Irish Budget 2011 Final PwC

8/8/2019 Irish Budget 2011 Final PwC

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As announced in the National Recovery Plan, a 6 billion adjustment is to beimplemented through Budget 2011, with two thirds of the adjustment coming inexpenditure measures and one third coming from taxation changes.

The tax h ighlights

No change to the 12.5% rate of corporation tax which was reaffirmed as acornerstone of Irish taxation and economic policy.

Stamp duty on principal private residences reduced to 1% (but with 2%applicable to any excess over 1m). Abolition of existing residential propertyreliefs and exemptions, including first time buyers exemption.

Removal of 75,036 ceiling for employee PRSI contributions.

The Income Levy and Health Contribution to be replaced by a singleUniversal Social Charge.

PRSI and Universal Social Charge to apply to employee pensioncontributions.

10% reduction to income tax bands and income tax credits.

Tax free pension lump sum to be capped at 200,000. Tax free ex-gratiatermination payment is also capped at 200,000.

Lifetime tax relieved pension pot is reduced to 2.3m.

B u d g e t 20 1112.5% corporation tax ratehere to stay. Other

adjustments of 6bn proposed

12.5% corporation tax rate

here to stay. Other

adjustments of 6bn

proposed

7 December 2010


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Taxation of individuals

The most significant announcement in Budget 2011 related to the proposedconsolidation of the current income and health levies into one Universal SocialCharge (USC) which will apply from 1 January 2011. The USC is to be considered a

tax rather than a social contribution. Furthermore, as the USC will largely apply at 7%on all income in excess of 16,016, it is likely to give rise to substantially higher taxpayments for all taxpayers. In addition, it will apply to all individuals earning inexcess of 4,004 (excluding social welfare payments).

While the Budget does retain the top aggregate rate of tax and PRSI payable at 52%for higher earning employees, it is clear that the higher rates will be applied on muchlower levels of income. Hence, almost all sectors of society will lose out under theBudget proposals.

Certain amendments in the Budget are proposed to take effect from 1 January 2011.Therefore, there are opportunities for individuals to take certain actions between nowand year end to potentially benefit from existing more favourable tax reliefs. The mostnotable ones to consider pre 31 December include:

Maximising personal pension contributions (see pension announcementsbelow).

Potentially exercising share options.

Availing of higher tax free ex-gratia termination payments.

Availing of higher tax free pension lump sums (see pension announcementsbelow).

S t a n d a r d in c o m e t a x r a t e b a n d s

The tax bands will be decreased by 10% for 2011:

2011 2010

20% 41% 20% 41%

Single and widowedperson: no dependentchildren

32,800 balance 36,400 balance

Single and widowedperson: dependentchildren


Marr ied couple: one

income


Marr ied couple: twoincomes*


*With a maximum transferability between spouses of 45,400 in 2010 and 41,800in 2011


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T a x c r e d it s

Tax credits will also be reduced by 10% across the board. The main personal taxcredits are:

2011 2010

Employee tax credit 1,650 1,830

Person al tax credit single

1,650 1,830

Person al tax credit -married

3,300 3,660

O t h e r c r e d i t s a n d r e l ie f s

Some of the credits and reliefs abolished from 1 January 2011 are as follows:

Abolition of tax credit for trade union subscriptions (currently 70 per year.

Employer provided childcare will now be considered a taxable benefit in kindin the hands of an employee.

Professional subscriptions paid by employers on behalf of employees will nowbe subject to benefit-in kind tax. Such subscriptions will now be liable to tax,PRSI (both employer and employee) and the USC.

E x -g r a t i a t e r m i n a t i o n p a y m e n t s

The Budget includes a cap of 200,000 on tax free ex-gratia termination paymentsmade on or after 1 January 2011.

