Brexit, housing, environment - the key changes within Budget 2020

The government's tax and fiscal policy for 2020 had, at its core, a priority to safeguard the continued economic growth of Ireland from the dangers of the UK crashing out of the EU without a deal, especially within the agrifood sector, the tourism industry and for vulnerable but viable businesses, writes Gerard Nagle.

Minister for Finance, Paschal Donohoe, revealed a cautious and conservative budget for the coming fiscal year. It will not come as a surprise to many as this approach has been taken in light of the substantial global uncertainty surrounding Brexit, the numerous economic risks which it poses to the country of Ireland and the potential overheating of the Irish economy should the UK depart the European Union.

Budget 2020 also focused in on a number of pressing social issues, the environmental agenda, housing and property.

Also to the fore was the constantly evolving EU and OECD (Organisation for Economic Co-operation and Development) policy changes and how they may be incorporated into Irish legislation and business practices.

Brexit measures

The government, in a bid to safeguard the Irish economy, introduced a number of Brexit measures within the budget, which include:
• A fund of €1.2 billion to be allocated across a number of government departments for any measures needed.
• In supporting the Agriculture, Enterprise and Tourism sectors, €650 million will be dedicated to assist the most affected citizens and regions. Of this, €220 million will be deployed immediately in the event of 'no deal'.
• €110 million will be introduced to help fund emerging businesses who would be most affected by a no deal Brexit.
• An extra €365 million to be provided for Social Protection expenditure, on the Live Register and related schemes;
• €45 million being made available for re-education, retraining and new employment opportunities.
• As committed in Budget 2019, despite Brexit and other pressures on Exchequer finances, €1.5 billion will be transferred from the Ireland Strategic Investment Fund to the Rainy Day Fund, however the additional annual Exchequer contribution of €500 million for 2020 will be deferred.

The environmental agenda has gained significant traction in recent times, and its presence has been further highlighted with the introduction of increased carbon taxes and a new nitrogen oxide charge on petrol and diesel cars in the Budget.

The price of carbon per tonne is to be increased from the current €20 to €80 per tonne by 2030. There has been a €6 increase of carbon tax on auto fuels, which was applied from midnight, October 17.

Carbon tax increases on other fuels will be delayed until May 2020. The one per cent diesel surcharge introduced in Budget 2019 is to be replaced with a nitrogen oxide (NOx) emissions-based charge, which will apply to passenger vehicles registering for the first time in the state from January 1, 2020.

VRT relief for hybrid vehicles will be extended until the end of 2020 (and will be subject to CO2 emission levels). The diesel rebate scheme used by road haulage operators and passenger transport operators will be modified to provide relief from the increase in carbon tax, a welcomed development for those involved in this sector.

The zero per cent BIK charge on qualifying electric vehicles has been extended to 2022.

The subsequent Finance Bill published in the wake of the budget announcement, included a number of provisions to support domestic entrepreneurship. These included new provisions added to research and development regime and a newly reformed EII (Employment and Investment Incentive) scheme.

R&D tax credit

The R&D tax credit system is to be reformed to include the following detailed measures:
• The R&D tax credit is to increase from 25 per cent to 30 per cent for micro and small companies, the thresholds for which are included in the table below.
• The addition of an enhanced method to calculate the payable element of the R&D tax credit, based on twice the current year payroll liabilities.
• The Finance Bill is also introducing a new provision which will allow 'micro and small companies' to claim the R&D tax credit on qualifying pre-trading expenditure prior to the company commencing to trade. In this case, the payable credit will be limited for offset against VAT and payroll liabilities only. However, no amount shall be surrendered to a tax liability where the emoluments to which the payroll liabilities relate remain unpaid three months after the end of the relevant accounting period.
• The allowable limit of R&D expenditure outsourced to universities/institutes of higher education is to be increased from five per cent to 15 per cent.
• Where a company may qualify for both scientific capital allowances and the R&D tax credit, only one relief can be claimed in respect of the expenditure.
• The following anti-avoidance provisions will apply to the R&D tax credit:
a) The Finance Bill will also align the penalty application in respect of an R&D tax credit over-claim with the penalty procedures for credit over-claims of other tax heads;
b) Grants funded by any state and/or the European Union must be deducted from qualifying R&D expenditure;
c) A company which outsources to third parties must now notify the third party involved in advance of, or on the day of, payment, if that company intends to make a claim for the R&D tax credit;
d) The Finance Bill clarifies that where a payable amount or amount surrendered to a key employee is later withdrawn, then it is not permissible to use any offset of losses or credits to shelter the clawback of such an amount.

Employment and Investment Incentive scheme

There was further alterations/improvements the previously amended EII scheme. Full relief will now be made available to eligible individuals in the first year of investment (as opposed to an initial relief of the qualifying investment made available in the tax year in which the investment is made, with a further relief given after year three subject to certain conditions), effective from October 8, 2019.

The additional changes include:
• From 2020, the maximum investment relief amount allowed is to increase from €150,000 to €250,000 in respect of a four year investment and increase to €500,000 where the length of the investment is 10 years.
• Further technical amendments have been provided under Finance Bill 2019, the purpose of which is to ensure that the conditions in relation to investments made prior to Budget 2020 will continue to apply and secondly, that the anti-avoidance clawback provisions will also apply to investments which are to be held for 10 years.
• Managers of a designated fund are obliged to return details of holdings of eligible shares, within 30 days of receiving the statement of qualification from a qualifying company.
• Furthermore, where a company buys back, redeems or repays any shareholder for shares in the company using EII investments within the compliance period, there will be a subsequent reduction of the relief granted to all EII investors.

Other key announcements

1.) Improvements are being made to the KEEP (Key Employee Engagement Programme) scheme rules to make it more functional for SMEs. The scheme provides for tax relief for certain share remuneration provided to key employees by unquoted SMEs. It is stated that the improved rules can apply to existing options;
2.) A €150 increase in Earned Income Credit for the self-employed to €1,500;
3.) The Capital Acquisitions Tax Free thresholds for gifts and inheritances within Category A (from parents to their children) to increase from €320,000 to €335,000 from October 9, 2019;
4.) The dividend withholding tax ('DWT') rate is to increase from 20 per cent to 25 per cent, taking effect from 1 January 2020. This an acceleration of the payment of tax on dividends which will be further changed in 2021 to integrate DWT with the PAYE regime;
5.) Stamp duty on commercial property was increased by 1.5 per cent, from six per cent to 7.5 per cent with effect from October 9, 2019. However there are some transitional measures in place for transactions in progress at time of change;
6.) The Special Assignee Relief Programme ('SARP') and Foreign Earnings Deduction ('FED') have been extended to 2022.