Yesterday, Tuesday 12 October 2021, Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath announced Budget 2022, the first budget speech for two years.
There were some stark figures announced in the early parts of Mr Donohoe’s speech, including the €17.25bn spent on Covid supports, the €240bn of debt forecast for next year and current inflation of 3.7% in September 2021 being the highest since June 2008.
However, there was positivity highlighted in the recent exchequer performances, in particular VAT and income tax receipts, and this allowed the Ministers to announce a budget package of €4.7bn split between €4.2bn worth of spend and €0.5bn of tax measures.
We have set out below some of the key tax measures announced in the budget speech. The draft Finance Bill will be published later this month which will provide more detail on each of these measures.
Every worker will benefit from the income tax measures introduced, and these were marginal amendments primarily to account for inflation and the increase to the minimum wage from €10.20 to €10.50 per hour. The main impact on personal tax is as follows:
- The income tax standard rate band has been increased by €1,500. The entry point to the 40% income tax rate now increases to €36,800 for single individuals and €45,800 for married couples (with one earner).
- The PAYE credit, personal tax credit and earned income credit will all increase by €50 to €1,700 from the tax year 2022 onwards.
- The ceiling of the 2% USC rate will be increased from €20,687 to €21,295 to ensure it remains the highest rate of USC paid by full-time minimum wage workers. The threshold for the highest rate of Employer PRSI will also increase by €12 to account for the increase to the minimum wage.
- The income tax deduction in respect of light and heat expenses incurred by employees working from home has been increased from 10% to 30%.
In general, the changes to income tax rates will save a single middle-income earner €415 per annum.
The announcement of the new 15% corporation tax rate for large multinationals last week led to the first budget for many years, where a commitment to our 12.5% corporation tax rate was not reinforced. However, our 12.5% corporation tax rate will be retained for groups with a turnover of less than €750m, so it will still be the prevailing rate for SMEs.
International influence on our corporation tax code was also seen in the announcement of the introduction of the interest limitation rules, which are adopting the ATAD measures from the OECD BEPs programme. These measures will seek to cap interest deductions at 30% of EBITDA. However, there will be exemptions, including where the interest deductions are less than €3m and certain financial institutes. Another measure of the ATAD programme is the anti-reverse hybrid rules which are also being adopted by Ireland from 1 January 2022. These rules are aimed at preventing transparent entities from avoiding tax when controlled outside of Ireland in jurisdictions where the income will not be subject to tax.
Outside of the international changes, there were no significant changes to the corporation tax code. There had been anticipation of changes to both transfer pricing and the R&D tax credit regime, which are both awaiting ministerial orders from prior year announcements. There may be more focus on these items in the finance bill.
A new tax credit has been announced for the digital gaming industry, presumably to drive growth in this area within Ireland. The credit will be calculated at 32% of eligible expenditure from a minimum spend of €100k to a max spend of €25m in relation to the design, production or testing of a game.
In respect of new companies, the corporation tax start-up relief has been extended to the end of 2026 and will now be available for the first five years of trading instead of the first three years.
It was also announced that there would be a 3-year extension to the Employment Investment Incentive Scheme (“EIIS”) and some legislative amendments to make it more accessible.
One key talking point for tax practitioners in advance of the budget was around the current position, which does not entitle a proprietary director a tax credit for PAYE withheld on their employment income where the company paying their wage is availing of debt warehousing. However, it was announced that debt warehousing is now being extended to income tax liabilities for those proprietary directors caught in this position to combat such situations.
It was welcome news that there would be no cliff edge to the Employee Wage Subsidy Scheme (“EWSS”). The EWSS is to be extended to 30 April 2022 but will be changed gradually between now and then to phase it out. There will be no change to the scheme for October and November. For December, January and February, there will be two rates of €151.50 and €203, while for March and April 2022, there will be a flat rate subsidy of €100. From 1 January 2022, no new applicants can apply for the scheme.
The hospitality and tourism sector will welcome the announcement that the 9% VAT has been extended to 31 August 2022 for their industry.
Much of the noise from opposition benches arose during the announcement of measures on property and housing. There was no inclusion of any form of a vacant home tax which had been raised in some pre-budget discussions and commentary. Instead, a new Zoned Land Tax will be introduced, which will be calculated as 3% of the market value of certain land suitable for residential units. This tax will have a two-to-three-year lead-in time and will replace the vacant site levy once brought into force.
The Help-to-Buy scheme has been extended to 31 December 2022 but will be reviewed during the year while relief for some specific pre-letting expenses incurred by landlords to be continued for a further three years to the end of 2024.
Indirect Taxes and Green Measures
Despite the pressures of climate change and having the Green Party as a coalition member, Budget 2022 was not as green-focused as some commentators may have predicted. Some of the measures for a Greener economy are set out below:
- Carbon tax was increased by €7.50/tonne of CO2 from midnight for auto fuels and from 1 May 22 for other fuels.
- It was announced that the VRT rates will be increased from 1 January 2022, with a new rate table being brought into force.
- Tax relief was offered for income generated from selling self-generated electricity back to the grid.
- VRT relief on battery electric vehicles to be extended to the end of 2023.
- The Accelerated Capital Allowance Scheme for Energy Efficient Equipment has been extended for another three years to 31 December 2026. However, equipment operated by fossil fuels is no longer applicable for the scheme. Hydrogen-powered vehicles have now been included in the list of equipment that qualifies for the ACA scheme.
- Smokers see an extra 50cent on a packet of 20 cigarettes.
There was some good news for the farming industry, with Stamp Duty relief for Young Trained Farmers being extended to 31 December 2022 and stock relief to be extended to the end of 2024.
As has become normal practice, much of the headline items had already been leaked in advance of the budget announcement. Despite the commitment to continue the EWSS until Spring, there may rightly be some disappointment among both entrepreneurs and SMEs that there is not a greater focus on assisting them with any further tax incentives. However, given the backdrop of Covid and Brexit, it is a difficult period to control the finances, as some of the figures highlighted in our introduction suggest. We would hope the Covid supports and measures introduced can allow businesses to emerge from this difficult period, and perhaps future budgets can provide some much-needed tax incentives to our domestic SMEs and entrepreneurs.