P A Y E on t a x a b l e sh a r e a w a r d s With effect from 1 January 2011, PAYE will apply to benefits in the form of shareawards. This brings restricted stock units (or RSUs) and performance shares awardsinto the PAYE net. It is as yet unclear whether this will be extended to share options but based on the proposals announced today, it would appear the current 30 daypayment mechanism through the Form RTSO1 will be retained. Hence, there is someuncertainty as to how PRSI and the USC on share option gains will be collected from2011.

The introduction of withholding taxes for share awards has some significantimplications, both positive and negative. On the negative side, PRSI and the USC willnow clearly apply to the taxable gains at source. It is assumed that the PRSI chargewill include employer PRSI, albeit the detailed provisions regarding any PRSI changes

have yet to be published.

On the positive side, however, the value of any share awards subject to PAYE shouldnow be relevant for the purposes of Irelands special expatriate assignment reliefprogram. This should help promote Ireland as an attractive location for key talentwhich in turn helps increase foreign direct investment in the country.

O t h e r s h a r e s p l a n r e l a t e d ch a n g e s

A number of other smaller measures involving share schemes were also announcedincluding:

Confirmation that approved share option schemes have been abolished for

options exercised on or after 24 November 2010. This was flagged in theNational Recovery Plan but in practice has limited application to companiesin Ireland given that very few plans have been approved.

Confirmation that the USC will be applied from 1 January 2011 to approvedprofit sharing schemes and SAYE schemes. It is also understood that PRSI


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will be applied to these plans from 2011. Importantly, there are no proposalsto abolish the beneficial tax reliefs associated with Revenue approved profitsharing and SAYE plans.

The abolition of relief for new shares purchased on issue by employees after 7December 2010. This relief was previously capped at a lifetime limit of6,350 and also had limited application in practice.

Relief for interest paid on a loan to acquire shares in certain companies willbe abolished in respect of loans obtained after 7 December 2010. For existingloans, tax relief is to be phased out over the next four years.

U n i v e r s a l S o c i a l Ch a r g e

Both the income and the health levy are to be abolished and replaced by a newUniversal Social Charge (USC).

The proposed USC rates are as follows:

Person s under the age of 70

Annua l Income Charge 4,004 0%First 10,034 2%10,034 to 16,016 4%Over 16,016 7%

Persons aged 70 or over Annua l Income Charge 4,004 0%First 10,034 2%Over 10,034 4%

In essence, the USC is likely to follow the approach of the income levy in that itapplies to practically all income sources (before reliefs) and it is also considered a taxrather than a social security contribution. Some of the more significant pointsregarding the USC which have emerged today include the following:

the current exemption from levies for medical card holders is unlikely toapply to the USC;

income for USC purposes can be reduced for certain capital allowances, butonly where taxpayers are actively involved in the relevant business;

the current levy exemption on tax-free termination payments will also extendto the USC;

salary and pension payments paid under a PAYE exclusion order toindividuals resident in a treaty country will be exempt;

income for USC purposes can be reduced by maintenance payments whichqualify for income tax relief; and

social welfare and similar payments will be exempt from the charge.

P R S I

A full summary of PRSI measures was not published along with the Budget. Hence,further details are likely to emerge shortly. However, the most significant issueannounced in the Budget is the removal of the ceiling on employee (Class A) PRSIcontributions (currently 75,036). This will significantly increase the PRSI cost for

high earning employees with effect from 1 January 2011.

The Minister has increased the self employed (Class S) PRSI contribution rate from3% to 4% thereby harmonising PRSI across both the self-employed and employees.There is also a reference to a 4% PRSI charge being applied to certain public offices


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which are currently exempt from PRSI. This could have implications for certaincompany directors of State organisations.

DIRTAn increase of 2 percentage points was announced on retention taxes on deposits andexit taxes on life assurance policies and investment funds to apply from 1 January

2011. Consequently, existing tax rates will increase from 25% to 27% for paymentsmade annually or more frequently and from 28% to 30% on payments made lessfrequently than annually.

