Irish Tax Institute on Budget 2022

Today, Minister for Finance, Paschal Donohoe T.D., and Minister for Public Expenditure and Reform, Michael McGrath T.D., presented a Budget package of €4.7 billion including €500 million of tax measures. In his Budget 2022 Statement, Minister Donohoe said, “In framing this Budget, we have been conscious of the cost of living pressures that are currently confronting citizens and businesses.”  Commenting on the extension of the Employment Wage Subsidy Scheme (EWSS) to 30 April 2022 in a graduated form, the Minister noted “These revised arrangements for EWSS strike a balance between helping those businesses which continue to need support, while recalibrating the scheme in light of the wider economic recovery.” The Minister for Finance also noted that “Supporting entrepreneurs and the wider business community will be central to our broader national recovery. They are indeed the backbone of our domestic economy, supporting tens of thousands of jobs across the country.”   In welcoming the Government’s decision to continue the EWSS until the end of April next year, Institute President, Karen Frawley, said, “We all know that the recovery has been uneven across the economy and there are businesses that are struggling to return to pre-pandemic levels of trading. The decision to continue the EWSS and the reduced rate of Employers’ PRSI will be of enormous benefit to these businesses.”  Commenting on the Minister’s admission in his Budget speech that the Employment Investment Incentive (EII) scheme has yet to reach its full potential, the Institute President said “We welcome Minister Donohoe’s undertaking to open the scheme to a wider range of investment funds and to ease the restrictions around the redemption window and the 30% expenditure rule. But we await the details in the Finance Bill to see if these changes will make this important scheme more attractive to investors and more user friendly for our high potential and early-stage enterprises.” The President also noted the changes to the income tax bands and credits announced by the Minister as a welcome start. “But if we are to remain an attractive location for investment, a more comprehensive review of our personal tax system will be required. We look forward to engaging with the Commission on Taxation and Welfare on this matter,” said Ms. Frawley.

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Over 340 members tuned into our Budget 2022 Panel Discussion this evening, with Institute President, Karen Frawley, Fergal O’Brien, Ibec, Lolly Strahan, Lolly and Cooks and Fergal Cahill, Cahill Taxation Services, which was chaired by Shane Coleman of Newstalk. The Institute will host a Budget 2022 Technical Webinar at 11am tomorrow, Wednesday, 13 October, presented by Cian Liddy, KPMG. Cian will be joined by Mark Barrett, Ronan Daly Jermyn to discuss the implications of Budget 2022 for CTAs and their clients. To join this technical update and receive a recording of this evening’s Budget 2022 Panel Discussion, you can book your place here. We have collated the key Budget documents on the Institute’s Budget 2022 Webpage and summarised the main tax and business support measures in this Special Budget 2022 TaxFax. Finance Bill 2021 is expected to be published next Thursday, 21 October. We will update members on developments in a Special Finance Bill 2021 TaxFax next week. The Institute will host a Finance Bill 2021 Webinar on 3 November 2021 at 10.30am with Emma Arlow, Deloitte and Paul Nestor, BDO and you can book your place on the webinar here. In today’s Special Budget 2022 TaxFax, we cover:Personal Tax Entrepreneurs COVID-19 Supports for BusinessCorporation Tax Property  Agri-taxation  Climate and Environmental Taxes Miscellaneous

Personal Tax

USC and Income Tax Bands As widely reported in the run up to Budget 2022, there was a modest increase to the standard rate income tax band. The entry point to the 40% income tax rate will be €36,800 for single individuals and €45,800 for married couples (with one earner). In his Budget speech, Minister Donohoe confirmed that the ceiling of the 2% USC rate will be increased from €20,687 to €21,295 to ensure it remains the highest rate of USC paid by full-time minimum wage workers, when the National Minimum Wage increases on 1 January 2022. It was also announced that the reduced rate of 2% USC that currently applies to medical card holders and those aged over 70, whose aggregate income does not exceed €60,000, will be extended for one year to the end of 2022.   This means that the marginal rates of tax will remain at 48.5% for those earning between €36,801 and €70,044, 52% for employees earning over €70,044 and 55% for the self-employed earning over €100,000.

