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Irish Finance Bill 2011 – changes aplenty and severity galore

#TaxTipsIreland

The Finance Bill 2011 was published on Friday and was every bit as sobering as expected. The key measures of the Finance Bill are summarised below. There’s plenty to read so get yourselves a cup of tea and settle back...

Items announced in Budget

Income Tax -  the main changes:

  • Tax bands and the main tax credits have been reduced by 10% for 2011. This is in line with the National Recovery Plan and the Budget
  • The age credit has been reduced by €80 per annum for a single person and €160 per annum for a married couple
  • The age-related exemption limits have been reduced by 10% to €18,000 for a single/widowed person and €36,000 for a married couple. These exemptions will be phased out over the next four years
  • A limit of €200,000 has been implemented in respect of the tax free element of ex gratia termination payments i.e. any payments over this amount will be taxable at the marginal rate
  • The Finance Bill confirms that Rent relief will be phased out over the next seven years in line with the removal of mortgage interest relief. No new claims after 8 December 2010 will be allowed and the amount of the credit for individuals currently claiming the relief will be reduced to nil over the next seven years. For 2011 the credit has been reduced by 20% from 2010 rates.
  • Relief on loans to acquire shares in certain companies to be phased out over four years. No new claims after 8 December 2010 will be allowed and for existing claimants the relief will be reduced by 25% per annum over the next four years
  • Tax relief on trade union subscriptions is abolished by the Bill. The net effect of this for relevant individuals is the loss of an annual tax credit of €70
  • The tax exemption from BIK for employer provided childcare has been abolished
  • Relief in respect of Approved Share Options Schemes and new shares purchased by employees has been abolished
  • PAYE, PRSI and USC will be applied to share awards
  • A ceiling of €40,000 has been introduced, as expected, in respect of the artist exemption

The reduction of tax bands and credits will have a significant impact on all taxpayers. Each euro reduction in tax credits represents a reduction in net pay of one euro. For example, the single credit has been reduced by €180 for the year 2011, leaving taxpayers less well off by €15 per month. The same reduction has been made to the PAYE credit.  The reduction of these credits alone, therefore, results in a net loss of €30 per month for a single person.  We have also seen a decrease in the rent credit in the year 2011 impacting on those in the rental market.

The standard rate tax bracket at which taxpayers pay tax at 20% has been reduced by 10% also, pushing many middle income earners into the higher tax bracket and paying tax at 41%.

The above changes in respect of PAYE, PRSI and USC on share-based compensation will be criticised by employees and employer alike as they will most likely result in additional PAYE withholding issues in addition to increased costs.

Income Levy, Universal Social Charge and PRSI:

  • The introduction of the Universal Social Charge (USC) to replace the Health Levy and Income Levy is included in the Bill
  • The employee PRSI ceiling was abolished in the recent Social Welfare Act
  • PRSI rate for the self employed was also increased from 3% to 4% in the Social Welfare Act
  • PRSI and Universal Social charge to be applied to share based remuneration in line with the National Recovery Plan

A simplified social security rate has been introduced and will be applied on a gradual basis depending on the level of income. The USC is a tax rather than a social security contribution and therefore the payment of this charge does not result in any entitlement to State Benefits.

Taxpayers will start paying the USC on income as low as €4,004. This pulls a significant number of low income earners into the tax net where before, those earning less than €15,036 did not pay the income levy and those earning less than €26,000 did not have to pay the health contribution so this new measure will have a negative impact on low earners who are already trying to make ends meet. This measure will potentially have an impact on students working in part time jobs in order to fund the increased student fees above.

The PRSI ceiling has been abolished, increasing the PRSI liability for higher earners significantly. Also the increase in the PRSI rate for self-employed people has increased to by 1% to 4%. This is a significant burden on sole traders who may be already struggling to keep afloat.

The combined effect of the PRSI and USC amendments is such that the majority of the population will be paying out more than before without the promise of any additional benefits down the line to look forward to.