Pe n s io n a n n o u n ce m e n t s

PRSI on pension contributionsThe PRSI and health levy reliefs previously available for employee pensioncontributions are to be abolished. With effect from 1 January 2011, employee pensioncontributions will be subject to employee PRSI and the USC.

Employer PRSI relief on pension contributions made by employees is also to be

reduced by 50% from 1 January 2011.

Contribution limits for pension reliefThe annual earnings limit which (along with age-related percentage limits)determines the maximum tax-relievable contributions for pension purposes will bereduced to 115,000 from 1 January 2011.

These reduced limits apply for payments made in 2011 irrespective of whether thepension contribution is against 2011 earnings or to the earnings of 2010 under thethrow back provisions. Accordingly, to maximise the benefit in 2010 of the currentthreshold of 150,000, employees may wish to consider additional pensioncontributions before the end of the tax year.

Reduction of the Standard Fund ThresholdThe upper lifetime limit for tax relieved pension funds, the Standard Fund Threshold,is reduced to 2.3m, down from 5.4m a reduction of some 57%. Where a pensionfund exceeds the lifetime limit punitive rates of tax apply to the excess.

Individuals can apply to The Revenue Commissioners within 6 months of Budget Dayfor a Personal Fund Threshold to grandfather the value of pension benefits thatexceed the 2.3m limit at 7 December 2010.

Where the higher Personal Fund Threshold (above 5m) has already been approvedunder the legislation that introduced lifetime limits in December 2005, the higherPersonal Fund Thresholds will still apply.

Restriction of pension tax free lump sumFrom 1 January 2011 the tax treatment of lump sums from pensions will be as follows:

The first portion, up to a limit of 200,000, will be tax free (previously1.35m)

Sums between 200,001 and 575,000 (being 25% of the 2.3m thresholdabove) will be liable at 20%

Sums above 575,000 will be liable to marginal rate tax.

Lump sums received before December 2005 will be ignored under these rules.

The tax benefits available to staff retiring from an organisation on or before 31December 2010 would appear to be much more advantageous that those that willapply from 1 January 2011.


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Changes to Approved Retirement Funds (ARFs)From 2011 ARFs will become more widely available with all members of DefinedContribution pension schemes now being eligible but an individual wishing to avail ofthe ARF options must satisfy the lower of the following new minimum set aside rules:

Invest the first 120,000 or so in a Minimum Retirement Fund or

Other annual pension income of around 18,000 already in payment.

The Budget provides for changes to the deemed distribution rules for ARFs from2011 in that an annual income tax charge based on 5% of the value of the ARF at 31December each year (formerly 3%) applies. This tax applies irrespective of whether ornot the individual actually withdraws funds from the ARF: effectively it is a forceddistribution as credit for the income tax on the deemed distribution is not available onsubsequent distribution from the fund.

B u s i n e s s t a x a t i o n

Corporation taxThe commitment to the maintenance of Irelands iconic 12.5% corporation tax rate isconfirmed again in the Budget speech.

The rate, is complimented by the R&D tax credit regime, the holding company regimeand Irelands network of tax treaties

Start-up comp aniesIn order to promote job creation, the Budget proposes to extend and amend theexemption for start up companies from corporation tax and capital gains tax.

The proposal is to extend it to companies which commence a new trade in 2011. The

Budget also amends the relief to now link the amount of relief available, to theamount of employers PRSI paid by a company in an accounting period subject to amaximum of 5,000 per employee. Where the amount of qualifying employers PRSIis lower than the reduction in corporation tax, relief will only be available at thatlower amount.

Patent royalties

In line with what was announced in the National Recovery Plan in relation to tax

exemption for qualifying patent royalties, the exemption both for dividends and

income earned directly from same is abolished effective from 24 November 2010.

Small and Medium Enterprises

A new Employment and Investment Incentive (EII) is being introduced to replace theBusiness Expansion Scheme (BES) that will come into operation after the necessary

approval from the European Commission has been received and expire on 31

December 2013. (The existing BES incentive will continue to operate in the

meantime.) The Minister announced significant increases in the investment limits

(see below) permitted under the new EII incentive. Other important features of the

new incentive (list of qualifying activities, investor limits, period investment must be

held) have not been announced.