Income Tax Credits The Personal Tax Credit, Employee Tax Credit and Earned Income Tax Credit will each increase by €50 to €1,700 from the tax year 2022 onwards.

Sea-going Naval Personnel The Sea-going Naval Personnel Tax Credit has been extended for a further year to 31 December 2022.

Employers’ PRSI The weekly income threshold for the 11.05% rate of Employers’ PRSI will be increased from €398 to €410 from 1 January 2022. This will ensure that the 8.8% rate of Employers’ PRSI will apply to workers on the minimum wage once it is increased on 1 January 2022.

Remote Working In his Budget speech, Minister Donohoe confirmed in keeping with the Government’s policy to facilitate remote working, the current tax arrangements for working from home will be enhanced and put on a legislative basis in Finance Bill 2021. It is proposed that an income tax deduction will be available, amounting to 30% of vouched heat, electricity and broadband costs incurred for days spent working from home. Revenue guidance currently permits up to 10% of the cost of electricity and heat, and 30% of the cost of broadband by concession for the duration of the COVID-19 pandemic. Costs must be apportioned based on the number of days working from home in a tax year and claims are allowable on the basis that the employer does not reimburse the expenses incurred.

Expansion of Debt Warehousing Scheme (Section 997A) The Budget 2022 Tax Policy Changes document notes that the Debt Warehousing Scheme will be expanded to allow self-assessed income taxpayers with employment income who have a material interest in their employer company, to warehouse tax liabilities relating to their Schedule E income from that company. We will update members on developments on this measure following publication of Finance Bill 2021 next Thursday, 21 October. The Institute had raised the interaction of section 997A TCA 1997 with the Debt Warehousing Scheme in representations to the Minister for Finance in our Pre-Budget and Pre-Finance Bill Submissions. We have continually raised concerns with Revenue about the financial implications for those individuals who are subject to section 997A but who do not qualify for income tax debt warehousing, as a tax liability could immediately crystalise when the individual’s Form 11 for 2020 is filed.

Entrepreneurs

In his Budget speech, the Minister confirmed that he is implementing a package of measures to support smaller businesses and entrepreneurs, who will be central to Ireland’s broader national recovery. Employment Investment Incentive (EII) Scheme  The Minister stated the EII scheme has the potential to become a real driver of investment in early-stage companies and high-potential start-ups, while noting “it has yet to reach its potential.” In his Budget speech, the Minister confirmed the scheme will be extended for a further three years to 31 December 2024. Following consultation with relevant stakeholders, the Minster plans to open the scheme to a wider range of investment funds with the aim of increasing investment in early-stage enterprises. In our response to the Department of Finance Public Consultation on the EII scheme last February, we had recommended the rules governing EII should be broadened to cater for investors pooled in vehicles which mirror the operation of an alternative investment fund established to invest in “qualifying companies” for the purposes of EII. The Minister also confirmed, subject to certain conditions, the rules around the “capital redemption window” will be relaxed for investors. Noting that the 30% expenditure rule is unduly restrictive in the context of the self-assessment principles that now apply to the relief, the Minister confirmed this rule will be removed. In our response to the EII public consultation earlier this year, we highlighted the significant administration burden on early‐stage companies to track expenditure and ensure 30% of funding is spent on a qualifying purpose or within two years of investment. We had recommended enabling the Statement of Qualification to be issued once an investment has been made in a qualifying company to reduce this administrative burden for early‐stage companies. Further details on the improvements to the EII scheme will be included in Finance Bill 2021.

