Budget 2011

Introduction
This budget has been introduced in conjunction with the Four-Year National Recovery Plan 2011-2014 published already on 24 November.  As expected the corporate tax rate remains the same with the view of trying to encourage foreign direct investment (FDI) opportunities.  For many earners, this Budget 2011 will substantially increase their effective income tax rates with many tax reliefs having been reduced significantly or abolished altogether.

 

Universal Social Charge (USC)
A new Universal Social Charge (USC) will be introduced to replace both the health levy and income levy.  The charge will apply to all income at rates between 2% and 7%, once annual income exceeds €4,004.  Pension contributions will not have an exemption from the charge however there will be an exemption from the charge for “genuine” business capital allowances. Persons aged over 70 years are not liable at the rate of 7% but instead will pay 2% on gross income up to €10,036 and 4% thereafter.

 

Persons entitled to a full medical card are not excluded from the Universal Social Charge.

Income Tax Bands and Credits
From 1 January, the 20% tax rate band will be cut by 10% from €36,400 to €32,800 for a single person and from €45,400 to €41,800 for a married couple where one spouse is earning and from €72,800 to €65,600 for a married couple where both spouses are earning over €32,800 each. 
The main tax credits will also be cut by approximately 10%. As outlined in the four year plan the tax credits and band will be followed by a 2.5% reduction in 2012 and further 2% for 2013 and 2014. The employee tax credit will be cut to €1,650 from an existing €1,830. Likewise the single personal tax credit will be €1,650. Other tax credits such as the home carer credit, widowed parent credit, and the incapacitated child credit will be cut by 10%. 

As announced in the Four Year Recovery Plan, the age credit and age exemption limits will be abolished over four years beginning in 2011.  The age credit is to be cut by approx 25% in the first year from €325 to €245 for a single person and from €650 to €490 for a married person and the age exemption limit will be reduced by 10% for both single and married persons to €18,000 and €36,000.   

Also under the Four Year Recovery Plan the Government has abolished from 2011:
-              Approved Share Options Scheme
-              BIK Exemption on employer provided childcare
-              Trade Union Subscriptions Credit
-              Income Tax relief for rent paid for private rented accommodation to be phased out over 8 years, the same timeline as previously announced for Mortgage Interest Relief.
-              A ceiling of €40,000 on the tax exempt earnings of artists
-              Tax Relief on subscriptions to professional bodies

A number of other charges will be introduced as follows:

1. PRSI, Health and Income Levy charge on Approved Profit Sharing Schemes
2. PRSI, Health and Income Levy charge on Approved Save-As-You-Earn Schemes
3. PRSI, Health Levy charges for Unapproved Share Options
4. PRSI, Health Levy charge for Share Awards

Tax relief on Loans to Acquire an Interest in Certain Companies
The valuable relief used by individual and corporate investors on funds borrowed to invest in companies is to be phased out between 2011 and 2014.  The relief will be restricted by 25% in 2011, 50% in 2012, and 75% in 2013.

 

PRSI Changes
The employee PRSI ceiling on income of more than €75,036 is to be removed.  Self-employed (class S) PRSI rate will increase from 3% to 4%. A modified PRSI rate (certain public servants) increased to 4% on incomes in excess of €75,036 and there will be an introduction of a 4% PRSI charge for certain Office Holder (e.g. Judiciary and State Solicitors).

Employer Exemption from PRSI
The above scheme first introduced in July 2010 for Employer PRSI Exemption is to be extended to 2011.  This applies to employers who engage unemployed individuals in their businesses.

 

Tax and PRSI changes on Pension Contributions
From 1 January 2011, employee contributions to occupational pension schemes and other pension arrangements will be subject to employee PRSI and the Universal Social Charge.  The current employer PRSI exemption for employee contributions to occupational pension schemes and other pension arrangements will be reduced by 50% from 1 January 2011.

The contribution limit (along with age-related percentage limits) is being reduced from €150,000 (2010 rate) to €115,000 for 2011.

Under the four year recovery plan, ex-gratia termination and pension lump sum payments in excess of €200,000 are to be taxed and the rate of income tax relief on pension contributions will be reduced from 41% to 34% in 2012, to 27% in 2013 and 20% in 2014.

 

Deposit Interest Retention Tax (DIRT)
From 1st January 2011, DIRT tax and Exit tax will increase by 2%. Deposit accounts interest will increase from 25% to 27% and Life assurance policies and funds will now become liable to tax at 30%.

Section 23 and Capital Allowances for Passive Investors
From 1 January 2011, section 23 type relief will be restricted to income only from the section 23 property itself (currently such income can be set against all rental income)  At end of ten year holding period, any unused relief will be lost.  If section 23 property is sold within this period, the new owner will not get Section 23 relief and the seller continues to be subject to a clawback of relief already given.  For Section 23 properties yet to be sold, for which the relief has yet to be claimed, the 10-year qualifying period will start on 30 June 2011 regardless of the date of the first qualifying lease.  Therefore, in such cases no Section 23 relief will be available after 30 June 2021.

