Reviews of Budget 2011 and the likely impact on support for businesses, economic activity and jobs.

According to the Minister for Finance, Ireland is in recovery and this recovery is being led by exports. Commenting on recent developments certain economic commentators point to the possible emergence of a two tier Europe, as France and Germany seek to insulate their economies from the effects of crises in Ireland, Greece and possibly Portugal and Spain. It is clear however that business in Ireland is operating on two tiers. At one level many foreign companies have seen an increase in manufacturing output and exports whilst indigenous companies – those operating in what one might call the real economy - continue to struggle.

When one discards the Minister’s rhetoric about having to “work off the excesses of the boom”, it is difficult to identify any new measures that will stimulate growth in the domestic economy. On the contrary, certain measures have the potential to stifle new business and cause greater difficulty for businesses already struggling in the current tough economic environment.

Some of the new measures that will impact SMEs are outlined below.

Abolition of Relief for Interest on Loans to Companies

Included in the list of tax reliefs being abolished – some of which had been expected due to leaks in advance of the budget – is a proposal to disallow tax relief on loans to acquire an interest in certain companies. Many family-owned businesses have had to borrow personally to provide necessary funding to keep their businesses afloat. The denial of relief on money borrowed to lend to genuine businesses seems counter intuitive and put more pressure on businesses that are already struggling to meet their obligations.

At the time of writing it is understood that the abolition of relief will have effect from 1 January 2011. If this is the case, individuals should consider whether repayments can be restructured to accelerate interest over capital payments before the relief ends.

Abolition of Patent Exemption and reduction in qualifying limit or Artist Exemption

The exemption from tax on income from qualifying patents has been implemented with effect from 24 November. Also, the maximum tax-free income that can be earned by an artist from 2011 is €40,000.

Persons with patent or artistic income should consider replacing existing ownership structures with a dividend access share structure. A dividend access share structure will, in certain cases, enable individuals to continue to access income from patents and artistic activities tax-free.

Pension Planning & Retirement Lump Sums

The annual earnings limit which (along with age-related percentage limits) determines the maximum tax-relievable contributions for pension purposes is being reduced from €150,000 (2010) to €115,000 for 2011.

As expected the overall life-time limit on the amount of tax-free retirement lump sums that an individual can draw down from pension arrangements is being reduced to €200,000. The excess will be taxed at the standard income tax rate up to an amount equal to 25% of the new Standard Fund Threshold (up to €575,000). The excess of retirement lump sum payments over that amount will be taxed at the taxpayer’s marginal rate of income tax. Furthermore, tax-free retirement lump sums taken since 7 December 2005 will be counted towards “using up” the new tax-free amount.

These changes take effect from 1 January 2011 there is an opportunity to avoid the restrictions by retiring directors in family companies on or before 31 December 2010.

Going forward, sole-traders and professionals will find that significant benefits can be achieved through partial or full incorporation of their businesses.  As well as greater pension planning opportunties, incorporation provides access to a significantly lower rate of tax on earnings, cheaper working capital and flexibility in relation to cash extraction.

Section 23 Relief

There is a significant pool of unoccupied and poorly performing section 23 property in Ireland. Many SME business owners invested in these properties and hold property where the level of rent does not cover mortgage repayments. The Government has announced that this relief will be ring-fenced to Section 23 property only and abolished altogether in 2014. These drastic measures will adversely impact many owner-managed businesses that will be forced to extract working capital from their businesses to meet repayments on these properties. The measures are arguably unconstitutional on the basis that the Government encouraged investment in these properties in the first place. As presented it is difficult to see how this measure would not end up in the Courts.

Technology Companies

The only ‘smart’ measure continued in the Budget is the extension of tax relief for investment in energy-efficient equipment for a further three years. No amendments have been made to the R&D tax credit system which continues to lag behind similar relief available to companies in other jurisdictions.

There is an opportunity to position Ireland as a center of excellence for gaming companies. However, the rate of VAT chargeable on business to consumer supplies is an issue. This can of course be avoided by incorporating a wholly owned subsidiary in Cyprus.

Estate Planning

The government has passed up the opportunity to implement the proposals of the Commission on Taxation in relation to the curtailment of CGT retirement relief and CAT business property relief. However, the tax-free thresholds have been reduced further by 20 20%.

It should be noted that the rates of CGT and CAT are to be replace with a multi rate system in 2012. This is a clear signal to family owned companies to review their affairs before reliefs are curtailed or abolished. There are a number of tax-efficient strategies that can be implemented to pass value and extract income without diluting control.

Summary

The Budget contains no significant stimulus measures for Irish indigenous businesses. Instead a broad range of taxes and cutbacks will be imposed on business and the Irish public. It is clear that there will be significant changes to the tax system in coming years. It is critical that correct tax advice is taken to minimise the impact of these changes of indigenous Irish businesses.

Bringing it all back home

Did you know that ...Ireland has concluded Tax Information Exchange Agreements (TIEAs) and Agreements with Guernsey, the Isle of Man and Jersey.
Ireland has also concluded Tax Information Exchange Agreements (TIEAs) with Anguilla, Antigua and Barbuda, Bermuda, the British Virgin Islands, the Cayman Islands, the Cook Islands, Gibraltar, Liechtenstein, the Marshall Islands, Samoa, St Lucia, St. Vincent & the Grenadines and the Turks & Caicos Islands.

In addition, Ireland has been designated by the Cayman Islands as a country that may make requests for tax information under Part IV of the Tax Information Authority Law. This allows the Revenue Commissioners to request information relevant to a tax investigation (including bank and entity ownership information) from the Cayman Islands authorities without the necessity of a bilateral TIEA. This applies for taxable periods beginning on or after 1 May 2009

Ireland's Patent Income Exemption

So, the Government is proposing to abolish Ireland's Patent Income Exemption with effect from 24 November 2010 (http://www.finance.gov.ie/viewdoc.asp?DocID=6599).  In truth, it's difficult to know to what extent the relief attracts innovation into Ireland, and the relief has attracted some bad press (http://www.irishtimes.com/newspaper/finance/2010/0723/1224275295222.html).

I understand that IBEC, the Irish Software Assocation and others are lobbying the Department of Finance to row back on their decision.  But, from what I've heard, the exemption is part of the price for retaining our 12.5% rate of corporation tax.

It doesn't help that the Commission on Taxation recommended abolition of the relief in 2009 (http://www.commissionontaxation.ie/Report.asp).  Ironically, only one member of the Commission refused to sign the report - that was Brendan Hayes, Vice President of SIPTU.  The consenting members of the Commission are below. 

Now, nobody asked me.  But it would be helpful if the consenting members issued a joint statement retracting their support for "the tax exemption for patent royalties to be discontinued".  As I said, nobody has asked me. 

•Tom Arnold, CEO, Concern
•Julie Burke, JMB Tax Solicitors
•Micheál Collins, Department of Economics, Trinity College
•Frank Convery, Heritage Trust Professor of Environmental Policy
•Tom Donohue, Partner, Russell Brennan Keane Chartered Accountants
•Eoin Fahy, KBC Asset Management
•Colin Hunt, Division Director, Macquarie Capital Group
•Sinead Leech, Director, Integral Finance and Technology Ltd
•Con Lucey, Chief Economist, Irish Farmers Association
•Danny McCoy, Director, IBEC
•Feargal O’Rourke, Partner, PWC
•Mary O’Sullivan, Irish Banking Federation
•Mark Redmond, CEO, Irish Taxation Institute
•Willie Soffe, Chairman, Dublin Transportation Office
•Mary Walsh, Chartered Accountant