Budget 2021: Facing the future with confidence

13 October, 2020

Minister for Finance, Paschal Donohoe TD, and Minister for Public Expenditure and Reform, Michael McGrath TD, today presented perhaps the most critical Budget in decades. After a year that has pitched the country into isolation, the economy €21 billion into the red and businesses into defending their operations and their people, the Budget needed to strike a note of confidence in the face of a perfect storm of threats including COVID-19, Brexit, climate change, international tax reform and the trade impacts of the upcoming US election.

This has been a 'carefully expansionary' Budget, clearly targeting necessary supports to key sectors such as hospitality, tourism and the arts. While certainly big on spending, we have yet to see the details on any big new ideas. However the Government has left themselves some flexibility for innovation in the future through the introduction of the Recovery Fund.

The focus was, as expected, on supporting businesses and employees as they continue to face COVID-19 and Brexit as well as housing, healthcare and the green agenda.

Minister Donohoe used the Budget to once again reiterate the importance of a stable and transparent corporate tax regime, reaffirming the Government's commitment to the 12.5% corporate tax rate and a regime which is competitive, legitimate and sustainable. It was therefore disappointing to see the unsignalled change to the Section 291A capital allowance regime.

A photo of a large, open and flat green landscape with wind turbines dotting the horizon.

Addressing the challenges of COVID-19

In recognition of the likely ongoing nature of the challenges COVID-19 presents, the Budget included a number of measures to benefit both businesses and their employees. It is very welcome to see the Minister extending the EWSS to the end of 2021, subject to potential changes to the format of the scheme when conditions are clearer.

This, combined with the extension of the tax warehousing scheme to include repayments of Temporary Wage Subsidy Scheme funds owed by employers, and the introduction of a new COVID-19 Restrictions Support scheme which allows for cash reimbursements to qualifying businesses whose trade has been significantly impacted by restrictions, will be of huge relief to companies as they negotiate massive operational challenges.

The reduction in the VAT rate from 13.5% to 9% with effect from 1 November provides very welcome support to businesses in the hospitality and tourism sectors.

The announcement of a one year extension to the residential stamp duty refund scheme and a six month extension of the time frame by which the development must be completed in order to qualify are positive measures but we would have welcomed further amendments to the regime to make it more effective.

A Budget against the backdrop of Brexit

As well as COVID-19, Brexit presents its own unique set of challenges. The Minister stated that the Budget was prepared on the basis that the EU and UK will fail to conclude a bilateral free trade agreement. Businesses in Ireland will feel the impact of that outcome, and need to plan accordingly. Recent Budgets provided extensive provisions for Brexit support measures, and this Budget and the July Stimulus Package makes further support available with a commitment from the Government to access the Brexit Adjustment Reserve announced earlier this summer by the European Council.

With up to 2.5% expected to be subtracted from GDP in the early part of next year, the further extension of Brexit support packages for business is welcome, with €340 million available to support customs compliance activities, hiring 500 additional frontier staff and the improvement of infrastructure at Irish ports and airports. While perhaps we might have expected more specifics on Brexit support measures, the Budget provides for a flexible €3.4 billion recovery fund which will be used to stimulate demand in the economy. Part of this recovery fund will be used to support Government decisions next year which may need to be taken to stimulate domestic demand and mitigate the impacts of Brexit and COVID-19 on the economy.

Income tax and employment tax measures

As expected, no income tax changes were announced in the Budget. Targeted changes to USC bands and employer PRSI thresholds were announced to ensure there is no impact to minimum wage workers. We also saw an increase to the Dependent Carer Credit, and alignment of the Earned credit for the self-employed with the employee PAYE credit.

The Budget contained no additional reliefs to support the significant number of employees who are now working from home. It did provide welcome clarification that employee claims may also now take account of broadband costs. Commitment has been made to develop a further strategy for remote working which may result in further measures being announced.

The announcement of additional funding and support for over 10,000 upskilling and reskilling opportunities is also welcome. With the likelihood that the unemployment rate for 2020 will average 16%—a figure unlikely to vary a great deal in the new year—the ability of people to fill new roles in digital-first organisations that are experiencing growth in the middle of crisis will be key in bringing that figure down.