Section 486C – Relief for start-up companies   The Minister announced an extension of section 486C tax relief for a period of five years until 31 December 2026. Section 486C provides corporation tax relief for certain start-up companies by granting a reduction of corporation tax for the first three years of trade if the corporation tax liability due is €40,000 or less in a tax year. If the corporation tax liability due is between €40,000 and €60,000, the business may be entitled to partial relief. The relief is calculated by reference to the amount of Employers’ PRSI paid by a company in its first three years of trading (subject to a maximum of €5,000 per employee and €40,000 overall).    In August, the Institute provided feedback to the Department of Finance on the operation of section 486C and proposed enhancements to this relief. In his Budget speech, the Minister noted data which shows that this relief continues to support employment and businesses in a cost-efficient manner. The Minister stated that in view of the challenges companies are currently facing in utilising the relief, start-up companies will now be able to avail of the relief for up to five years, instead of the current three years and that these changes will provide greater certainty to recently established companies, and to those seeking to commence, as Ireland recovers from the pandemic. A review of the relief was published today. The review states that according to Revenue, prior to the pandemic the growth of small and medium enterprises (SMEs) was outpacing that of large companies. However, the COVID-19 pandemic has impacted SMEs significantly, leading to the concentration of corporation tax receipts from large companies becoming prominent and it is in Ireland’s interest to continue its progress in broadening the corporation tax base, as this will improve the resilience of corporation tax revenues into the future. The review states that the COVID-19 supports introduced by the Government have impacted the availability of section 486C relief as a large proportion of claimants of this relief are from sectors particularly affected by the public health restrictions. The review highlights the options considered to amend the provisions of section 486C and notes that while it has been suggested that the link to Employers’ PRSI could be removed altogether, this would be a departure from the key objective for the relief, which is to support the creation and maintenance of jobs. Another option considered was a multiple of a business’s prior-year Employers’ PRSI when calculating the available relief. However, the review states that the relief specifically supports new businesses in their start-up phase when employment is scaling up as the business grows. Therefore, a look-back provision of this sort is likely in many cases to be either not possible (as companies may not have existed prior to the year of claim) or not particularly helpful, as companies had fewer employees in their early stage of business. The review concludes that the impact of the relief is difficult to assess as the situation that would have prevailed in the absence of the relief is unknown. The data shows that many firms claim the relief annually and a significant amount of jobs are created and maintained in the short term by firms that are availing of the relief. The number of firms claiming the relief and the number of employees employed by these firms have been increasing since 2013, indicating a positive trend among new start-ups.

Innovation Equity Fund  Further to last year’s Budget, in which the Minister announced the Government would commit a €30 million investment to the Innovation Equity Fund through the Ireland Strategic Investment Fund, the Minister today confirmed the Government intends to commit a further €30 million investment to this fund through Enterprise Ireland. This will be matched by €30 million from the European Investment Fund, subject to Board approval. Expected to be launched in early 2022, the Innovation Equity Fund with potential investments of up to €90 million, will increase the availability of early-stage funding for Irish SMEs. A Memorandum of Understanding is currently being developed by all three parties.

COVID-19 Supports for Business

Employment Wage Subsidy Scheme (EWSS) The Minister reiterated his commitment that there would be no cliff-edge to the EWSS and announced that the scheme would remain in place in a graduated form until 30 April 2022. It will operate within the following parameters:There will be no change to the EWSS for the months of October and November.A two-rate structure will apply to subsidy payments for the months of December, January and February, with subsidy rates of €151.50 and €203. A flat-rate subsidy of €100 will apply in March and April, the final two months of the scheme.The reduced rate of Employers’ PRSI (of 0.5%) will cease on 28 February 2022 and the full rate of Employers’ PRSI will apply for March and April. The scheme will close to new employer entrants from 1 January 2022.Eligibility for the scheme will continue to be based on at least a 30% reduction in turnover/customer orders in 2021 when compared with 2019.  The estimated cost of extending the scheme from November 2021 to 30 April 2022 is approximately €1.26 billion.  The Institute will keep members updated in TaxFax on the amendments to Revenue’s EWSS Guidelines to reflect the changes proposed in the Budget.

VAT 9% rate In his Budget speech, the Minister confirmed that the reduced 9% VAT rate for the tourism and hospitality sector will be extended until 31 August 2022. Plans to extend the 9% rate until the end of August had been announced as part of the Economic Recovery Plan presented by the Government in June. The 9% rate had originally been due to expire on 31 December 2021.

