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No surprise as corporation tax stays static but start-ups scheme extended

Expert believes focusing on employee numbers won’t necessarily make new businesses a success.

Increasing employee numbers is targeted by the revamped BES scheme - but will it actually make the economy more money?
Increasing employee numbers is targeted by the revamped BES scheme - but will it actually make the economy more money?

AS SUSPECTED BY the rest of Europe, the rate of corporation tax in Ireland remains unchanged by Budget 2011.

It will stay at 12.5 per cent, said Minister Brian Lenihan as “was restated in the National Recovery Plan”. He said:

I welcome recent comments by European finance ministers who understand the importance of this issue to Ireland.

GENERAL ENTERPRISE

  • The corporation tax exemption for start-up firms who start trade in 2011 will be extended by three years. But the relief will be linked to the amount of employers’ PRSI paid by the company. That is meant to focus the tax relief on employment creation.
  • The Business Expansion Scheme is to be revamped and renamed as predicted earlier today. It will be renamed the Employment and Investment Incentive but will need to be approved by the EC. Until that time, the existing scheme will continue to operate. Under the new incentive, the limit that can be raised by comanies will be increased from €2m to €10m, and the amount that can be raised in 12 months will be increased from €1.5m to €2.5m. This incentive will last until December 31, 2013.
  • The National Pensions Reserve Fund will invest in Irish infrastructure assets on a commercial basis in partnership with third-party institutional investors. The Government will help identify opportunities for the NPRF and other private investors.

CONSTRUCTION

Minister Lenihan declared that “it will be some time before the sector returns to a sustainable level of output”. To protect what is left of the construction industry, he announced:

  • Significant reform of the Relevant Contracts Withholding Tax regime (also affects the meat-processing and forestry industries). There will be a new withholding rate of 20 per cent on subcontractors registered for tax and 35 per cent rate will be retained for subcontractors not registered for tax. This is meant to reduce fraud.
  • There will also be a cash flow benefit to tax-registered subcontractors “that will enable them to compete for business on a level playing field”.
  • The new incentive to improve the energy-efficiency of a minimum of 15,000 – tax relief at the standard rate will be available to householders on expenditure of up to €10,000 on a list of approved work – is meant to stimulate the construction and building trade also. Again, contractors employed to carry out this work must be registered with the Revenue Commissioners.

TOURISM

  • The reduction of the tax on passengers departing Irish airports from €10 to €3 is a measure, to help “support tourism”. However, Minister Lenihan warned that the reduced rate was only being applied on a “temporary basis” until the end of 2011. He said:

I do not want to see the reduction in the tax being used by airlines as an opportunity to raise their fees and charges.

  • However, the Budget summary document says that there will be a “curtailment of support for regional air services from mid-2011″.

MOTORING INDUSTRY

  • The Car Scrappage Scheme is being extended for another six months to stimulate vehicle sales.The VRT relief for hybrid and flexible fuel vehicles – which was also due to expire at the end of December – is also being extended. It will go on until the end of December 2012.
  • Hauliers, taxi drivers and other people who drive for a living or for whom vehicle usage is a major expenditure in their work, will be hit by a 4 cent per litre increase on petrol and a 2 cent per litre increase on diesel, both inclusive of VAT, from tonight.

AGRICULTURE

  • The existing general 25 per cent stock relief for farmers and the special incentive stock relief of 100 per cent for young trained farmers are being extended from January 1 for a further two years. This must be cleared with the EC first though.

THE EXPERT’S OPINION

Rory Meehan is Head of Tax with the FGS partnership, the independent firm of business advisers and consultants. He told TheJournal.ie that he doesn’t see the changes in the Business Expansion Scheme and new incentives for start-up businesses to be of real benefit in helping firms to success.

The BES is being oriented toward employment numbers and in the Finance Bill there will probably be rules on the numbers that have to be employed – but we no longer live in a world where employment numbers are key to a business’s success. Some firms can generate wealth with a small number of employees and technology. We have seen very little take-up of the company start-up incentives so far in that way and I can’t see how this will add to it.

He also sees the drop in income level at which the new Universal Social Levy kicks in as stifling salary negotiations between employers and employees. Employees simply won’t be able to afford to go under a certain amount because they will be “caught up in the new universal levy very quickly”, says Mr Meehan. “People will have a huge problem negotiating a salary that they can live with.”

He also notes that with the PRSI ceiling gone for employees, “they will be hit with PRSI no matter now much they learn”, again leading to a knock-on effect on salaries.

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If there is one light at the end of the tunnel for industry that Rory Meehan can see is the delay in increasing VAT (in the Four-Year National Recovery Plan, the first hike would be in 2013). He says:

It’s a cost to most businesses because it increases price and can put people off making purchases. I wonder will they (the Government) back off from that because of the huge hit that incomes are taking. People are saving a lot of money in Ireland because of fear, so if you reduce the amount you take home, you will not be spending. It is possible that the Government knew that with the changes they would make to the income tax system with this levy, they would not be able to increase VAT for two years to give people a chance to recover from the knock.

As for construction, he feels that the constriction on capital allowances on plant equipment – where allowances can not be carried forward from year to year anymore – will have a damaging effect. The stamp duty system has been simplified so that “at least people know where they stand”, but by removing all stamp duty exemptions, “they have taken out the incentives for people to get their foot on the property ladder”.

About the author:

Mary

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