Ahead of Budget 2024, capacity constraints, inflation and interest rates are limiting room for manoeuvre and making the selection of policy choices more difficult writes Tom Woods, Head of Tax at KPMG
In our recent pre-budget submission we made a number of policy suggestions. The objective was to put forward a range of proposals to help address some of the big challenges Ireland faces, including: housing, decarbonisation, and growing the workforce.
We recommended several changes to support domestic business including promoting entrepreneurship and innovation, whilst ensuring Ireland also stays attractive for FDI in a competitive global environment that is changing rapidly.
Housing
Our pre-budget submission suggestions include the introduction of a new low VAT rate on the sale of new builds to help with the affordability of purchasing a new home. We also support the reintroduction of mortgage interest relief to help homeowners with rising interest rates and growing mortgage repayments.
We recommended that the taxation of professional landlords be reformed to put them on a similar footing to trading businesses to keep and attract more landlords and housing stock into the rental market.
We also recommended that a very controlled and targeted Section 23 type rented residential relief be reintroduced to promote housing investment in certain areas.
Growing the workforce
As a small, open economy our successful tax policy has helped make us a location of choice for multinational businesses. As a country at almost full employment, it is critical that we have an attractive personal tax regime to keep and grow mobile talent to support the growth of businesses, both domestic and international, here.
There are a range of budgetary measures that would help us in this regard, including the widening of the personal tax bands and credits, consideration of a new intermediate tax rate of say 30%, and the automatic indexation of credits and bands to help dampen the impact of inflation and to help protect the value of wages.
We also believe that the taxation of share-based remuneration could be simplified and we would like to see some improvements to the SARP regime.
Supporting innovation and entrepreneurship
The impact of FDI on the Irish economy can't be overstated. However, the ongoing changes to the international tax landscape serve to emphasise the importance of having the most attractive regime possible within the new rules. Having an attractive personal tax regime as mentioned above will become more important as will having an attractive R&D regime to promote and foster more innovation here.
We believe that there are a number of measures that could be introduced to promote more innovation. These include an upfront entitlement to cash refunds of R&D tax credits for smaller businesses.
We also believe that the R&D tax credit of 25% could be improved to either 30% or 35% to make it more attractive internationally. Moreover, the rules and the application process to qualify for the R&D credit should be simplified. Other jurisdictions continue to refine and improve their R&D offering so it has never been more important for Ireland’s regime to be as attractive as possible.
The international changes also underscore the need to support the growth of the domestic sector. We have made a number of recommendations to support SME’s. These include the introduction of a new 20% CGT rate on the sale of shares in SME’s as well as some improvements to entrepreneur’s relief to promote investment in SME’s. We also advocate for some simplification of the rules around Employment Incentive Investment Scheme (EIIS) to make it more accessible and easier for businesses to raise capital.
We also propose that the standard rate of income tax of 20% applies to dividends paid by SMEs. This should encourage promoters of SMEs to remain committed to growing their businesses and enable companies of scale to emerge from the domestic SME sector without the need to sell down equity.
Climate change
Meanwhile, in the face of climate change, Ireland has ambitious climate goals that will present challenges and opportunities for individuals and businesses. We believe that there are a number of tax supports that could be considered to help Ireland to achieve its climate goals.
These include measures to promote private finance for green investments via ESG bonds and pension funds. We also believe that there could be tax measures introduced to help accelerate the transition to electric and hybrid vehicles, as well as supporting the agri-sector in its transition to more sustainable practices.
Inflation
As mentioned, the Government has a number of challenges to contend with. While the exchequer receipts are in rude health, there is vulnerability in those receipts into the future and a measured approach will need to be taken when deploying the resources available. While there is potential for some measures to impact on inflation, the significant benefits of achieving the policy objectives need to be weighed up against the potential inflationary impact.
The measures unveiled in the forthcoming budget will signal Government’s direction of travel across many issues. The good news is the resources are there to help sustain our social and economic progress.
Tom Woods is Head of Tax at KPMG in Ireland
