As expected and heralded, there have been substantial cuts to public sector expenditure in the much anticipated and certainly dreaded 2010 Budget. Public Service salaries are to be reduced as are Social Welfare payments and new entrants to the Public Service are to have reduced Pension benefits. All of these expenditure cuts will, no doubt, have been expected and watched closely by the International Community and will have a direct bearing on Ireland’s ability to raise finance going forward.

However, from a tax perspective there were few large scale changes to the existing tax regime. That being said, a reiteration of Ireland’s long term commitment to maintaining a corporation tax rate of 12.5% is reassuring for both businesses currently operating in Ireland and also for those considering Ireland as a base in the future.

In addition, the extension of the corporation tax exemption for new start ups is a positive measure. Companies which commenced to trade in 2009 were eligible for a corporation tax exemption for three years provided certain conditions were met.  This existing scheme has now been extended to include companies that commence to trade in 2010 also.

This budget did focus somewhat on the higher earners with new restrictions being introduced and a broadening of the tax net for those Irish domiciled but non resident individuals.

Those earning in excess of €125,000 per annum who avail of existing tax incentives to reduce their overall tax liability are to face an increased minimum tax rate of 30%. This measure is to be introduced on a tapered basis with the full restriction applying to those earning up to €400,000 per annum.  

Irish domiciled individuals whose worldwide income in any year is in excess of €1million and whose Irish capital assets are valued at more than €5million are to be subject to tax of €200,000 per annum. Further details on this measure are to be included in the Finance Bill but given the subjective nature of capital valuations and the ability to manipulate income levels it is difficult to predict the tax take on this measure for the Exchequer. 

The Minister also revealed his intention to simplify the income tax system by removing the existing PRSI, Health Levy and Income Levy and replacing this with a low level of social contribution to be paid by all with income tax rates increasing as earnings increase. This move, although flagged today, is not to take effect until 2011.

In a complete reversal of provisions only introduced in the last budget mortgage interest relief, rather than being abolished, is now to be extended until 2017.

Equally, VAT only recently increased from 21% to 21.5% is now to be returned to 21% from the 1st of January 2010. Excise duty on alcohol has also been decreased with effect from midnight of the 9th of December. 

A Carbon tax at a rate of €15 per tonne is to be introduced on fossil fuels. This will have the impact of increasing the cost of diesel and petrol from midnight on the 9th of December with home heating oils and gases being impacted from 1st of May 2010.

However, from a tax perspective, in many ways there is more to be said, both positive and negative, about provisions that were not included in the much anticipated 2010 Budget and many will view this budget as a missed opportunity to provide some element of stimulus to the struggling SME sector. Although the introduction of some form of credit review system for rejected lending applications by banks covered under the capital guarantee scheme is welcome, tax policy itself has not moved on in terms of encouraging economic activity.

Certainly the failure to remove the close company surcharge in the current environment is a gaping omission. Effectively penalising businesses that retain cash by the application of a further level of tax seems ill conceived in the current trading circumstances that businesses face. Equally, a reduction in employer’s PRSI levels is perhaps an area which should have received some attention.

Also, the failure to expand the corporation tax exemption for new business start ups to those operating service companies is disappointing and does not sit particularly well with the Government’s views on progressing a knowledge based economy or even simply encouraging increased levels of employment.
Thankfully the Minister resisted pressure to increase taxes on already beleaguered individuals and this is certainly to be welcomed. In an international context, increasing the level of tax for individuals any further could have acted as a disincentive to multi-national organisations to locate operations in Ireland notwithstanding the low rate of corporation tax. 
The tax rates for Capital Gains Tax, Capital Acquisitions Tax and Stamp duty also remain unchanged.

Taken as a whole, the budget is lacking some positive business measures, however the Minister has stated that recommendations from the Innovation Taskforce and some measures to strengthen Ireland’s competitive edge in the International Financial Services sector would form part of the Finance Bill. We shall have to wait and see.

Darragh Kilbride is a Director of Kilbride Consulting, a specialist tax consultancy practice offering advice to both business and private clients. To learn more about the complete range of tax consultant solutions we offer, please visit: www.kctax.ie

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