Keeping Ireland investable

At a time of economic uncertainty, it is vitally important for Ireland to continue to attract and retain foreign direct investment. The Minister used the Budget to once again reiterate the importance of a stable and transparent corporate tax regime, reaffirming the Government's commitment to the 12.5% corporate tax rate and a regime which is competitive, legitimate and sustainable.

However, the FDI community is likely to be disappointed by the unsignalled change in the Section 291A capital allowance regime for newly acquired intangible assets, particularly given that it has immediate effect. This change applies to assets acquired on or after 14 October 2020.

Ireland has built a reputation of stability and certainty for many years through consultations and road maps. The manner in which the change was announced is out of line with the Government's long-standing policy of wide consultation and 'no surprises' and may shake the confidence of the sector in Ireland's predictability. We have concern that this move may erode our competitiveness at a critical time when the sector is bringing so much to the economy through tax receipts and employment.

Addressing international tax and OECD reforms

The Minister referred to the tax reform proposals published by the OECD yesterday to address the tax challenges of digitalisation. This BEPS 2.0 initiative is likely to reach a crucial stage next year. He acknowledged that the outcome of the initiative could have a negative impact on Ireland's corporation tax receipts while noting that a lack of consensus at OECD level was also a risk to the Exchequer.

An update to the Corporation Tax Road map is expected to follow shortly from the Department of Finance outlining additional areas of change proposed to Ireland's international tax policy, including interest limitation and anti-reverse hybrid rules.

Measures for the SME sector

For SMEs, we have always said that public sector support needs to be supplemented by private sector investment. While the Minister announced an assessment of how the Employment Investment Incentive Scheme (EIIS) can be enhanced, we have been through the consultation process on a couple of occasions. Specific measures would have been welcome such as allowing USC relief in addition to income tax relief, relief for loan capital investments and an awareness campaign for SURE, which is available to individuals who leave PAYE employment to set up their own business.

In terms of increasing transactional activity and the circulation of capital, we saw the relaxation of the minimum 5% shareholding requirement for CGT entrepreneur relief. However, as entrepreneurs typically own for more than 5%, it might have been preferable to see a reduction in the headline CGT rate of 33% (one of the highest in the OECD) and the reintroduction of CGT rollover relief, which would allow shareholders to defer the incidence of CGT if they reinvest the sales proceeds into a new business. Some enhancement of reliefs for capital taxes associated with "NextGen" transfers would also have been welcome.

The announcement around extending and potentially expanding the film tax credit to include digital gaming is welcome.

Climate change

The announcement of the draft Climate Action Bill, and the Taoiseach's statement warning that Ireland would face a point of no return unless urgent climate change action was taken, set the scene for Budget 2021 supporting the green agenda.

It was very welcome to see a broad range of areas referenced including investment in the transport system through a climate lens, support for deep retrofitting of social housing, a reform of the VRT and motor tax regime, funding for landfill restoration and additional funding to support retrofitting grants for households moving to a B2 rating.

From a tax incentive perspective, it is positive to hear in the Minister's speech that he plans to extend the tax regime for energy efficient equipment. The expected increase in carbon taxes and changes to the VRT and motor tax regimes will encourage lower carbon transport options, but may not be popular on the ground.

This was certainly a 'greener' budget. However the recent EPA pronouncements suggesting that Ireland is struggling to decouple economic and emissions growth still stands and more action will be needed to ensure we meet our 2030 and 2050 emissions reduction targets.

Facing the future

Budget 2021 is carefully expansionary, set against a backdrop of a perfect storm of challenges that nobody could have anticipated twelve months ago. If Brexit was not going to be hard enough to manage and mitigate, the pandemic has piled more pressure on the economy and business. The combination of measures presented will start to create a defence that will help the economy return to growth. It will be uncertain and likely unsteady at times, but Budget 2021 has placed Ireland on a surer footing to face the future with confidence.

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Susan Kilty

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6740

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