BDO Pre-budget commentary - Derek Henry, Head of Tax

Economic Landscape

Forecasts are indicating a budget surplus of €10 billion for 2023, raising to €11.7 billion in 2024. Employment figures at 2.6 million represent the highest level of employment in the country in modern history. 

In this regard, Budget 2024 is framed with the backdrop of the economy at maximum sustainable levels. This, coupled with the impending general election in 18 months, leaves the Government with the challenging job of introducing a measured and balanced budget that stimulates areas that need investment while not fuelling further inflation.

As outlined in the Government's Summer Economic Statement, we can expect a Government package of €6.4 billion, of which €1.1 billion will be in the form of net Tax cuts.

One off versus permanent tax expenditure

The potential vulnerability of the corporate tax base is a continued concern that needs to be carefully considered. We have seen the year-on-year drop in Corporation Tax receipt in August. While it is too early to classify this as a downward trend, I think we will see a sensible approach from the government in terms of its strategy to ensure unsustainable permanent tax expenditure, not embedded into the system coupled with further funds committed to the National Reserve Fund.

It is also important that the Government gets the balance correct between improving household situations given the cost-of-living increase while not fuelling further inflation.

Tax Raising 

The bank levy is expected to be extended, albeit with some changes possible to the current rules. This could result in an increase above the €87m contributed by this tax in the current year.

The increase in the corporate tax rate for the biggest firms in the country to 15% in line with the international Pillar 2 project will kick in this year. It is well discussed about the sustainability of the current level of corporate tax in the medium to long term, but in the short term, this measure is likely to increase the level of corporate tax raised in the coming year.

Again, it is important to note that this 15% rate only applies to the very largest companies, i.e., companies with turnover of more than €750m globally. The 12.5% rate remains for all other companies. The government and, indeed, opposition parties have affirmed their continued commitment to the 12.5% rate for all other companies to maintain Ireland's competitiveness and attractiveness for business. We at BDO support this commitment and note the importance to our SME and large clients that fall under the limits. For these companies, the certainty of the 12.5% rate gives them the confidence to drive the growth of their businesses.

Cost of living measures

The cost-of-living measures will be the main focus of Budget 2024, and we will see a package of measures aimed at reducing the burden on individuals and families.

I do not think there will be a change to income tax rates, nor will there be the introduction of a mooted middle rate of income tax. However, I do believe we will see increased standard rate bands and potentially an increase in tax credits. 

Also, the USC is an area that will see a reduction in rates, with particular signs that the 4.5% rate, which affects income bands from about €23k -€70k, may be reduced. Alternatively, we may see more increases in the banding, which will positively affect taxpayers' bank balance.

There will likely be an increase in both the children’s allowances and some increased support to help reduce the cost of childcare.

Finally, I think there will be some direct support, such as electricity credits, to assist with rising costs. It is likely that there will be at least one more €200 credit, which will be funded from taxes raised from the windfall profits of the energy companies.

Other welfare payments, including the State Pension, could see increases. It is also likely that the minimum wage will go up to €12.70.

Housing stimulus

The Help to Buy Scheme will likely be extended to assist first-time buyers with talk of it being extended to second-hand homes. 

In an effort to stop small landlords from leaving the market, I expect to see some stimulus on this, which could see a tax-free rate to a limit or a lower rate of tax on residential rental income to bridge the gap between the corporate tax rate of tax on rental (25%) and the marginal rate paid by individuals (up to 55%).

Our wish for the sector

This is the fundamental emergency facing the country and the Government at the moment.  The housing crisis is not only causing hardship for individuals and families. It is starting to affect economic output as the capacity to house workers is hampering our attractiveness and becoming a limiter on economic growth. It is forcing our homegrown talent to look abroad and is reducing our ability to attract foreign talent to our shores.

This is a complex area, and anyone who suggests it is a simple fix is either disingenuous or misguided. A myriad of actions need to happen across all parts of the sector.  However, urgent and decisive action and, indeed, political bravery are needed. To prioritise this action, we would suggest three areas for immediate focus by the government.

1. We need to make house-building viable for homebuilders.
2. We need to unlock the planning system to prevent delays, particularly address the delay caused by judicial reviews.
3. We need to attract foreign capital into the system to address the indigenous capital shortfall from what is required to address the housing.

In terms of what can be done in the budget to address some of these issues, we would suggest the following:

Tax policy can successfully drive desired behaviour. Historically, we have seen this positive effect in projects such as the docklands redevelopment, which transformed the area in the 90s/2000s due to targeted tax reliefs. The various relief were then expanded in a broad manner that undermined their effectiveness and resulted in bad outcomes. However, this was as a result of bad policy. Controlled and targeted tax measures can be very effective in increasing residential property stock.

