Commentary and analysis
Budget 2023 labelled ‘A Cost of Living Budget’ includes targeted measures to tackle inflation and the increasing cost of living. The tax package was presented by the Minister for Finance Paschal Donohoe today.
With headline inflation running at levels not seen for many decades, the economic backdrop to Budget 2023 is one where consumer sentiment readings are the lowest on record, and households are increasingly apprehensive about the economy. Business sentiment is not as downbeat but has been tracking lower over the year.
Energy costs have been a significant economic headwind over the past year, and the €600 household electricity credits and Temporary Business Energy Support Scheme, which will enable businesses to reclaim 40% of their energy bills where costs are 50% higher than 2021, are important interventions from an economic performance viewpoint.
As widely reported by the media in the run up to the Ministers budget speech, the standard rate band has been increased to €40,000, a resulting in a tax saving of €640 per individual where fully utilised. This along with the approx 4% increase on the main annual tax credits, as proposed in the Commission for Tax report, and the increase in the 2% USC band to align with the increase in the minimum wage, means that the average middle income family with two incomes will be €1,660 better off.
There is good news from 2022 onward for the 400,000 tenants who will benefit from the newly introduced Rental Tax Credit of €500 per year.
The increase of pre-letting expenditure relief from €5,000 to €10,000 is a welcome change for Landlords. Additionally, the time limit for which a property must be vacant is halved to 6 months; which is likely to encourage a return of rental properties to the market at a faster pace.
Further assistance to the housing market is the announcement that the Help to Buy scheme has been extended to the end of 2024.
The Small Benefit Exemption facilitates an employer to provide a non-cash tax free benefit or voucher of up to €500 in value each year. Budget 2023 has increased the tax free threshold to €1,000 per year effective immediately and also facilitated the provision of two vouchers in a year.
As widely expected, there were no major changes to the corporate tax regime announced in Budget 2023.
A Temporary Business Energy Support Scheme is being introduced to assist qualifying businesses with the rising cost of energy. In short, the average unit price for the relevant 2022 billing period must increase by more than 50% when compared to the corresponding 2021 reference period in order for a business to be eligible. Once eligible, the monthly payment will be calculated up to 40% of the amount of the increase and will be capped at €10,000 per month. The scheme is subject to State Aid approval and it is expected to be in operation from September 2022 to February 2023.
There were relatively few international tax measures announced, however the Minister did reference ongoing international tax reform at the OECD and EU level, in particular the proposed 15% minimum effective corporate tax rate for large multinationals.
The Special Assignee Relief Programme (SARP) has been extended until 2025 (with the qualifying income threshold increased from €75,000 to €100,000), with a view to maintaining Ireland’s attractiveness to senior foreign executives, and by extension as a location for foreign direct investment.
The Foreign Earnings Deduction (FED) provides Irish income tax relief to Irish resident individuals who spend some time working abroad in relevant States for example, Brazil, India and China. FED was due to expire on 31 December 2022 and Budget 2023 has extended the relief to 31 December 2025.
Budget 2023 made changes to several existing tax incentives for businesses, including:
Also, the lifetime company limit for KEEP shares is being raised from €3 million to €6 million. Changes to KEEP rules introduced in Finance Act 2019 about group structures and qualifying employees are being brought into effect.
In a welcome easement on electricity and gas costs, the reduced VAT rate of 9% applying to these supplies is being extended to 28 February 2023.
Despite industry lobbying, the Minister has confirmed that the reduced VAT rate of 9% applying to the hospitality sector will be discontinued from 1 March 2023, at which point it will revert back to the 13.5% VAT rate. This includes catering and restaurants, as well as hotel and similar accommodation and entry to a range of amenities including cinemas, theatres, museums and galleries.
As an aid to the media sector and to support an independent press, the VAT rate applicable to newspapers has been reduced to 0%, effective 1 January 2023.
The zero rate of VAT will also be extended from 1 January 2023 to hormone replacement and nicotine replacement therapies, as well as the small number of period products that are currently subject to VAT at 9%. The zero rate of VAT is also being extended to defibrillators.
For the second year in a row, the Flat Rate farmer addition has been reduced. The rate will fall from 5.5% to 5%.
The current excise reduction on petrol (21c per litre), diesel (16c) and marked gas oil (MGO)(5.4c) is extended until 28 February 2023.
The excise duty on a package of 20 cigarettes is to increase by €0.50 with pro-rata increases for other tobacco products.
In accordance with the EU Alcohol Directive, up to 50% excise relief will apply to cider and pear cider produced by small independent producers.
With effect from Budget Day, excise fees on the application of a late night special exemption application will reduce from €110 to €55, displaying the Government’s commitment to supporting the night time economy.
Capital taxes measures were relatively light touch in Budget 2023.
The Residential Property Development Refund Scheme for stamp duty has been extended from 2022 to the end of 2025. This provision provides a partial refund of stamp duty where non-residential land is purchased to build residential property. The refund essentially reduces the 7.5% stamp duty paid to 2%.
As expected, an extension has been granted from 2022 to 2025 for five key relief measures for the agricultural sector and young farmers, being;
A new Vacant Homes Tax will be introduced from next year. This aims to increase the supply of homes for rent or purchase. The tax will be equal to three times the Local Property Tax liability.
As part of his speech, the Minister for Finance commented that a number of amendments will be introduced to improve the efficiency of the Residential Zoned Land Tax.
The Minister had the task of balancing the protection of the environment with addressing the increased cost of living, with the main focus being on the latter. However, there are some measures in the environmental space within the Budget announcements.
Carbon Tax on fuels will increase as planned from the current rate of €41 to €48.50 per tonne of CO2. To alleviate the inflationary impact of this two cent per litre increase, the carbon tax increase on auto-fuels will be offset by a reduction in the National Oil Reserves Agency (NORA) levy from two cent per litre to zero. This will apply to auto fuels with effect from 12 October 2022 and all other fuels from 1 May 2023.
To encourage the adoption of environmentally positive farming practices, accelerated capital allowances are being introduced for the construction of modern slurry storage facilities, so that 50% of expenditure will be tax deductible over two years as opposed to seven years.
In his speech, Minister Donohoe stated that work is currently underway in the EU on capturing the windfall gains of energy companies, and Ireland aims to be part of this EU-wide response to high energy prices. If this is not possible, the Government is committed to bringing forward their own measures.
Given the backdrop, we knew this was going to be a Budget that had to carefully tread the needle between addressing the cost of living crises for people and business while not adding to inflationary pressures. Thanks to strong exchequer revenues over the past year, mainly driven by exceptional corporation tax receipts, but also reflective of a strong labour market, the budget was able to deliver over €4.1bn in once off measures and budgetary measures for 2023 worth €6.9bn.
Budget 2023 is yet another ‘crisis budget’ following Brexit and the Covid-19 pandemic. Whether the various measures announced today are sufficient to boost consumer and business sentiment and avert the crisis of a deep recession remains to be seen, but initial indications are that Budget 2023 has made a comprehensive range of interventions that should leave more money in the hands of consumers and businesses and offset at least some of the inflationary cost of living increases.