Personal tax
Budget 2023 provided the Government with an opportunity to relieve some of the tax burden on individuals facing increases in the cost of living. The measures will put some money back in the pocket of taxpayers, which will contribute towards those increased costs of living.
The key measures include a significant increase in the Standard Rate Cut-Off Point to €40,000 so a single individual can now earn an additional €3,200 before paying tax at 40%. This results in a direct tax saving of €640 and represents the highest single increase in rate bands in over a decade. There is also an increase of €75 in the personal tax credit, employee PAYE and the earned income tax credits which, while not matching inflation, are welcome additional measures, supported by a small increase in the 2% threshold for USC. Meanwhile, there was some welcome relief for renters with the reintroduction of a rent credit of €500 for 2023 and subsequent years, which will also apply on a retrospective basis for 2022. An increase of €100 in the home carer credit will provide some support for carers.
Employers will welcome the fact that there has been no increase to employer PRSI rates, although these may yet come at a later date as part of the Government’s medium-term roadmap for personal tax reform.
They will also welcome changes to the Small Benefits Exemption scheme, which will now increase to an annual limit of €1,000 per employee effective from 2022, as well as the extension of the SARP and KEEP schemes to 2025 to attract and retain staff from abroad.
Private businesses
Private business remains a key focus in Budget 2023, with the Minister acknowledging the contributions of small- and medium-sized enterprises (SMEs) to the wider economy and announcing measures to support such businesses.
In addition to the employer supports noted above, the Temporary Business Energy Support Scheme (TBESS) was introduced to support trading businesses. Businesses carrying on trading activities will be eligible for a refund of 40% on the increase in electricity and gas prices, subject to a monthly cap of €10,000 per trade (an overall cap will also apply on the total amount a business can claim).
Corporate tax
From a corporate tax perspective, there were—as expected—few surprises in this year’s Budget.
For many years, calls have been made for Ireland to introduce a territorial regime of double tax credit relief in the form of a participation exemption. The Minister signalled that options for the introduction of a territorial exemption would be seriously considered in conjunction with the ongoing work to implement Pillar Two.
Regarding global tax reform, the Minister’s statements regarding Ireland’s position on, and approach to, the implementation of the Pillar Two agreement reaffirmed Ireland’s long-standing position that a co-ordinated and multilateral approach is the best approach to ensure that the international tax system keeps pace with today’s business environment. Changes to the R&D tax credit (in relation to the tax payable portion) will also be made in light of these changes (see below).
This Budget has taken clear steps to support a knowledge economy and attract investment that relates to creative and research-based industries. This is evidenced by:
- the extension of the film corporation tax credit beyond the current end date of 2024, until December 2028;
- a review focused on supporting the unscripted television production sector;
- extending the Knowledge Development Box (KDB) by four years with a new effective rate of 10%.
In relation to financial services, Minister Donohoe confirmed a review of the Section 110 regime as well as the establishment of a working group to consider the taxation of funds, life assurance policies and other investment products.
The Minister acknowledged the key role played by institutional investors in increasing housing supply and ultimately supporting a properly functioning and sustainable market. In this regard, a review of the REIT and IREF regimes was announced, which will be key to maintaining the certainty and stability of these regimes and therefore ensuring that they continue to play a crucial role. The output from such reviews will likely be considered in the context of Budget 2024 measures.
The bank levy has also been extended for a further year, with the long-term future of the levy to be considered following the publication of the Retail Banking Review.
R&D
The Minister has announced changes to the operation of the R&D tax credit to align this key relief with international tax developments. Changes have been announced in relation to the payable portion of the tax credit. Currently, companies must offset the R&D tax credit against corporation tax of the current year and prior year before a claim for a payable credit can be made over a three-year period.
The changes announced provide for a fully payable credit over a three-year fixed term with the removal of the caps that currently exist on payable R&D tax credits. The changes will provide flexibility for taxpayer companies to either call for the payment of their R&D tax credits in cash, or for these to be offset against its tax liabilities in this three-year fixed period. Although these amendments will not change the quantum of R&D tax credits that are calculated by companies, they are a welcome announcement in the context of aligning our R&D tax credit regime with recent international tax developments. They also endorse Ireland’s commitment to the R&D tax credit regime. In addition, Budget 2023 announced a positive cash flow measure for SMEs by providing that the first €25,000 of an R&D tax credit claim will now be payable in the first year. This will be particularly beneficial for companies with smaller R&D tax credit claims. The details of these changes will be included in the Finance Bill and we will monitor developments closely in the build-up to the release of the Bill.
Property
There were a number of measures announced focused on encouraging residential development and supporting the private rental market, which are welcomed and should help to alleviate current supply constraints. The key measures include the following:
- The Help to Buy scheme has been extended by two years, and will now expire on 31 December 2024. A formal review of this scheme was undertaken earlier this year, and its results will be published today.