Taxation of international flight crew In his Budget speech, the Minister noted that the Aviation Sector has paid a particularly heavy price during the pandemic. Therefore, he intends to amend the tax arrangements that apply to international flight crew in section 127B TCA 1997 in the forthcoming Finance Bill. Irish double taxation agreements typically (but not always) preserve Irish taxing rights in respect of aircraft cabin crew working on international flights to where the employer’s place of effective management is situated. Section 127B was introduced to ensure that non-resident cabin crews and pilots working on aircraft operated by Irish airlines generally remain liable to Irish taxation. It is understood that the proposed Finance Bill amendment will exclude certain non-resident air crew from Irish payroll withholding on the satisfaction of specific conditions.

Corporation Tax

Tax credit for digital games  Confirming the commitment made in his Budget 2021 speech last year, the Minister announced that a new tax credit for the digital gaming sector will be introduced in Finance Bill 2021. As EU State aid approval is required, the credit will be introduced subject to a commencement order. The introduction of the credit is intended to support quality employment in creative and digital arts in Ireland. The relief will take the form of a refundable corporation tax credit available to digital games development companies for qualifying expenditure incurred on the design, production and testing of a digital game. It will be available at a rate of 32% of eligible expenditure up to a maximum limit of €25 million per project. There will also be a per project minimum spend requirement of €100,000. Claims may be made for expenditure incurred on an annual basis and therefore it will not be necessary to wait for the completion of a project to make a claim.   A digital game must be issued with a Cultural Certificate from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media to qualify for the credit. Relief will not be available for digital games produced mainly for the purposes of advertising or gambling. A digital game development company will be required to sign an undertaking in respect of quality employment similar to the requirements in place under section 481 for relief for investment in films. A claimant will not be permitted to qualify for additional relief under section 481 Film Relief or the R&D tax credit.

OECD Inclusive Framework agreement to reform international tax rules  In his Budget speech, the Minister referred to the historic decision taken by the Government last week to join the OECD Inclusive Framework agreement to reform international tax rules. He said, “It maintains our tax competitiveness and strengthens our position in the world. The agreement, which we shaped, is balanced and represents a fair compromise. While there will be a cost to the Exchequer, it provides long-term certainty for businesses and investors for the benefit of Irish jobs.”  The Minister also noted that Ireland will continue to offer the 12.5% rate for businesses with revenues less than €750 million meaning that there will be no change for 160,000 businesses employing 1.8 million people. Following the announcement last week, the Institute welcomed the Government’s decision to join the OECD agreement as it will provide certainty for business. Institute President, Karen Frawley said, “The change in language around the global minimum rate secured by the Government as well as the commitment from the EU that the Commission will hold to that rate, brings much needed certainty and stability to the international tax system. This is good news for business and good news for governments as the world recovers from the pandemic.” The President also welcomed the assurance from the EU that the new rate will apply only to companies with global revenues in excess of €750 million stating that, “This means that our SMEs can continue to benefit from our 12.5% rate without any damage to their competitiveness.”

ATAD Interest Limitation Rule  The Minister confirmed that changes required to implement the Anti-Tax Avoidance Directive Article 4 Interest Limitation Rule (ATAD ILR) into Irish law will be introduced in Finance Bill 2021. The ATAD ILR will place a limit on deductible interest expenses of 30% of EBITDA for companies within the scope of the measure. Disallowed interest may be carried forward and may be deducted in future years if the company has sufficient interest capacity. The Institute has been engaging with the Department of Finance regarding the proposed transposition of the ATAD ILR. Responding to two Feedback Statements published by the Department on the proposed transposition in December 2020 and July 2021, the Institute made several recommendations on modifications to existing tax legislation which should be made in Finance Bill 2021, to help to integrate the ATAD ILR into domestic legislation, without imposing significant additional complex rules on businesses, while maintaining the necessary protections for the corporate tax base.

