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What Budget 2016 means for Irish workers and SMEs

Posted: October 29, 2015 Comment: 0 Read: 113 times
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He said it early; he said it loudly. The price of a packet of cigarettes would be raised by 50 cent, but that was “the only tax increase in this Budget”.

On October 13, Finance Minister Michael Noonan unveiled a mixed bag of cuts and reforms to Ireland’s tax regime, targeting low- to middle-income earners, entrepreneurs, farmers, tech investors and the self-employed, but above all, voters, ahead of a General Election.

Income tax rates and bands were untouched in Budget 2016, but, as anticipated, the hated USC was reduced. There were cuts in the 1.5%, 3.5% and 7% USC rates, but the 8% rate was maintained.

This means low to middle income earners can look forward to some extra cash in their pockets in the New Year, and marginal tax rate for workers earning €70,000 will drop below 50% for the first time since 2009. 

From 2016, the self-employed and business owners will be eligible for an “earned income tax credit” of €550, in a move designed to offer PAYE-style credits to those outside the system. It is the first step towards equalising tax treatment between the two groups.

Other measures targeting entrepreneurs and business owners included a reduction to 20% in Capital Gains Tax on the sale of a business worth up to €1m, and an extension of the three-year relief of corporation tax for start-ups commencing business in the next three years.

Knowledge Development Box

An interesting announcement from the international perspective was the introduction of the Knowledge Development Box (KDB) and the associated corporation tax rate of 6.25%.

The instrument is aimed at SMEs, start-ups and investors in the technology sector. It is similar to the ‘Patent Box’ introduced in the UK in 2014, generally maintains Ireland’s competitive tax regime, and is likely to convince home-grown tech firms to stay put.

It comes as part of an overall response to the OECD’s Base Erosion and Profit Shifting (BEPS) reports, and the Government’s efforts to bring more transparency to the country’s tax regime, which has been loudly debated in Europe and beyond. The BEPS report seeks to ensure that taxable profits are based on real economic activity.

The Irish Tax Institute contributed to the consultation process on the KDB.

“It is expected that the KDB will contain provisions which are designed to make it more accessible for certain SMEs (being companies with a global turnover of less than €50m and who derive income of less than €7.5m annually from IP assets).

“In particular, SMEs who develop assets which are not patent protected can still be eligible for the scheme, provided that the company receives formal certification from an independent government agency. A strong focus of the Institute’s submission on the regime was to ensure that the KDB would be ‘SME friendly’ so this provision is welcomed,” the Institute says.

It was set up under a BEPS framework, and so it is the “first IP Box globally to comply with the OECD’s new standards”, the Irish Tax Institute says. It comes into effect on January 1 next year.

Other tax measures

Those involved in tourism were relieved to hear that the reduced VAT rate of 9% would be maintained for that sector. Film relief was also increased from €50m to €70m.

General stock relief, stock relief for young farmers and for registered farm partnerships was extended until 2018, while new rules on farm succession transfer partnerships were announced.

The commercial motor tax system has been overhauled, with five rates ranging from €92 to €900 replacing the current 20 rates from New Year’s Day. 

And the entry point for the top rate of Employer PRSI was increased to €376 a month.

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