Taxation/Budget News
Budget 2010 – “turning a corner “ ?
By Alan Lawlor, Tax Partner Wallace O'Donoghue
Dec 9, 2009 - 11:59:00 PM

Budget 2010 – “turning a corner“ ?

The Minister for Finance Mr Lenihan has struck a decidedly positive note in delivering his 2010 Budget speech to the Dail. While declaring the worst is over he has announced little in the way of tax changes for the vast majority of tax payers and has introduced spending cuts of €4 billion which he says is the “last big push” towards achieving budgetary stability in the current economic crises.

There are a number of measures targeted at stimulating certain beleaguered sectors of the economy, while top earners who historically used tax shelters to reduce considerably their effective tax rate will be unhappy with the increase in the minimum effective tax rate from 20% to 30%.

In summary the main points are as follows:

1. Macro economic outlook

The budget deficit to the end of November 2009 was slightly in excess of €22 billion, and will probably increase to circa €25 billion by year end. With no material increase in tax revenues likely in 2010 and a saving of just €4 billion in expenditure, next years deficit will in all likelyhood be in the order of €22 billion.

There will be an expected fall in GDP of 7.5% in 2009 and although the rate of contraction will in the Governments view be  in the region of just 1.25% in 2010 we are as a nation by no means out of the woods in terms of the current financial and economic crises. Indeed the Minister in aiming to achieve a budget deficit within EU monetary guidelines of 3% of GDP by 2014 has conceded that in 2011, 2012 and 2013 additional cost saving measures will be required.

Hopefully, before then however,  an international economic upturn coupled with greater competitiveness in the domestic economy (inflation is in the region of -6% per annum) will assist Ireland in closing the budget deficit in a shorter time span.

2. Taxation  measures

There have been no changes in either tax rates or in rate bands. In 2011 a new universal social welfare contribution will replace the existing income levy, employees PRSI and health levies which it is planned will be levied on all taxpayers at a low rate as a collective contribution to public services.  While any simplification measure in this area will undoubtedly be welcomed by tax advisors and payroll bureaus alike it remains to be seen what the new “low” rate will be and indeed whether or not it will lead to removal of some of the existing anomalies in the system as between benefits available to employed and self employed individuals.

In brief the other main changes include:

• Mortgage interest relief will be continued in certain cases up to 2017 after which it will be phased out completely.
• At present high earners with adjusted income in excess of €250,000 per annum who have taken steps to reduce their taxable income through use of tax shelters are required to pay tax at a minimum effective tax rate of 20%. It is proposed that the effective rate will increase to 30% plus PRSI/levies  in 2010. In addition the adjusted income ceiling below which the restriction on use of allowances to shelter income will not apply has been reduced to €125,000. Marginal relief will however mean that the full rigour of these changes will only apply where an individuals adjusted income exceeds €400,000.
• In what will be regarded as a controversial move a new “domicile levy” of €200,000 is planned  for non resident Irish nationals who have worldwide income of €1 million per annum and Irish capital of greater than €5 million. At this early stage it is not known how exactly “capital” will be defined or indeed how Revenue would seek to go about collecting this additional tax.
• In a welcome move the 21.5% VAT rate will be reduced to 21% on 1 January 2010.
• New start up businesses will also welcome the extension of the three year exemption from corporation tax for certain new companies which commence trading in 2010, in addition to those which commenced in 2009.
• A new car scrappage scheme is being introduced whereby a reduction of €1,500 in vehicle registration tax (VRT) will apply to individuals trading in cars which are 10 years or older, for new low carbon emission cars.
• This is in line with the Governments green agenda which now sees the much heralded carbon tax being introduced immediately in the case of petrol and diesel, leading to an increase of circa 4 cents per litre from midnight on 10 December.  
• Publicans and high street retailers alike will welcome the considerable reduction in excise duties on alcohol products which is designed along with the reduction in the VAT rate to halt the exodus of shoppers across the border.

Finally it should be noted that the Government plan to introduce water charges and a new property tax sometime later in 2010.

3. Expenditure measures

The Minister has not disappointed commentators who have long argued for any corrective budgetary measures to be effected through spending cuts rather than by increasing taxes.

It is envisaged that there will be cuts in spending across the board with the following measures likely to be of greatest significance:

• Reduction in public sector salaries ranging from 5% on the first €30,000 of income to  10% of income in excess of €70,000 per annum. Higher paid public servants will see even larger cuts.
  
• A decrease in average dole payments of €8 per week with greater cuts for those aged 20 to 24.
  
• An average decrease in child benefit  of €16 per month although this will not be taxed 
  
• A reduction in capital spending of €1 billion in 2010 and a planned further reduction in 2011 of €2 billion
  

Conclusion

The budget changes particularly on the spending side were well flagged and the absence of any significant curtailment in existing tax reliefs for business and business owners will be welcomed by many in the sector. As with all budget measures it remains to be seen if the Governments estimates of tax receipts and expenditure will be transformed into reality in the present difficult and turbulent times.

It will only be at that stage that we can really begin to comment on whether this budget is really an indication that we are as an economy beginning to turn a corner and move away from the worst downturn in the history of the State.
Finally, the 2010 Finance Bill which gives effect to the tax changes proposed will be introduced in late January and will give considerable more detail on the matters outlined above.

For more information please contact Alan Lawlor Tax Partner in Wallace O Donoghue 01 8880830

http://www.wallaceodonoghue.ie/