Analysis: will the Minister for Finance use the tax system in innovative ways to assist businesses hit by the pandemic?
It's that time of the year again. This year’s budget arrives in the most unexpected of circumstances and will contain measures unimaginable this time last year.
But at the same time, some things never change. The central pillar of the tax policy of successive Irish governments since the 1980s has been low corporation taxes. Although this is the first budget of the new Fianna Fail led Government, there will be no increase in the corporation tax rate this year. Indeed, there would have to be an even greater shock to our society than a global pandemic for a Fianna Fail or Fine Gael Government to increase this rate.
Government corporation tax policy will continue to support and improve measures that encourage companies to locate high value activities here. While not an overwhelming success, the Knowledge Development Box, which provides for an effective 6.25% rate of corporation tax on income arising from assets such as computer programmes, patents and intellectual property, will likely be extended past the end of 2020 when it is due to expire.
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From RTÉ One's Nine News, how corporation tax boosted Exchequer figures by €1.4bn in 2019
The spectre of the global pandemic has brought us into recession and will cast a long shadow over this budget. During the last recession, the cost for the Government to borrow on international markets was too high and most taxes increased over a number of year to fill the hole in the country’s finances brought about by the banking collapse.
But this recession is different. Prior to the pandemic, the economy was reasonably sound, government finances were stable and the government can still borrow inexpensively. This recession has been brought on by the requirement to shut down some economic activities to prevent the spread of Covid-19. Therefore, tax policy decisions will also be different.
This budget will have two main goals that will have to be balanced against each other. The first will be to provide support to ailing businesses and support employment. The second will be to ensure that the public finances remain under reasonable control.
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From RTÉ Radio 1's Drivetime, Minister for Public Expenditure and Reform Michael McGrath on the Government's July Stimulus Package
The main problem for business is cash flow. Business revenue has reduced while fixed costs, like rent, continue to fall due. The tax system can be used in innovative ways to assist these business to shore up their cash flow difficulties.
The July stimulus allowed companies to estimate losses for 2020 and make interim claims for 50% of these losses against the previous accounting period. A similar measure was made available for the self-employed subject to a €25,000 limit. As losses for 2020 crystallise, this type of relief could be extended, not just by removing the limits imposed in July but also by allowing losses to be carried back beyond the preceding accounting period.
A measure could be introduced to allow capital allowances that businesses will be claiming as a deduction in future years to be claimed upfront in 2020. This would then enhance trading losses and allow for further relief. Remember, businesses have paid their tax for earlier years and so allowing loss relief to be claimed in earlier periods may generate significant tax refunds for cash-strapped businesses.
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From RTÉ One's Nine News, VAT cut for tourism industry likely to be announced in Budget
Indeed, should a business not have paid significant tax in previous years that can generate those refunds, a measure could be introduced to allow for the losses to be converted to a tax credit that can be refunded independently. There is precedent for this and the Research and Development tax credit operates in this way. There would have to be conditions attached to these reliefs to ensure that businesses that benefit from the relief are those with a realistic chance of survival and have saved or created jobs. The reduced 3% rate of interest on underpayments of tax could be extended indefinitely from its proposed October 31st cessation date or perhaps the rate could be reduced further.
On a temporary basis, businesses could be exempted from interest charges for the non-payment of preliminary tax. Reduced rates of employer PRSI would make it easier for businesses to afford to keep or hire employees. We may see further reductions in VAT and while it won’t be as effective as in the last recession it may provide some assistance to struggling retailers.
A stay and spend income tax credit scheme was introduced for expenditure on holiday accommodation and restaurant meals and the relatively low maximum credits could be increased. Perhaps a similar scheme could be introduced in the run up to the Christmas season for those who purchase gifts from Irish stores, be they online or on the High Street.
While it's impossible for the government to please everyone, good tax policy decisions can further assist recovery
But some taxes will see increases. The Programme for Government appears to indicate that we will not see tax increases that hinder recovery from the pandemic. This would rule out income tax increases as this would reduce the money available for spending in the economy, which will be so important to business and employers in recovery. Increases in the carbon tax, sugar tax and excise duty on electricity have all been floated. Excise duty on cigarettes will likely be increased and may be introduced on e-cigarette liquid. A Deposit Interest Retention Tax increase on bank savings is a possibility, as is an increase in Capital Acquisitions Tax on gifts and inheritances through either reduced thresholds or a higher tax rate.
This is a difficult time and it means a challenging budget. While it's impossible for the government to please everyone, good tax policy decisions can further assist recovery.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