Income Tax other changes:

  • The Finance Bill includes a new tax credit for expenditure incurred by individuals on energy efficient improvements to their “residential premises”. The relief is at the standard rate of tax and is available for expenditure up to €10,000 for a single person and €20,000 for a married couple. The relief will be granted in the tax year following the year in which the expenditure was incurred.
  • The benefit in kind exemption in respect of employer paid subscriptions to professional bodies has been removed i.e. when an employer pays such subscriptions on behalf of an employee a benefit in kind charge will now arise.
  • The Business Expansion Scheme (BES) is being replaced by the Employment and Investment Incentive (EII). The changes are aimed to simplify the process, increase company limits and restructure the level of relief. The changes are subject to approval from the European Commission and until this happens the current BES scheme will continue.

The relief in respect of expenditure incurred by individuals on energy efficient improvements is welcomed. However, this is to be implemented by Ministerial Order. Therefore, we do not know when it will actually come into operation. Furthermore, it is difficult to determine how many individuals will be in position to avail of the relief as a decision to make such improvements is not a top priority for people already struggling to make ends meet in the current environment.

The introduction of the benefit in kind charge on professional subscriptions is intended to “mirror” the removal of the tax credit for trade union subscriptions. However, such a change is viewed as particularly harsh given that the individuals suffering this additional charge are generally required to hold their qualifications in order to carry out their employment duties.

Tax on Savings

  • DIRT on ordinary deposit accounts has been increased by 2% to 27%
  • DIRT on longer term deposit accounts has been increased by 2% to 30%
  • Similar increases have also been applied to Life Assurance Policies and Investment funds

The move to further increase the rate of DIRT will not be welcomed by those in the country fortunate enough to be able to save each month. The increase in the rate to 27% marks a 33% increase on the rate in just a few short years.

Pensions

  • The Finance Bill confirms the reduction announced in the budget in the annual earnings cap for tax relievable pension contributions from €150,000 in 2010 to €115,000 in 2011
  • The life-time limit on the tax-free pension lump sum has been capped at €200,000. Any excess over this amount will be taxed at the standard rate up to the new Standard Fund Threshold (€575,000) and thereafter at the marginal rate
  • The effective tax rate on  the deemed distribution from Approved Retirement Funds (ARFs) is increased from 3% to 5%
  • The maximum allowable pension fund at retirement has been reduced from €5.4m to €2.3m with transitional arrangements for certain individuals
  • The attractive, flexibility of the ARFs is to be extended to all Defined Contribution plans from the date of the passing of the bill
  • The changes in respect of employee and employer PRSI relief on pension contributions as announced in the Budget were brought into law in the Social Welfare Act in December 2010.

Prior to the 2011 Budget, taxpayers contributing to their pensions were entitled to relief from PRSI and the health levy on their contributions making this an attractive option, which encouraged people to save for their future.  However, contributing to a pension now seems to be a luxury that many people will no longer be able to afford with PRSI and USC relief no longer available.

The budget measures in respect of pensions  are not  likely to  encourage taxpayers to contribute to their pensions, especially now that when a pension is finally drawn down, it is taxed at the higher rate of 41%.

The above contradicts the push in early years by the Government to encourage people to contribute to their pensions.

Stamp duty

  • The Finance Bill implements the reduction in rate for transfers of residential property to 1% on properties valued up to €1million as announced in the Budget
  • A 2% rate will apply to amounts over €1million
  • Removal of many reliefs to include transfer of a site to a child, owner occupier relief, first time buyer relief, and consanguinity relief on transfers of residential property
  • These changes are effective from 8 December 2010

The above Stamp Duty amendments on residential property are significant. Those that might previously have had to pay Stamp Duty at 7% and 9% can now look forward to reduced rates of 1% and 2%.  The abolition of many valuable reliefs, however, such as first time buyers’ relief will be a huge loss to those hoping to get a foot on the property ladder given the reduced property prices today. A 1% Stamp Duty charge on properties up to €1m and 2% on amounts thereafter will in some cases just be another expense that will have to be factored in to the decision to buy or not.