For passive investors, from 7 December 2010, any unused capital allowances carried forward beyond Budget day, any unused capital allowances carried forward beyond the 7 year period within which the allowances are made will be lost.  From 2011 onwards, capital allowances will be restricted to offset against income from the property which gave rise to them, whether rental or trading income, with no setting sideways against any other form of income.  Schemes with a period over 10 years which has not ended will be shortened to 7 years from when allowances are first made.  Capital allowances limited by this shortening will be reduced by 20% and may be made evenly in the year of assessment 2011 and all subsequent years of assessment up to and including the 7th year after the allowance was first made.

 

Corporation Tax
The corporation tax rate remains unchanged at 12.5%.

 

Start-up Corporation Tax Exemption Revised
The three year tax exemption for start-up companies is being extended to include start-up companies which commence a new trade in 2011.  The scheme is being modified so that the value of the relief will be linked to the amount of employers’ PRSI paid by a company in an accounting period subject to a maximum of €5,000 per employee.  If the amount of qualifying employers’ PRSI is lower than the reduction in corporation tax liability otherwise applicable relief will be based on the lower amount.

 

BES Replacement Scheme
The Business Expansion Scheme is set to be replaced with a new Employment and Investment Incentive scheme.  BES will be renamed “Business Investment Targeting Employment Scheme” (BITES).  The maximum amount that can be raised by companies in a 12 month period is to be increased significantly as will the lifetime amount that can be raised per company. 

 

Patent Royalties
Under the four year plan, the tax exemption for patent royalties has being abolished.

 

Capital Gains Tax (CGT)
Under the four year recovery plan there will be structural reforms to CGT in 2012.The base for CGT is to be broadened and the levels of reliefs and exemptions will be reduced. In place of the single rate of CGT, a new system with differing rates for different level of gains will also be introduced.

 

Capital Acquisitions Tax (CAT)
The current group tax free thresholds are being reduced by 20%.  This reduction applies in respect of gifts and inheritances taken from midnight on 7th December 2010.

 

Under the four year national recovery plan, the base for CAT is to also to be broadened and the level of reliefs and exemptions applicable to be reduced.  Similar to CGT, the current single rate of 25% is to be changed to a system with different rates for different levels of asset values.

 

Stamp Duty
In respect of instruments executed on or after 8 December 2010, a 1% rate will apply on the transfer of residential property valued up to €1 million, with 2% applying to amounts over €1 million.

There is also the abolition of various reliefs and exemptions, in respect of instruments executed on or after 8 December 2010 as follows:

1. • First time buyer relief
2. • Exemption for new houses under 125 sq m in size
3. • Relief on new houses over 125 sq m in size
4. • Consanguinity relief for residential property transfers
5. • Exemption for residential property transfers valued under €127,000
6. • Site to child relief

A transitional provision will be put in place to ensure that anyone who has entered into a binding contract to purchase a residential property before 8 December 2010, and who executes the transfer of that property before 1 July 2011, will not lose out.

 

Relevant Contracts Tax
The current RCT rate of 35% is to be replaced with a two-rate withholding system:

1. 20% rate for subcontractors registered for tax with an established compliance record
2. 35% rate for subcontractors not registered for tax

However, the Revenue is to issue guidelines on how these new rates may affect C2 holders.

The current monthly repayment system will be abolished and replaced with an offset system. 

Other Amended Regulations

Excise Duty
From midnight on 7th December 2010, the excise duty on diesel increased by 4 cent per litre on petrol and 2 cent per litre on auto-diesel (both inclusive of VAT)

 

Air Travel Tax
A single revised rate of Air Travel Tax of €3 will come into effect on 1 March 2011, on a temporary basis.  This tax will be reviewed at the end of 2011 at which point it will be increased “unless there is evidence of an appropriate response from airlines”.

 

Betting Tax
All bookmakers taking bets online from Ireland will pay 1% betting duty on those bets in the same way that betting shops currently do.

 

VAT Rate to Increase to 23% by 2014
The standard rate of VAT is to be increased by 1% in 2013 to 22%.  The rate will be further increased to 23% in 2014.

 

Carbon Tax
Carbon Tax will double by 2014.  A carbon tax of €15 per tonne was introduced in the 2010 Budget.  It is proposed that over the period of the National Recovery 4 Year Plan that the price of carbon will be doubled to €30 per tonne by way of a €10 increase in 2012 and €5 increase in 2014.

 

VRT and Motor Tax
On 1 January 2013, the Government will adjust the current VRT bands and Motor tax rates in line with technological advances made in the EU by this date.  It is expected that the VRT and Motor Tax systems will continue to be based on CO2 emissions.

 

New Taxes on the Way

Water Metering to be introduced by 2014
 It is intended that the domestic water charges will cover local authorities’ operational costs and a proportion of the capital costs of providing water.  A system of water metering will apply to domestic homes and the water charges will be based on the amount consumed above a free allocation.

 

Site Value Tax to be Introduced
A flat rate “household charge” will be introduced in 2012 as an interim measure which is expected to be €100 per household.  It will be followed in 2013 by a final Site Value Tax, which will be introduced when valuations have been completed and may cost some householders up to €200 per annum.

 

Summary
This is anticipated to be the first of a major step in getting Ireland back on track to improve the economy but over the next few years more policy reforms are expected by the Government and without job creation and market growth these expenditure cuts and tax hikes may become harder to sustain for certain sectors of society as time goes on.

If you have any queries in relation to any of the above please contact a member of our Taxation Department.

 

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Mulcahy Gorman Mulcahy and employees do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.