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Irish initiative to create jobs, improve competiveness and build confidence!

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The sun is shining, the days are long and the new government is making big efforts to make improvements. Just 9 weeks since the change of government, Michael Noonan announced the jobs initiative. They certainly have (as they said they would) "hit the ground running".

The purpose of the jobs initiative as cited is to "assist in employment generation", "provide opportunities for those who have lost their jobs" and to "kick start economic activity". A tall order you might say, but the document contains many welcome changes for employers and those in the tourism industry. Unfortunately, anything good has to be paid for and it is the pension funds that bear the burden in this instance.

Following 3 successive years of declining economic activity the government is hopeful that growth will happen soon with positive expectations for 2011 and 2012. In order to assist growth the jobs initiative will provide a number of measures, some of which are summarised below.

12.5% Corporation Tax 

The government have again reiterated their commitment to maintain the 12.5% corporation tax rate, emphasising that this is "here to stay".

PRSI on share based remuneration 

Some employers deliver part of their employees' compensation via shares. Various types of schemes have been developed in this regard - sometimes employees are permitted to purchase shares at a discount, sometimes shares are provided to employees free of charge and sometimes employees are advised that they will acquire shares at a future date.

These schemes are obviously seen by employers as a means of incentivising their employees but up to 31 December 2010 a further attraction existed; in that although an income tax charge often applied to employees on the acquisition of the shares, no employee or employer PRSI charge arose. The recent budget, however, includes a provision to introduce an employer and employee charge on this income. This was not welcomed by employees but for employers it brought significant worry (a charge of 10.75%).

The government has recognised the increased business cost which would arise from this and the fact that this could have a negative impact on employment levels. If applied it would appear that any benefit gained from this measure would not outweigh the negative impact, thus the minister has now confirmed that employer PRSI will not be due on such remuneration. This is effective from 1 January 2011. Employee PRSI unfortunately is still due (in respect of agreements entered into after 1 January 2011).

Research & Development Tax Credit Scheme 

Ireland's R & D scheme is very attractive, as it allows companies to offset qualifying expenditure (within certain limits) against their corporation tax liability. In addition, this scheme has the added advantage that in cases where the company has no corporation tax liability the credit may be repaid to the company.

This scheme plays a role in the encouragement of foreign investment into Ireland and is therefore very important in any discussion regarding growth in the future. The minister has acknowledged this by announcing his intention to make the legislation more flexible in terms of how companies account for the credit. 

Introduction of temporary second reduced VAT rate 

The minister announced the introduction of this lower VAT rate from 1 July 2011. It will apply to certain services, mainly in the tourism section. Among the services mentioned are restaurants and catering, hotel and holiday accommodation, entertainment (cinemas, museums etc) and hairdressing.

As always, when we see reductions in VAT rates, the question arises as to whether or not the reduction will be passed on to the consumer? For example will we see a reduction in the cost of a hair cut? As many businesses have been struggling for some time they may choose not to reduce their prices but rather to enjoy the benefit of the reduced rate themselves. 

Employer PRSI reduction

In order to assist in job creation the minister announced a reduction in the employer PRSI rate with effect from 1 July 2011. The intention being to reduce employer costs in the creation of new jobs. Currently, a reduced rate of 8.5% applies in respect of employees earning up to €356 per week. The minister has announced that this rate will now be halved. This will apply until the end of 2013.

Coupled with the PRSI exemption scheme for employers creating new positions (the exemption applies for 12 months for qualifying positions) this move is welcome and will hopefully assist businesses to survive these difficult times.

Air Travel Tax Abolished

Another measure to help the ailing tourism sector was the reduction of the air travel tax to zero (date to be confirmed). The position in respect of this will be reviewed before the end of 2012 in order to determine whether or not the desired effect has been achieved i.e. if this results in more overseas visitors to Ireland. 

Pension levy 

The above relieving measures unfortunately need to be funded and the minister has advised that this will be done via the introduction of a temporary levy. The levy of 0.6% will be applied to the capital value of assets under the management of pension funds in Ireland (with certain exceptions) and will apply for 4 years from 2011.

There is concern as to the impact of this levy on the pension sector and the minister has acknowledged this concern. However, it is a short term measure which is being delivered as the better or two evils given the difficult challenges with which the government is faced.

In summary some good news and some bad news but all in all it looks like there is hope for the future. The main aim of the initiative is to create jobs, improve competiveness and build confidence. Only time will tell as to the success of this. However, in the interim many people will hopefully feel some positive effect.