ExistingBES

NewEI I

Company fund-raisinglimits

2m 10m

Aggregate (lifetime)

12 months

1.5m 2.5m


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It is hoped that EII will stimulate greater investment in the SME sector and will behighly focused on job creation and job retention.

The Minister also announced that the certification requirements under EII will bemuch more straightforward than is the case under BES.

BES is listed as specified reliefs subject to the high earners restriction and this mayexplain some of the fall off in investment over recent years. There is no firmindication at this stage as to whether an investment under the EII will be included inthe list of tax incentives, which are subject to the high earners restriction. If it is, thebenefits envisaged may, in practice, turn out to be less than expected.

The tax relief available on a BES investment insulates the investor against some of therisks of investing in SME enterprises a 41% taxpayer investing 10,000 wouldgenerally receive a 4,100 tax benefit irrespective of whether the business succeeds.However, providers of capital base their investment decisions primarily oncommercial rather than tax consideration so only businesses with real prospects willattract interest.

E n v i r o n m e n t a l t a x a t i o n

Energy efficient equipm entA scheme of 100% upfront capital allowances (tax depreciation) for energy efficientequipment was introduced in 2008 for an initial period of three years. The Budgetextends this scheme by a further three years to 31 December 2014.

Companies which qualify for these accelerated allowances benefit from cash flowsavings as tax relief for this spend can be claimed in the first year of use rather thanover the normal eight year capital allowance period for other items of plant.

Home improvementsA new tax incentive will be introduced to promote employment and energy efficiencyin homes. This new scheme, designed to encourage individuals to make their homesmore energy efficient, will provide relief in the form of an income tax credit at thestandard rate for expenditure of up to 10,000 with the tax credit available in thefollowing tax year. A fund of 30m will be available for this scheme in a single taxyear.

R e le v a n t Co n t r a c t s T a x ( R CT )

It is proposed to introduce a second rate of RCT at 20% for tax compliant

subcontractors (i.e. those holding valid C2 cards). The existing rate of 35% willcontinue to apply to unregistered subcontractors. Previously C2 registeredsubcontractors could receive payments gross from principal contractors. The new20% rate coupled with a proposal to allow RCT only as an offset against tax due by thesubcontractor, as opposed to obtaining periodic repayments, will mean that allsubcontractors should now suffer withholding tax which will be retained against taxdue. Under current legislation if a trader holds a C2 card no withholding tax applies

More robust reporting requirements for principals are also proposed to boost taxcompliance. Further details regarding RCT proposals are likely to emerge in theFinance Bill.

It should be noted that RCT may impact on many industry sectors, including thepublic sector and telecommunications industry. It is not always limited to thetraditional RCT industries of meat processing, construction and forestry.


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P r o p e r ty b a s e d t a x in c e n t i v e s

The Budget announced a number of measures designed to restrict the utilisation ofproperty based tax incentives and the abolition of all such schemes from 2014 asummary of which is as follows:

Capital allowances claimed by individuals and companies on rental propertiesmay only be offset against rental income from the specific propertyconcerned. This measure applies to individuals from 1 January 2011 and tocompanies for accounting periods beginning on or after 7 December 2010.

An individual who carries on a trade (whether as sole trader or inpartnership) and who claims capital allowances on a building used in thattrade may only offset those allowances against income from the tradeconcerned, unless the individual is actively involved in the trade. Thismeasure applies from 1 January 2011.

Any unused capital allowances may not be carried forward beyond the 7 or 10year write off period for the building concerned.

Capital allowances schemes with a write off period of 10 years and which havenot ended will be truncated to 7 years, with the capital allowances truncatedbeing reduced by 20%.

From 2014 all unclaimed capital allowances arising after 2014 and anyunused capital allowances carried forward will be terminated.