- Landlords will now be able to claim €10,000 (i.e. double the previous amount) per premises in respect of pre-letting expenses. The premises must now only be vacant for a period of six months to qualify (reduced from 12 months).
- A vacant homes tax will be introduced, which will apply to residential properties that are occupied for less than 30 days in a 12-month period. However, exemptions will apply where the residential property is vacant for “genuine reasons”. We will share more information on this as it becomes available. The tax will be charged at a rate equal to three times the property’s existing basic Local Property Tax rate.
- Amendments to the Residential Zoned Land Tax (announced in Budget 2022 and due to come into effect from May 2024) are expected as part of the upcoming Finance Bill. The Minister outlined that the focus of the measures will be on streamlining the operation of the RZLT and ensuring that it is efficiently administered.
- A 10% levy will be applied to concrete blocks, pouring concrete, and certain other concrete products from 3 April 2023. The proceeds of this levy will be used to fund the MICA redress scheme.
- The stamp duty residential land rebate scheme, which allows for a refund of eleven-fifteenths of the stamp duty paid on land that is subsequently developed for residential purposes, was due to expire on 31 December 2022. It has been extended to the end of 2025. Unfortunately, no other relief changes that have been sought over the last few years—such as amending the 75% land coverage test, extending the timeframe for commencing construction and extending the deadline for completing construction—have been announced.
Climate change
The Minister re-emphasised the Government’s commitment to tackling climate change, noting that climate change is one of the “key challenges of our time” and that the Government is acting to reduce emissions and support newer and cleaner technologies. While Budget 2023 included a number of very welcome measures aimed at tackling soaring energy costs, we would have liked to have seen more incentives to mobilise private investment in sustainable innovation and drive the decarbonisation of our economy.
Following much speculation in advance of Budget Day, the Minister did not announce the immediate introduction of a ‘windfall’ tax. Instead, the Government will monitor progress at an EU level and have committed to proceeding with domestic windfall tax measures if EU measures do not materialise.
Other key climate measures:
- Carbon tax continues to increase by €7.50 per tonne, as planned. However, the Government is proposing to offset this carbon tax increase with a reduction to zero of the National Oil Reserves Agency (NORA) levy. Almost half of the €623 million in funds raised by the carbon tax in 2023 will be invested in improving the energy efficiency of homes.
- €850m will be allocated to the Department of the Environment, Climate and Communications, of which €377m will go towards energy efficiency including the Warmer Homes Scheme. There will also be funding to support the introduction of a new low-cost loan scheme for residential retrofitting.
- Every household will receive three €200 energy credits.
VAT and Excise
In respect of VAT, the key takeaways are as follows:
The 9% reduced VAT rate for electricity and gas has been extended to 28 February 2023. It was due to expire on 31 October 2022.
There was no extension to the 9% reduced VAT rate currently applicable to the tourism and hospitality sector. Consequently, the 9% reduced VAT rate will end, as previously scheduled, on 1 March 2023 when the rate will revert to 13.5%.
VAT on newspapers (including digital editions) to be reduced from 9% to 0% with effect from 1 January 2023.
Changes to VAT rates on certain health products.
In addition to the predetermined carbon tax increases referenced above, other key excise duty points are as follows:
To address cost of living expenses, the excise duty reductions of 21c per litre on petrol, 16c per litre of diesel and 5.4c per litre of marked gas oil introduced earlier this year have been further extended to 23 February 2023.
To promote public health policy, there will be a 50c excise duty increase on a pack of 20 cigarettes and a pro-rata increase on other tobacco products.
The Minister committed to introduce an excise relief of 50% for micro-producers of cider/perry. The relief is similar to that currently in place for microbreweries.
The qualifying production threshold for the relief for microbreweries is being increased to support the expansion of the industry.
To support the night-time economy, there will be a 50% reduction in excise duty for “late night” licences from €110 to €55.
Conclusion
Budget 2023 can best be described as a ‘tactical’ budget given its focus on helping individuals, families and business through the cost of living crisis. Of course, there are many strategic challenges and opportunities the Government could have addressed—and probably would have in more normal circumstances—but the clear priority is providing the resources necessary to help people through the winter. Ireland also has an opportunity to build its resilience against future shocks by investing in high-growth areas. Some of the money put aside in the National Reserve Fund could be used for this purpose.
Where inflation will go in 2023 remains unclear, but the Government has given individuals and businesses much-needed support for what will be a difficult period for the economy as a whole.
PwC is here to help you understand what Budget 2023 means for you and your business. If you have any questions about the measures announced by the Minister for Finance, contact us today.
