Nine months into the year, tax receipts are only 3.0% behind the same period in 2019. On the face of it, this is quite remarkable, particularly given that some of the deficit is timing and will be collected in 2021.
The dip in September income tax figures comes after several positive months. This may simply be a blip or it may represent something more fundamental. However year to date income tax figures remain only 2.1% behind the equivalent 2019 figure, which is a strong performance. It is also worth noting that some of the September dip will represent a deferral of payments and hence a timing issue.
September is an important month for VAT. After a 50% drop in receipts at the start of COVID, VAT returns have begun to stabilise, with the September figure only 14% behind the 2019 comparable. Again it is worth noting that many businesses have chosen to defer VAT payments, so the actual drop in consumer spending is lower.
Unquestionably, government supports have had a big impact in propping up disposable income and spending. With lower government subsidies coupled with factors such as the termination of loan repayment breaks, a further dip in spending and VAT receipts would not be unexpected.
The government will hope that any dip in VAT receipts is buffered by strong corporation tax returns. The September corporation tax figures were encouraging, 9% ahead of the 2019 equivalent.
Year to date corporation tax receipts are now €1.6bn ahead of 2019, with this surplus propping up weaknesses elsewhere. It is critical that the surplus is maintained, with November the key payment month for many companies.
An unknown factor is how much losses incurred in 2020 will impact on corporation tax receipts this year. Many businesses will also defer corporation tax payments, which while only a timing issue will impact on 2020 receipts. However the impact of tax losses will be felt this year, 2021 and beyond and represents a permanent hit to the Exchequer. It could spell the end of large corporation tax surpluses for at least a couple of years.
To date, Ireland has weathered the storm of global tax reform. Further challenges lie ahead, not just on the EU front but also from the US. Regardless of the election outcome, the US is likely to take further steps to attract jobs and economic activity back to the US, which will represent a further challenge to FDI here.
In summary, the latest Exchequer figures provide evidence of a remarkably resilient economy in the face of COVID. It won’t move the dial much in terms of Budget decisions in two weeks. While significant tax changes are not expected, there is much debate as to whether capital taxes may be reduced. While this may be politically challenging, in our view it would help stimulate activity in the market and help ensure capital assets are at their most productive.