.

Capital Gains Tax, Income Tax and Corporation Tax

The special 20% rate applied to the trading profits from dealing in or developing residential development land is being abolished. The income will be charged at the person’s relevant marginal rates of income tax or the 25% rate of corporation tax. This change will apply as regards Income Tax for the year of assessment 2009 and subsequent years and as regards Corporation Tax for accounting periods ending on or after January 1, 2009 (with accounting periods straddling that date being deemed for this purpose to be separate accounting periods).

Where trading losses have been incurred from dealing in or developing residential development land in circumstances where, if trading profits had been made, they would have been eligible to be taxed at 20%, and a claim to use those losses has not been made to and received by the Revenue Commissioners before April 7, 2009, the losses from today will generally only be relievable (on a value basis) up to a maximum of 20%. Where any such loss is a terminal loss, the restriction will be implemented by “ring-fencing” the loss.

There will be a new tax relief on capital expenditure incurred in the acquisition of Intellectual Property. The details will be contained in the Finance Bill.

The bill also brings in the termination of capital allowances scheme for private hospitals and nursing homes. Transitional arrangements will be put in place for projects that are at an advanced stage of development. The Finance Bill will contain further details on this measure.

Excise Taxes

The mineral oil tax on auto-diesel will be increased by EUR0.05 (including VAT) with effect from midnight on April 7, 2009.
The Excise Duty on a packet of 20 cigarettes will be increased by EUR0.25 (including VAT) with a pro-rata increase on other tobacco products, with effect from midnight on April 7, 2009.

Value-Added Tax

A Margin Scheme is being introduced whereby, with effect from July 1, 2009, dealers will be taxed on their margin in regard to second-hand cars they acquire and resell after that date. Second-hand cars acquired before July 1, 2009 and resold after that date will be taxed on their resale price. However, where such a second-hand car is resold before December 31, 2009 the payment of the VAT due on the resale price of the car may be spread in equal amounts over the following three VAT periods. It is not possible to write off the VAT input credit dealers have already received when they purchased the second-hand cars. The precise details will be contained in the Finance Bill.

Summary

The government’s interim budget is expected to provide an additional EUR1,806m in 2009 and EUR3,621m annually thereafter. Retention in social welfare, overseas development aid, childcare allowances, payroll cuts in the public sector, general government department retention, and other areas will save an additional EUR886m in 2009 and EUR1,215m annually thereafter for the Irish government.

The package in total will remove EUR2,692m from the Irish economy in 2009 and provide the government with an additional EUR4,836m annually thereafter, according to government projections.

Budget Preamble

The Irish Finance Minister Brian Lenihan announcing his budget, and underlining the Irish government’s policy-making decisions on Ireland's economic sustainability stated:

“The Pre-Budget data published last week show a EUR5bn widening from the budget deficit projected this January.”

“A correction of this amount in a full year approximates to a EUR3¼bn adjustment in the part of this year which remains.”

“The government recognises that part of this shortfall relates to the global economic cycle. It is reasonable to expect part of the shortfall to disappear as economic activity recovers here and abroad. However, part of the gap between spending and revenues, derives from structural problems in the public finances. We must take firm actions to eliminate these problems within a reasonable period of time.”

“Our approach is rooted in a determination to control our own destiny. We cannot control developments abroad, and we cannot control what others think of us. But we can take decisive actions to put this economy on the road to renewal and demonstrate that we have the ability to make the right choices for everyone in this country.”

“The problem is our expenditure base is too high and our revenue base is too low. If we fail, refuse or neglect to address this structural problem we will condemn our generation and the next to the folly of excessive borrowing. Already, the share of tax revenues that go to service the national debt has risen from 5% in 2007 to more than 11% this year. As we accumulate more and more public debt, this figure increases. This is dead money that should be used to improve vital public services.”

“Without this supplementary budget the general government deficit would have been 12¾% of GDP reflecting the large gap needed to fund the difference between spending and revenue. In the prevailing economic circumstances the natural preference should be to leave expenditure and taxation as they stand. This is not an option for this government or this House because of the scale of the deterioration of the public finances. A difficult balance must be struck between the need to show a credible way forward on our structural problems and the need to protect our economy as far as we can this year. It is the considered view of the government that a borrowing target of 10¾% strikes the correct balance.”

“To date this year, the government has reduced public expenditure by EUR1.8bn primarily through a reduction in the public service pay bill. Measures announced today will result in a further reduction of nearly EUR1.5bn in gross public expenditure and additional revenue of EUR1.8bn.”

“The scope for additional expenditure reductions at this stage of the year is limited. Further immediate reductions in expenditure today would have necessitated additional pay cuts for public servants, reductions in the rates of payments for welfare recipients and the cancellation of all contractually uncommitted investment projects.”

“The deterioration in tax revenues from EUR47¼bn in 2007 to EUR40¾bn in 2008 to an envisaged EUR34½bn this year is a far greater decline than the decline in the economy. This illustrates that in recent years our tax system became over reliant on fast growing, construction heavy economic activity. As we move to the next stage of our economic development, we must restructure our tax system to suit an export led economy growing at a more sustainable pace,” underlined Lenihan

Lenihan then turned to address Ireland’s longer-term ‘multi-annual plan’:

“Last January, the government proposed to the European Commission that we could fulfil our obligations to secure stability and growth over a 5 year period. I am glad to report to this House that following intensive discussions with the European Commission, agreement has been reached with the Commission that 5 years is the appropriate timeframe for addressing our structural problems. I want to express my gratitude to Commissioner Almunia and my colleagues amongst the eurozone Member States who have been supportive of our efforts to stabilise the public finances.”

“To bring sustainability to the public finances, the government is today announcing the necessary multi-annual consolidation plan. In 2010 and 2011, the plan envisages greater reductions in expenditure than increases in revenue. I want to stress that the expenditure figures are the minimum that must be achieved and the figures mentioned for tax are the very maximum that can be imposed.”

“Spending reductions that the government has decided on for 2009 to 2011 will have a cumulative full year effect on current spending of EUR2.7bn in 2010 and EUR4.2bn in 2011. Reductions in capital spending will accumulate to EUR1.3bn in 2010 and EUR2.4bn in 2011. The policy decisions underlying these reductions are already in train. They entail further reductions in pay costs, programmes and numbers. There is no provision for extra social spending, other than dictated by demography and unemployment. There will be a cap on capital spending and efficiencies will be found throughout the public sector.”

“Savings on day-to-day spending will be made through more targeted welfare provision and further reductions in public service costs and numbers and the wider application of charges. Sharper targeting of programme spending and more efficient use of resources across the board will be required. Difficult decisions in all areas of policy are in prospect.”

“In 2010, we will seek up to an additional EUR1.75bn from taxation. In 2011, the target will be to raise up to an additional EUR1.5bn. Options to raise this may include the taxation of Child Benefit, the introduction of a Carbon Tax, a form of property tax and significant further base broadening through the elimination of unnecessary reliefs and a review of all areas of tax-exempt incomes.”

“Over the later years of the five-year plan, further adjustments will be required. The scale and nature of these measures will depend to a great extent on the strength of the economic cycle. If growth is better than forecast, less will need to be done at that stage,” concluded Lenihan.

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