The Minister in his Budget speech today has increased the effective rate on taxpayers caught by the High Earners restriction from 25% up to 44%. He has increased the effective income tax rate from 20% to 30%. This income is also subject to PRSI, Health Levies and The Income Levy. Tax based property investors who paid up to 26% in equity to avail of hotel and other tax investments are now faced with the prospect that the investment was a real cost as the real value of the tax saving is less than the upfront equity cost.

This means that any tax based projects currently in the pipeline are dead in the water at a time when the building industry needs a boost. In addition, it will not be welcomed by promoters of existing tax investments in financial difficulties who are seeking additional funds from investors to protect their allowances.

This reduced cap of €125,000 with tapering up to €400,000 will bring more taxpayers into the High Earners restriction. While there has been no specific change to the patent and artists exemptions the reduction in the High Earner’s cap means that that this income could be taxable at a rate of up to 44%.

The sacrificial lamb is the introduction of the levy of €200,000 per annum for Irish nationals and domiciled individuals who are not Irish tax resident. This tax arises where their worldwide income is in excess of €1million and they have Irish-located capital of greater than €5million.
 
The statement by the Minister to leave the Irish corporation tax rate at 12.5% is once again reiterating to the European Community that we are not for amending this rate. The extension of the exemption from corporation tax which has not yet been signed into law for a further 3 years for new start up companies is a positive step to encourage entrepreneurship. The Minister has broadened the capital allowances scheme for energy efficient equipment from seven categories to ten. The three new categories are

1 Refrigeration and cooling systems
2 Electro-mechanical systems
3 Catering and hospitality equipment

I welcome the reduction of the standard VAT rate back to 21% with effect from 1 January 2010. I think a further reduction down to 17.5% would have sent out a positive message to consumers and helped reduce the tax leakage to Northern Ireland as will the immediate reduction in excise duties on alcohol.

The introduction of a car scrappage scheme of €1,500 for 2010 can not come too soon for car dealerships. The Greens have put their stamp on this Budget with the VRT relief on electric cars and the relief of up to €2,500 on hybrid electrical vehicles being extended by a further 2 years to 2012. A new carbon tax of €15 per tonne has been introduced with immediate effect on petrol and diesel and from 1 May 2010 on home heating oil and gas.

On a positive note the Minister as outlined in previous press statements, has not increased the income tax, Capital Acquisitions tax or Capital Gains tax rates. The Minister has not tampered with the retirement relief or business and agricultural reliefs. A reduction in stamp duty rates would have assisted the ailing property market.

Following on from the recommendations by the Commission on Taxation, a new property tax will be introduced based on site values. No date has been set for its introduction. A water charge will also be introduced for those of us who do not have to pay for our water at present. The recommendation that pension lump sums below €200,000 should be tax free has been accepted by the Minister and the Government is considering the tax rate which should apply to any sums above this. Therefore, there is still time to retire and maximise the current tax free lump sum.

The Minister has outlined his plan to introduce a new simplified system of two tax charges in 2011. PRSI and levies will be amalgamated into a new universal social contribution and a progressive income tax system will be introduced. This is to be welcomed given that there are four different charges on income under the current system.

Full details of all the measures will be included in the Finance Bill in the New Year together with measures to strengthen Ireland’s competitive edge in the Financial Services sector and in dealing with tax avoidance. So alot to look forward to in the New Year!

Purcell McQuillan Tax Partners Limited
17 Clyde Road
Dublin 4
Ireland

Tel:  +353 1 668 2700  +353 1 668 2700 
Fax: +353 1 668 2750

Email: pmq@pmqtax.com