Budget 2012

BUDGET SUMMARY 2012

Budget Highlights

• Income Tax – No change
• VAT Standard rate raised by 2% to 23%
• USC Income exemption level rises to €10,036
• DIRT rises from 27% to 30%
• Motor tax to rise from January 1st
• Mortgage Interest relief for 2004-2008 buyers up to 30%
• Duty on 20pk cigarettes rises 25c
• Alcohol remains untouched
• Carbon tax rises to €20/tonne with exception of solid fuels
• CAT and CGT rise 5% to 30%
• VRT export scheme to be implemented for disposal of second hand cars
• Legacy property reliefs reduced
• Stamp Duty on commercial property transfers at 2%
• Lower Stamp Duty to apply to family farm
• Changes to R&D credits
• Sick pay tax exemptions changed

INCOME TAX

The following are details of the Budget 2012 announced on 6 December 2011 by the Minister for Finance.

Tax Credits

There are no changes to tax credits.

Marginal Rate Relief

Standard Rated Reliefs

All standard rated reliefs are allowed at the 20% rate band.

PRSI

While the current PRSI rates remain unchanged, the base for PRSI will be broadened by extending the PRSI charged to cover rental, investment and other income in 2013. The remaining 50% employer PRSI relief on employee pensions is being abolished with effect from 1^st January 2012.

Service Charges
The Service Charges relief announced in Budget 2011 are unchanged. The Service Charges relief is being abolished for tax year 2012 and subsequent years. In 2011, a maximum of €400 tax relief was granted (at the 20% rate) for service charges paid in the year 2010.

Rent Tax Relief
The Rent Tax relief announced in Budget 2011 are unchanged: Relief for rent credit will be withdrawn on a phased basis over 7 years by reducing the amount of rent that can be relieved at the standard rate of income tax as indicated in the following table.

Claimants who were not renting at 7 December 2010 and who subsequently enter into a rental agreement will not be able to claim relief.

Tax Rates and Tax Bands.

The tax rates and bands remain unchanged at 20% (standard rate) and 41% (higher rate). The table below sets out the tax rates and bands.

Exemption Limits

The exemption limits for persons aged 65 years are as follows:

Marginal Relief is subject to an income limit of twice the relevant exemption limit.

The above exemption limits are increased by €575 for each of the first two dependent children and by €830 for the third and subsequent children.

Mortgage Interest Relief - Tax Relief at Source – Mortgage Interest charged on qualifying home loans taken out on or after 1 January 2004 and on or before 31 December 2012 will (subject to the exception below) qualify for tax relief up to the end of 2017 at the following general rates and thresholds -

First time buyers - The tax relief on interest charged on qualifying home loans is 25% for years No. 1 and 2; 22.5% for years No. 3, 4 & 5 and 20% for years No. 6 and 7. The maximum amount of interest charged and qualifying for tax relief are €20,000 for individuals who are married, in a civil partnership or widowed and €10,000 for individuals who are unmarried and not in a civil partnership. After year No. 7, the rates and maximum allowable for relief are the same as for non-first time buyers.

Non-first time buyers - The tax relief on interest charged on qualifying home loans is 15%. The maximum amount of interest charged qualifying for tax relief are €6,000 for individuals who are married, in a civil partnership or widowed and €3,000 for individuals who are unmarried and not in a civil partnership.

Exception

However, notwithstanding the rates of tax relief mentioned above, individuals who purchased their first principal private residence on or after 1 January 2004 and on or before 31 December 2008, will attract tax relief of 30% of the interest charged on the loan to purchase that property for the tax years 2012 to 2017.

Mortgage Interest Relief Abolition

Interest relief will no longer be available for house purchasers making the purchase in 2013 or later and will be fully abolished for everybody in 2018.

Taxation of Illness Benefit

The 36 day tax exemption currently applicable to Illness  benefits is abolished with effect from 1 January 2012.

DIRT

Deposit Interest Retention Tax and Exit Taxes on Life Assurance Policies and Investment Funds

The rate of retention tax that applies to deposit interest paid and upon exit of  life assurance policies and investment funds is being to 30% for payments made annually or more frequently and 33% for payments made less frequently than annually. The increased rates will apply to payments, including deemed payments, made on or after 1 January 2012.

UNIVERSAL SOCIAL CHARGE (USC)

The Universal Social Charge (USC), which came into effect on 1 January 2011, will be deducted on a cumulative basis with effect from 1 January 2012.

The rates and thresholds of the Universal Social Charge are as follows:

Individual aged under 70 years

Individual aged 70 years or over, or individuals who hold a full medical card (regardless of age)

Exempt Categories:

3% Surcharge (self-employment)

The surcharge of 3% on individuals who have income from self-employment that exceeds €100,000 in a year, regardless of age, remains unchanged.

PENSIONS

Approved Retirement Funds

The annual imputed distribution which applies to the value of assets in an Approved Retirement Fund (ARF) at 31 December each year is being increased to 6% in respect of ARFs with asset values in excess of €2 million. Where an individual owns more than one ARF, where the aggregate value of the assets in those ARFs exceeds €2 million.

The increase will apply in respect of asset values in affected ARFs at 31 December 2012 and future years.

The transfer of ARF assets on the death of an ARF owner to a child of the owner aged over 21 is subject to a final liability tax at the standard rate of income tax in force at the time of the making of such a distribution (currently 20%). It is proposed to apply a higher final liability tax rate of 30% to such transfers and the details of this will be published in the Finance Bill.

