At this stage, everyone within the Business community will be painfully aware of the perilous state of the national finances. Between the collapse in tax revenues and increase in spending on both day to day items such as social welfare costs and on longer term commitments such as the recapitalisation of the Banks, the States finances are facing into an estimated deficit in 2009 of close to €25 billion.

While there are differing schools of thought as to how this deficit may be addressed, commentators and politicians alike agree that the current imbalance must be addressed and quickly.

There are quite simply only two ways this problem can be addressed namely increase taxes and/or cut spending. 

At the time of writing the public sector continues to lead the vanguard of resistance to cuts in the States’ annual pay bill while latest figures to the end of October show that despite significant increases in effective income tax rates through the imposition of the income levy and increased rates of PRSI, the Governments income tax receipts continue to plummet.

The position is the same in relation to VAT where an increase in the standard rate from 21% to 21.5% in December 2008 did no more than encourage a pre Christmas exodus across the Border to avail of the standard 15% rate applying in the UK. 

With these pressures in mind the Minister for Finance Mr Lenihan is facing tough decisions ahead of the Budget on 9 December if the Government is to meet its target of taking €4 billion out of the economy in 2010.

While there can be no certainty as to what will happen in the budget from a taxation perspective it would be prudent for the business community and their advisors to consider what tax changes may be introduced and based on this to make a valued judgement as to whether any steps should be taken now to minimise the impact of any changes.

Some considerations........

The Commission on Taxation report published in September contained 250 recommendations in relation to taxation ranging from macro issues such as introduction of an annual property tax and water charges to other more specific changes in the rules relating to existing tax reliefs.

As increases in the headline rates of tax are unlikely to generate additional tax Revenues it is likely that any tax changes will focus on reducing the effectiveness of existing reliefs.

With this in mind here are some thoughts as to what may transpire on 9th December:

1. Capital gains tax retirement relief

At present a capital gains tax exemption applies on proceeds of less than €750,000 arising on the sale of a business or shares in that business where certain conditions are met. Where a sale, including any transfer of an interest in a family business to a child takes place the full proceeds or if higher, the  deemed market value, may be exempt from tax in certain circumstances.

It may be prudent in circumstances where such transactions are contemplated anyway to advance the timing of completion of such a transaction to a date in advance of the December budget to ensure that the present tax reliefs are availed of.

2. Capital acquisitions tax - Business asset relief

This is a relief that is closely associated to retirement relief.In cases where assets are passed onto any party (but usually family members on a practical basis) for a consideration less than market value a potential exposure to gift tax arises. Fortunately however, business asset relief currently provides that the exposure is reduced by 90% in the case of qualifying business assets in certain circumstances. The Commission on Taxation has recommended that this relief be curtailed significantly and in light of the current budgetary position it may be wise to complete any transaction likely to give rise to an exposure in this area in advance of Budget day.

3. Pension contributions 

At present tax relief is available at a taxpayers marginal tax rate on contributions to a personal pension scheme at rates ranging from 15% to 40% of earnings depending on age. This is subject to an income cap of  €150,000 which it should be noted is significantly lower than the income cap of €€275,238 which applied in 2008. Given the ineffectiveness of increasing tax rates on the level of tax receipts obtained by the Government in 2009, a restriction in the level of relief in this area would seem to be a prime target of any attempts by Government to boost overall tax revenues. Notwithstanding the cash flow consequences arising and of course the important commercial considerations surrounding any investment decision of this nature, it may be prudent for taxpayers to advance the payment of any contributions to before 9th December so that the tax consequences can be determined with certainty.

In the case of companies the level of contributions to an approved company pension fund are not presently restricted in this manner and it may well be prudent for any company to consider advancing any contributions that it intends to make anyway in 2009 to a date in advance of  9th December.

4. Tax reliefs on maturity of pensions

On maturity of a pension fund at retirement date, a tax free lump sum equal to 25% of the value of the pension fund or 1.5 times salary may be drawn down with the balance invested to purchase an annuity or in an Alternative Retirement Fund (ARF).

Where a taxpayer is considering retiring in the immediate future it would again be prudent to ensure that all necessary arrangements are in place before the Budget so that the impact of any unwelcome changes contained in the Budget are minimised.  

5. Golden handshakes on termination of employment

At present, particularly where a departing employee or Director has significant service and a reasonably small pension fund it can be possible for reasonably large payments to be made to that employee or Director on a tax efficient basis. Added to this, at present all statutory redundancy payments are tax free with employers entitled to a 60%  rebate from the Department of Enterprise Trade and Employment.

Again, to achieve certainty with regard to the tax consequences arising, it would be advisable if any proposed arrangements on the part of employers in this area were finalised before Budget day in anticipation of any potential changes that may arise which may erode the current favourable tax treatment applying.

Other year end tips

- Maximise income between a married couple at the 20% rate band

With the individualisation of the 20% standard tax rate band the maximum earnings that can arise to a married couple with one spouse employed is €45,400. In many business the reality is that the second spouse often provides an essential and unremunerated support function to the business owner, which if performed by another person would be deserving of a wage or salary.

It is tax efficient if that second spouse were to be remunerated in a manner that maximises the benefit of the overall maximum standard tax rate band applying to a married couple of €72,800. This can also permit that second spouse to make arrangements in relation to either a State or private pension in their own name at retirement.  

- Minimise capital gains tax payments on 15 December 2009

This is the day when capital gains tax payments are due in relation to assets sold in the 11 months to 30 November 2009. Many taxpayers are at present holding assets, in particular, shares in quoted companies, which have a value considerably below their acquisition cost. It makes sense from a tax perspective for any taxpayer anticipating a capital gains tax liability to offset this gain by disposing of the loss making asset before 30 November so that it can offset the taxable gain otherwise arising.

It is essential to note that the loss has to be realised by selling the asset before it can be offset against a gain on sale of another asset.

- Research and development tax credits     

In last years Finance Bill the time limit within which companies could reclaim research and development tax credits was reduced to one year. The practical implication of this is that any company with a December year end has until 31 December 2009 to submit a claim to Revenue for a refund of tax credits arising in the year ended 31 December 2008.

This is a generous relief and is one of the central planks of the Governments initiatives to maintain investment levels in Ireland. It has in our experience wider application than is generally realised and in our view it can be beneficial to carry out an independent review of business processes and activities to ascertain if any benefit may be forthcoming.

And finally ....... many businesses today pay their VAT and PAYE/PRSI by means of Direct debit throughout the calendar year with any balance falling due for payment in January 2010.

To avoid interest charges arising steps should be taken to ensure that any balance of tax is paid within the strict deadlines set out by Revenue.

For more information please contact our Tax Partner, Alan Lawlor on 01 8880930 or 087/9096392 

Wallace O'Donoghue

Suite 138/139, The Capel Building, Mary's Abbey, Dublin 7.

www.walaceodonoghue.ie       info@wallaceodonoghue.ie