I think that anyone reading the papers in the last few weeks would agree that the effectively leaked speech was old news before Brian Lenihan even sat down.  Well almost! 

There were some words however which will have interested advisers and I would like to focus in on four quotes in particular: 

“The entry point to the restriction will now occur at adjusted income levels of €125,000”

This quote refers to high income earners who avail of specified reliefs.  This restriction provides for a restriction on the amount of reliefs which can be claimed.  The entry point was previously €250,000.  This measure will impact on advisers from a compliance and planning perspective.  In terms of compliance, far more individuals will be affected by the restriction and, as a result, most practitioners will need to familiarise themselves with the complex calculation required to determine the restriction.

In terms of planning, the typical high income earner may decide to reduce his or her earnings subject to income tax leaving by funds in corporate structures rather than paying over funds to Revenue. 

Capital gains tax, which continues to be chargeable at 25%, will continue to be an attractive cash exit mechanism on retirement or sale particularly with regard to the specified income restriction mentioned above and due to increased taxes through PRSI and levies.

Lastly, as measures are due to be introduced in 2010 are there planning measures which can maximise relief in 2009 while it is still available?  It is my understanding that certain specified “reliefs” such as patent exempt income cannot be carried forward because they are not in fact reliefs.

“I will examine the curtailment and removal of further reliefs in the context of the Finance Bill.”

While the budget speech left us with a feeling that nothing really happened from a tax perspective, this may be far from the case.  The Commission on Taxation report suggested the removal of many different reliefs.

My hope is that the Department will take a medium to long term view when deciding whether or not to curtail or remove reliefs.  Most reliefs were introduced to due to lobbying of some sort from particular industries due to a generally accepted need to stimulate a particular sector.  It takes time and effort to draft and introduce new reliefs.  It must be assumed that reliefs were introduced with worthwhile motives. 

Some analysis of reliefs has been to examine take up of the relief and, if there has been low take up, the relief is regarded as being of no particular benefit and is recommended for abolition.  One example of a relief which had a low take up and is recommended for abolition by The Commission on Taxation is the employee purchase scheme S479 TCA.  A deduction of €6,350 is available where new shares are purchased by employees.  While the relief did have a low take up that could be partially explained by the fact that businesses did not require investment during the boom.  In addition, Credit was easy to obtain sales were good.  This scheme however could be ideal for businesses which are finding it difficult to get credit or who wish to improve negotiation terms with their banks.  Employees may now be willing to invest to safeguard their jobs with the feeling that they have some control over their investment return.

While there is a lot of negative coverage of hotel and property schemes, we need to be careful not to completely destroy investor incentives.  I can foresee a need for a relief in the future in respect of restoration of derelict building projects some of which may have qualified for Section 23.  It is important that we do not compound our problems by hastily removing reliefs at the wrong time.

“I look forward to receiving the report of the Innovation Taskforce and I will explore its recommendations in the context of the Finance Bill”

This is a positive.  There is no doubt that BES relief and enterprise Ireland venture capital type funding has helped business in what was a bleak year.  This has a trickle down effect to advisers.  Tax relief can encourage investment in to companies which are not seen as bankable.  Some of these companies can become successful.  From Department of Finance perspective there may in some cases be little or no loss of earnings as many investors are converting deposit income taxed at 25% in to money used to pay wages which is subject to income tax and PRSI. 

“The 12½ per cent Corporation Tax rate will not change. It is here to stay.”

This assurance is obviously intended as a message to the foreign multi-national sector.  However, this is of key importance to professionals advising on taxation and business structures and in terms of structuring their own businesses.  I mentioned in my article on the supplementary budget of 2009 that more businesses would be inclined to incorporate in 2009.  This has certainly been the case.  Delay in debtor payment has brought cash flow to a critical point in businesses.  Incorporation of businesses can allow new and existing businesses to build up prudent cash reserves without the requirement to pay 50% of paper profit in cash to the Revenue each October / November.  We see businesses with cash reserves such as Ryanair being in a position to negotiate extra-ordinary bargains in times of downturn.  The long term assurance in respect of the 12.5% rate should allow Irish companies of varying sizes to build up prudent reserves which will allow them to profit during the next downturn and benefit the economy as a whole.

Conclusion

On the face of it tax has not been the focus of this budget there are important movements which will affect how we advise our clients.  The Finance Bill will reveal more.  In the meantime, for some, there may be merit to planning in the last weeks of 2009 year of assessment.

Douglas Sadleir
Notary Public
Taxation and Commercial
McGuire Desmond Solicitors
5 Lapps Quay
Cork
Douglas.sadleir@mcguiredesmond.com
www.mcguiredesmond.com
Tel: 021-4224600
Fax: 021-4224699