ATAD Anti-Reverse Hybrid Rules Finance Bill 2021 will introduce new anti-reverse hybrid rules in line with Article 9(a) of the Anti-Tax Avoidance Directive (ATAD). Broadly, the anti-hybrid rules are aimed at preventing taxpayers from engaging in tax system arbitrage. The provisions seek to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that exploit differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more territories. The first and substantial part of the ATAD anti-hybrid rules was introduced in Finance Act 2019. The remaining part of the rules, dealing with reverse hybrid mismatches, must be implemented by 1 January 2022. In August, the Institute responded to a Department of Finance Feedback Statement which set out our remarks, based on feedback from members, on the proposed approach to the implementation of the reverse hybrid mismatch provisions into Irish law.

Property

Zoned Land Tax The Minister announced the introduction of a new Zoned Land Tax to encourage the use of land for building homes. The tax will be charged at a rate of 3% based on the market value of the land. The tax, which will replace the Vacant Site Levy when it comes into operation, will apply to serviced land that has not been developed for housing which is zoned suitable for residential development or a mix of uses, including residential.  As the tax is intended to incentivise the development of small sites in town centres there will be no minimum size exclusion. Maps will be prepared and published by Local Authorities in advance of the commencement of the measure to identify zoned land within the scope of the tax. These maps will be updated on an annual basis. There will be a process established, in line with normal Local Authority procedures, to enable a person to apply to their Local Authority to have the zoning status of their land amended. While the tax will be introduced in Finance Bill 2021, there will be a two-year lead-in time for land zoned before January 2022, and a three-year lead in time for land zoned after January 2022. Dwelling houses and their gardens, amenities and infrastructure will be excluded from the tax and other exemptions will be set out in the Finance Bill. The tax, which will operate on a self-assessment basis, will be administered by Revenue.

Help to Buy Scheme extended The Help to Buy scheme which was due to expire at the end of this year has been extended to 2022 at the current enhanced rates. The Minister announced that a full review of the scheme will be carried out next year.

Relief for pre-letting expenses extended Section 97A TCA 1997 provides for a deduction, capped at €5,000 per premises, from rental income for certain pre-letting expenditure. The relief, which was due to expire this year, will be extended for a further three years to the end of 2024.

Agri-taxation

Stock Relief Section 666 TCA 1997 which provides for a tax deduction for increases in stock value (general stock relief) will be extended for a further three years until 31 December 2024. Enhanced stock relief for Young Trained Farmers (section 667B) and for farmers who are partners in Registered Farm Partnerships (section 667C) will be extended for a further year, until 31 December 2022.

Young Trained Farmer Stamp Duty Relief Section 81AA of the Stamp Duties Consolidation Act (SDCA) 1999 provides relief from stamp duty on the transfer of an interest in agricultural land to certain farmers who are under 35 years old and who hold a relevant agricultural qualification (i.e. Young Trained Farmers). The Budget extends the relief until 31 December 2022. In his Budget speech, the Minister noted the Young Trained Farmer Stamp Duty Relief and the Enhanced Stock Relief for Young Trained Farmers and farmers in Registered Farm Partnerships are deemed to be EU State aid under the terms of the Agriculture Block Exemption Regulation. Therefore, the Minister can only extend the reliefs until their scheduled expiry date of 31 December 2022. However, the Minister said he has been advised by the Department of Agriculture, Food and the Marine that they are confident that reliefs of this nature will continue to be an acceptable form of State aid under the terms of any revised Regulation.

Farmers Flat-rate Addition The Farmers Flat-rate Addition is paid to farmers who are not registered for VAT to compensate them for VAT paid on goods and services purchased in connection with their farming activities. Based on macro-economic data, the rate is being decreased from 5.6% to 5.5% for 2022.

Climate and Environmental Taxes

In his Budget speech, the Minister stated climate change is one of the most important issues of our time. The Minister said “the world is burning, and the only chance we have to control those fires is through coherent and effective policies. This is why carbon taxation is so important.”

Carbon Tax As set out in Finance Act 2020, the rate of Carbon Tax will increase by €7.50 from €33.50 to €41 per tonne of carbon dioxide emitted. This applies from Budget night for auto fuels and from 1 May 2022 for all other fuels. In his speech, the Minister noted studies which have shown that carbon taxation is likely to be the single most effective climate policy which can be pursued by Government. The Minister confirmed Carbon Tax will not be the only climate policy, as alone it will not deliver the required emissions reductions. The Programme for Government 2020 outlined Ireland’s commitment to reduce greenhouse gas emissions by 51% over this decade and to achieving climate neutrality by 2050. The Minister noted the challenges surrounding energy supply and prices across the globe in recent months and that the Government is conscious of how this will impact the most vulnerable. Therefore, the additional revenue from Carbon Tax will be used to invest in a socially progressive national retrofitting programme.

