Budget 2023 is being developed against a volatile economic backdrop, writes Nicola Quinn, Tax Partner at PwC.
While dealing with the impact for consumers and businesses of rising energy costs and other inflationary pressures, we must not lose focus on longer-term initiatives, such as housing, climate action and supporting the domestic business sector.
Budget 2023 will be a delicate balancing act. Addressing all concerns will prove costly but, thankfully, buoyant tax revenues give the Government some latitude to address the multiple challenges facing consumers and businesses.
“Private enterprise is the cornerstone of Ireland’s domestic economy. The Government supported these businesses through Covid and must continue to support these businesses through the volatility ahead”
With Budget 2023 framed as a ‘cost of living’ budget, significant energy supports and welfare increases are on the cards. In addition, tax bands and credits linked to wage growth or inflation could help protect workers from some of the impact of increasing prices.
Such measures would allow workers to benefit from a boost in take-home pay while retaining a higher proportion of any future pay rises.
However, a strict policy of indexation, where adjustments are made automatically on an annual basis, would diminish the Government’s ability to adapt spending as necessary in future budgets.
Focus on shortage of affordable housing
The Government must also continue to focus on increasing the supply of available accommodation. The shortage of accommodation is impacting Ireland’s ability to attract employees into Ireland. Increasing housing stock will take time.
Taxation policy can play its part in helping to address the accommodation crisis facing the country. For example, employers can be incentivised to provide accommodation through the employer company to their employees.
This could be done by reducing the corporate tax paid by the company on rents received from the employees to the trading tax rate of 12.5% (instead of a rate of up to 40% based on current rules).
Also, additional deductions could be made available for employers in respect of the purchase/retrofit of energy efficient properties.
Domestic businesses need support through the volatility
Private enterprise is the cornerstone of Ireland’s domestic economy. The Government supported these businesses through Covid and must continue to support these businesses through the volatility ahead, including helping them with cashflow.
The qualifying conditions and repayment timelines in relation to the Tax Debt Warehousing Scheme should be monitored and extended if needed and the rate of interest on late payment of tax should be significantly reduced.
Attracting and retaining talent is a persistent challenge for private enterprise, which is often forced to compete with multinational corporations in terms of salary packages and other benefits. Enhancing the Employment Investment Incentive Scheme (EIIS) as well as the Key Employment Engagement Programme (KEEP) could further support businesses in attracting and retaining talent.
Increasing the small benefit exemption for SMEs from €500 to €1,000 would make a big difference, efficiently transferring money to employees while also enabling these companies better compete for talent with their multinational counterparts (who can often offer attractive share options).
Notwithstanding the recommendations of the Commission on Taxation, we feel that planning for future succession or exits is crucial for business continuity and raising the capital acquisitions tax Band A threshold (including gifts and inheritances from parents to their children) to €500,000 and removing anomalies from CGT retirement relief would be a welcome boost for indigenous entrepreneurs.
Climate action must remain at the forefront of Government’s agenda
Climate action needs to remain at the forefront of the Government’s agenda. The Government should invest some of our corporation tax receipts in high-potential growth sectors, leveraging Ireland’s unique position at the edge of Europe to develop the offshore wind and green technology sectors further.
Environmental taxes and incentives can be used to influence behaviour. Some suggested initiatives include tax incentives for investing in renewables, allowances for grid connections for renewable energy and tax incentives for farmers and other land owners who make their land available to deliver renewable energy. Tax relief for interest on retrofitting projects and continued support for electric vehicles (including charging infrastructure) are also recommended to further the climate change agenda.
Budget 2023 will be a delicate balancing act but opportunities exist
The winter ahead will be difficult for many and the focus will rightly be on ensuring that the most vulnerable in our society are protected from inflationary pressures.
However, Ireland has an opportunity to simultaneously build its resilience against future shocks by investing its higher than expected corporate tax receipts in strategically important sectors.
This will help ensure that Ireland remains a supportive location for small enterprises, entrepreneurship, innovation and foreign direct investment.