As I say, this will take political bravery, but we have to face up to the reality that the State and private homebuilders working together is the solution to this problem.

In relation to attracting foreign capital, we encourage two approaches:

• Firstly, we need to change the narrative and public discourse regarding foreign and institutional capital. We clearly have a shortfall in our capital requirements to invest what needs to be invested. We cannot over-leverage State borrowings to fund the shortfall. That option would expose us to the type of economic shock we had in 2008. We need to have diversified sources of capital, and we need to accept that. We need to accept that tax policy is part of attracting foreign capital, and we need to accept that the injection of foreign capital was responsible for significant proportions of the new housing stock up until 2021. The retraction of this foreign capital has been detrimental to new housing since then. In short, some projects have been delayed or cancelled due to the exodus of foreign capital in recent years.
• the review of the fund sector that was announced is welcome and should be accelerated with any suggested outcomes to improve our attractiveness and competitiveness needs to be actioned as a matter of urgency.

BDO submission on this public consultation outlines a number of key areas to be addressed primarily around simplification and certainty. Foreign investors look for stability in the political environment in which they invest their capital, and unexpected changes introduced at short notice reduce our attractiveness internationally. Therefore, any changes should be introduced in a controlled manner with carefully considered transitional periods.

Climate measures

I expect the Minister to continue on the agreed carbon tax increases. However, some relieving measures may be introduced/maintained to deal with cost-of-living effects.

I think the BIK exemption on electric cars will be extended.

Green investment 

We would like to see the government be proactive in some changes to the and in this regard would hope that there will be other business stimulus to encourage investment in renewable energy such as: 

• Incentives to invest in renewable energy technologies, for example green 
• Supports to sustainable buildings (retrofitting grants, capital allowances)
• Enhancing the R&D Tax credit for research in the area of sustainability

International Tax

From a high level, from a tax technical perspective, I would like to see an approach to adopting the various changes at the international tax level that ensures Ireland remains as competitive as possible within the new international tax frameworks. This will involve, where possible, making the unprecedented level of change in this area as easy as possible for businesses to adopt. With a particular focus on early engagement with stakeholders, allowing feedback and reviews of draft legislation and guidance as early as possible with as much lead-in time to allow companies to prepare for any changes.   Where possible, the administrative burden of new legislation should be reduced as much as possible.

More specifically, I would like to see included the introduction of a Territorial System of Tax in Ireland. While the detail of this is quite technical at a high level, this would see Irish corporate entities taxed on profits generated in Ireland only (i.e. foreign sourced income would be exempted) rather than the worldwide income approach currently in place (i.e. tax on worldwide income with credits for foreign tax incurred). Some positive soundings were recently announced in this regard. It was very welcomed to see the minister publish his roadmap for the introduction of a participation exemption in September and we look forward to engaging with the various bodies as it is introduced.

SME measures

We would like to see improvements to the SME's supports to make them easier or more appropriate for the companies that really need them. In particular:

• making the R&D tax credit refunds payable in one year would give SMEs much-needed cashflow additionally, an increase in the rate of the credit from 25% to, say, 30/35% would again help secure investment in this important area, which is a key economic investment.

• Enhancing the Employment Investment Incentive Scheme to make it more fit for purpose and simpler for companies and investors to access and understand.

• Further enhancement to the Key Employee Engagement Programme (KEEP) would help SMEs attract and retain staff in the current competitive market.

• Enhancement of the Entrepreneurs' Relief would help encourage entrepreneurship. This could be an increase in the lifetime limit or a venture limit rather than a lifetime limit that would encourage serial entrepreneurship.

We would like to see the 3% USC surcharge for self-employed people abolished. It makes sense to encourage self-employment and entrepreneurship in the economy, which will lead to economic activity and job creation and therefore, being self-employed should not have tax disadvantages.

Capital Taxes

We would like to see capital acquisition tax thresholds increase to match inflation. The last time the Parent/child threshold was increased was 2019, and there has been obviously significant inflationary pressure in the interim.

On capital gains, I think there is an opportunity to raise additional taxes by reducing the rate. This was the experience the last time CGT was reduced, and I think we would see a similar change in asset ownership, resulting in high revenue for the government.

Also, I would suggest a lower rate of CGT for land or development that has planning for housing, so that it can be efficiently sold to people who intend to build out for residential use.