Tax treatment of income from micro-generation of electricity The 2019 Climate Action Plan recommended the development of “an enabling framework for micro-generation which tackles existing barriers and establishes suitable supports within relevant market segments”. Accordingly, the Minister announced a tax disregard of €200 will be introduced in respect of personal income received by households who sell residual electricity that they generate back to the grid.

Vehicle Registration Tax (VRT) From January 2022, a revised VRT table will be introduced, following on from significant changes made to the VRT system in last year’s Budget to strengthen the environmental rationale of VRT. The Minister noted that the structure of new car sales for 2021 compared to 2020 is evidence of the success of this approach, with an increase in vehicles registered at the lower end of the VRT scale. The 20-band table will remain with an uplift in rates, as follows:There will be a 1% increase for vehicles that fall between bands 9-12,a 2% increase for bands 13-15, and a 4% increase for bands 16-20. In addition, to continue to incentivise the uptake of electric vehicles, the Minister is extending the €5,000 relief for Battery Electric Vehicles (BEVs) to the end of 2023.

Extension of BIK exemption for electric vehicles The Benefit-in-Kind (BIK) exemption for BEVs will be extended out to 2025 with a tapering effect on the vehicle value. This measure will take effect from 2023. For BIK purposes, the original market value of an electric vehicle will be reduced by €35,000 for 2023; €20,000 for 2024; and €10,000 for 2025.

Accelerated Capital Allowance (ACA) Scheme The ACA Scheme for Energy Efficient Equipment is designed to encourage improved energy efficiency among Irish companies and unincorporated businesses. This scheme, which allows an accelerated 100% capital allowances deduction when businesses invest in highly energy efficient equipment will be amended to prohibit equipment directly operated by fossil fuels from qualifying for the scheme. In his Budget speech, the Minister noted this change is in accordance with wider Government policy to reduce reliance on fossil fuels. The ACA Scheme for Gas Vehicles and Refuelling Equipment was introduced in Finance Act 2018 and allows taxpayers to deduct the full cost of expenditure on eligible equipment from taxable profits in the year of purchase. This scheme allows an accelerated deduction when businesses invest in vehicles powered by natural gas / biogas and related refuelling equipment. The scheme will be extended to the end of 2024 and will be amended to include hydrogen powered vehicles and refuelling equipment. It provides for the acceleration of existing allowances and therefore is cost-neutral over the lifespan of the assets. In his Budget speech, the Minister noted renewable hydrogen offers significantly higher carbon savings when compared to fossil fuels and the policy to include hydrogen powered vehicles is aligned with wider Government policy to reduce Ireland’s greenhouse gas emissions and achieve net zero carbon emissions by 2050.

Miscellaneous

There were no announcements in relation to CAT or CGT.The Bank Levy was extended for a further year to the end of 2022. It will apply to a reduced number of institutions, due to the departure of Ulster Bank DAC and KBC Bank Ireland plc from the Irish market. The banks to whom the levy applies will not pay any more in 2022 than they paid in 2021. This will equate to approximately €87 million.The revised EU Alcohol Directive permits the granting of up to 50 per cent excise relief to independent small producers of cider and other fermented drinks products. The Minister considers there may be benefits from this for independent producers of beer and has asked his officials to engage with the sector.A 50c increase of excise duty will be imposed on a pack of 20 cigarettes from midnight, with a pro-rata increase on other tobacco products.The Commission on Taxation and Welfare will launch a public consultation over the coming weeks to inform its work to consider how best the tax and welfare system can support economic activity, while ensuring there are sufficient resources available to fund public services.The Commercial Rates Waiver will be extended for Q4, 2021, targeted at the hospitality, arts, and certain tourism-related sectors.