From 1 January 2011, Section 23 relief may only be offset against rentalincome from the Section 23 property and any unutilised Section 23 relief willbe lost at the end of the 10 year holding period. If a Section 23 property issold within the holding period, the new owner will not be entitled to claimany Section 23 relief notwithstanding the claw back suffered by the vendor.The Budget also indicates that any unused Section 23 relief will be terminatedfrom 2014.

Stamp duty

The Budget brings good news for the majority of house buyers (including investors) asit reduces the rate of stamp duty on purchases of residential property to just 1% (withany excess above 1m chargeable at 2%). This is a significant reduction from thecurrent progressive: first 125k 0%, next 875k at 7% and balance (over 1m) at 9%.

There is, however, a sting in the tail as existing reliefs and exemptions for purchasesof residential property are to be abolished. These include first time buyer relief(exemption), the relief for purchases of new property by any owner-occupier, the

relief for the transfer of a site to a child and the 50% relief for transfers of residentialproperty between relatives.

The new stamp duty rates will apply to any conveyances or transfers executed on orafter 8 December 2010. Transitional measures will be put in place to ensure that anypurchaser who has contracted to buy residential property before 8 December 2010and who completes the purchase by 1 July 2011 will not end up paying more stampduty than they would under the existing rules.

No changes are proposed to the rates of stamp duty on commercial property (top rate6%) or stocks and marketable securities (1%).


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Cap i t a l acqu i s it i on s t ax (CAT)

The only CAT change is a 20% reduction in the thresholds for gifts and inheritancesas follows:

Group Current On of after 8December 2010

Grou p A (parent to child) 414,799 331,839

Group B (related persons) 41,481 33,185

Group C (non-relatedpersons)

20,740 16,592

Cap i t a l ga i n s t a x (CGT)

While there is no specific mention of any changes to CGT in the Budget, it is possible

that some adjustments will be made to this tax in the coming years. For example, thePlan mentioned that the current single CGT rate of 25% will be changed to a system ofdiffering rates for different levels of gains, and that certain reliefs and exemptionswould be restricted or abolished.

Exc i se du t i es

Mineral oil tax With effect from 8 December 2010, the following changes have been made to exciseduty on mineral oils:

duty on petrol will increase by 4 cent per litre (including VAT);

duty on auto-diesel will increase by 2 cent per litre (including VAT);

Air tr avel taxA new single air travel tax of 3 will be levied on passengers departing Irish airportsfrom 1 March 2011. (This replaces the previous two-tier system introduced of 10 forflights to destinations over 300km and 2 for lesser flights.)

The Minister has indicated that this new rate is being applied on a temporary basisand will be reviewed at the end of 2011 at which point it will be increased unlessthere is evidence of an appropriate response from airlines.

Betting dutyThe Minister has proposed that the betting legislation be amended to apply the 1%betting duty to bets made by Irish punters to offshore entities, whether online or byphone.


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Vehicle re gistration tax

A car scrappage scheme applies to certain qualifying new vehicles registered from1 January 2010 to 31 December 2010 and provides for VRT relief of up to 1,500.Budget 2011 has extended the scheme to include certain new vehicles registeredfor a further six months up to 30 June 2011 but the maximum relief for those

vehicles will be capped at 1,250.

The current VRT exemption for electric vehicles and electric motorcycles isextended to those registered between 1 January 2011 and 31 December 2012.

The VRT relief of up to 2,500, for plug-in hybrid electric vehicles, is extended tothose registered between 1 January 2011 and 31 December 2012.

A new VRT relief of up to 1,500 will apply to flexible fuel vehicles (running on85% + bio-fuel) and hybrid electric vehicles (not qualifying as plug-in)registered between 1 January 2011 and 31 December 2012.

The 50 VRT charge on commercial vehicles is extended to certain smallervehicles for the transport of goods. The Minister also announced that the

commercial vehicle rate will increase to 200 from 1 May 2011.

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Irish Budget 2011 Final PwC

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