Capital Acquisitions Tax

  • The reduction in the tax free thresholds by 20% has been confirmed
  • This applies in respect of gifts or inheritances on or after midnight on 7th December 2010

A reduction in the thresholds for Capital Acquisitions Tax (CAT) in Budget 2011 was not a big surprise. Although 20% is a substantial reduction, given that the value of many assets has decreased significantly over the last number of years this reduction in the CAT thresholds may not necessarily have a real impact on the average man on the street.

Relevant Contracts Tax

  • A new online electronic system has been introduced
  • A three rate withholding system depending on each contractor’s tax status will be implemented
  • A rate of 0% will apply to C2 card holders
  • A 20% rate will apply to subcontractors who are registered for tax with an established compliance record but do not hold a C2 card
  • The 35% rate will apply in all other cases
  • The monthly payment system will be replaced by an offset system

A significant cash flow advantage arises for individuals holding a C2 card. We would therefore encourage all contractors to review their eligibility and seek advice if required.

Excise

  • The car scrappage scheme is extended to 30 June 2011 (this had been due to end on 3 December 2010)
  • The petrol and diesel increases announced in the Budget have been confirmed in the Finance bill (4 cent a litre on petrol and 2 cent a litre on diesel)
  • The single rate of air travel tax of €3 from March 2011 will apply on a temporary basis as detailed in the budget 
  • The 1% betting duty for bets made on the internet, telephone etc announced in the  budget has been introduced 
  • Betting exchanges will also become liable to a new excise duty of 15% of the commissions made by intermediaries in respect of people in Ireland

The car scrappage scheme involves a VRT rebate when a car aged 10 years or more is scrapped and a new car is purchased. The extension of this scheme will be welcomed by those in the motor retail trade as it undoubtedly helps increase the demand for new cars at a time when many people are not otherwise inclined to upgrade.

The increase announced in petrol and diesel costs are not welcomed and add to the growing tax burden of everyone and will have a day to day impact on peoples’ pockets. This measure will also have a significant impact on taxi drivers and other individuals purchasing petrol and diesel as part of the running of their business.

The single rate of air travel tax of €3 replaces the €2 rate for short flights and €10 for longer flights. While this does represent an increase in some cases the reduction for longer flights will be welcomed by the tourism industry.

Items not announced in Budget Income Tax

  • The €1,500 Student Services Charge is replaced with the €2,000 Student Contribution Charge. The current tax relief in respect of third level fees has been amended to disallow the first €2,000 paid from tax relief for full time students and €1,000 for part time students (the €2,000 excess is per family)
  • The age related tax credit for health insurance premiums has been removed for individuals aged 50 to 60. The amount of the relief has, however, been increased for those individuals over the age of 60

The increase of student charges coupled with the reduction in tax relief in respect of such charges will not be welcomed. The increased cost for insurance premiums for those aged between 50 and 60 was not expected. However, the increased relief for those over 60 will take away some of the pain for a few.

Self Assessment – Pay and File date

  • The pay and file date for income tax, capital gains tax and capital acquisitions tax have been brought forward from 31 October to 30 September
  • An additional 14 days for individuals paying on line will remain
  • This change will apply for the tax year 2011 onwards

The reason for this change has been cited as a means of improving the assessment of tax performance in advance of the December Budget i.e. it is hoped that this change will have the effect of reducing the concentration of tax receipts in October and November and allow the government to forecast budget needs with more accuracy.

The effect of this is not good for Irish taxpayers in terms of cash flow. Those already experiencing cash flow difficulties will be put under greater pressure with the earlier filing date. In addition, for 2011 this puts an additional administrative burden on many as preliminary tax for 2011 will be due for payment on 30 September 2011 whereas the 2010 filing date and payment of balance of tax will be 31 October 2011. This means that taxpayers and their agents will need to deal with two different payment deadlines in 2011.

Other/Miscellaneous

Among the other measures announced by the bill are the following:

  • The Finance Bill provides for an increase in the stamp duty levy payable by health insurance providers
  • The Bill introduces the facility to make tax payments by credit card, debit card or any other method approved by Revenue
  • The bill provides that the Collector General is no longer obliged to issue physical receipts for tax paid
  • Tax geared penalties have been extended to excise duties.