Personal Retirement Savings Accounts (PRSAs)

A “Vested” PRSA is a PRSA from which extraction of retirement benefits has commenced, usually in the form of the “tax-free” retirement lump sums.

The annual imputed distribution provisions, which apply to ARFs, will also apply on the same basis to “vested” PRSAs, where the assets are retained in the PRSA rather than having been transferred to an ARF. This includes the increase in the deemed distribution percentage rate to 6% for vested PRSAs with assets in excess of €2 million. Where an individual holds more than one PRSA the deemed distribution will apply to the aggregate of the assets in all of that individual’s PRSAs once any one of them is vested. The increase will apply in respect of asset values in affected PRSAs at 31 December 2012 and future years. Further details of this provision will be published in the Finance Bill.

Employer PRSI on pension contributions

The current relief of 50% of employer PRSI for employee contributions to occupational pension schemes and other pension arrangements is being removed from 1 January 2012. The change will be legislated for in the Social Welfare Bill.

DOMICILE LEVY

Domicile Levy and Non-Residents

The condition that the domicile levy will only apply to Irish citizens is being removed to ensure that the levy cannot be avoided by individuals renouncing their Irish citizenship.  The Minister said he will publish a set of proposed amendments to the current regime applying to non-residents in early 2012 for public consultation with a view to making amendments from 2013.

PROPERTY BASED ‘LEGACY’ RELIEFS

These measures will apply to the various property-based tax relief schemes in the following manner:

Section 23-type Reliefs and Accelerated Capital Allowances

Following an economic impact assessment, the Minister decided not to proceed with changes proposed in last year’s Budget.  This report is yet to be finalised and is due to be published with the Finance Bill.  It concludes that small investors in particular would be vulnerable to insolvency if the proposals were implemented.  A USC style charge will be introduced effective from 1 January 2012 on individuals with gross incomes over €100,000. The USC charge will apply at a rate of 5% on the amount of income sheltered by property reliefs in a given year. This charge will apply to all investors regardless of whether they invested in Section 23 or accelerated capital allowance schemes with this level of gross income. Residential owner-occupier relief is unaffected by these changes.

Accelerated Capital Allowances

Investors in accelerated capital allowance schemes will no longer be able to use any capital allowances beyond the tax life of the particular scheme where that tax life ends after 1 January 2015.

Where the tax life of a scheme has ended before 1 January 2015 no carry forward of allowances into 2015 will be allowed.

There were no further restrictions announced to the High Earners Restriction regime although those affected will suffer the new 5% surcharge.  The Minister said he will keep the High Earners Restriction under review in 2012.

VAT

VAT rate increase

With effect from 1 January 2012, the standard rate of VAT will be increasing from 21% to 23%.

Reduced VAT rate for district heating

With effect from 1 March 2012, the rate of VAT that will apply to the supply of district heating will be reduced from the standard rate to the rate of 13.5%.

Open Farms

There was good news for some, as it was confirmed that the VAT rate applicable to admissions to open farms will be reduced to 9%.

Reduced VAT rate for admissions to pet farms

With effect from 1 January 2012, the rate of VAT that will apply to admissions to pet farms/open farms will be the reduced rate of 9%.

Extension of the VAT Refund Order for flat-rate farmers to cover wind turbines

With effect from 1 January 2012, the refund order for flat rate farmers will be extended to cover micro-generation wind turbines. This will apply to wind turbines supplied and installed after that date.

CORPORATION TAX

Redundancy Rebate  

From January 2012, the employer rebate on statutory redundancy payments will reduce from 60% to 15%.

Relief for investment in Renewable energy generation

Currently, where certain conditions are satisfied it is possible for a company operating in the renewable energy sector to obtain a 100% tax deduction for the cost of its investment (subject to certain limits). This deduction can be offset against its total profits for the accounting period. The qualifying period for the scheme of tax relief for corporate investment in renewable energy projects is being extended from 31 December 2011 to 31 December 2014.

To qualify for the relief the energy project must be approved by the Minister for Communications, Energy and Natural Resources and be in one of the following categories of technology:

• Solar

• Wind

• Hydro (including ocean, wave or tidal energy)

• Biomass

3 Year Tax Relief for Start-up Companies
The scheme which provides relief from corporation tax on the trading income and certain gains of new start-up companies in the first 3 years of trading is being extended to include start-up companies which commence a new trade in 2012, 2013 or 2014.

Financial Services Industry 
The Government’s commitment to the International Financial Services sector which employs more than 30,000 people and contributes over €1 billion in tax revenues to the Exchequer was reaffirmed by the Minister.  Specific measures are to be introduced in the Finance Bill and will be aimed at the international funds industry, the corporate treasury sector, the international insurance industry and the aircraft leasing industry.

R&D tax credit
A number of changes are being made to the R&D tax credit scheme as follows:

Volume basis
The first €100,000 of qualifying R&D expenditure will benefit from the 25% R&D tax credit on a volume basis. The tax credit will continue to apply to incremental R&D expenditure in excess of €100,000 as compared with such expenditure in the base year 2003.

Outsourcing limits
At present sub-contracted R&D costs are eligible where they do not exceed 10% of total costs or 5% in the case of subcontracting to third level institutions. This limit can disproportionately affect smaller companies who may have greater need to outsource R&D work than larger multinationals with greater internal resources. The outsourcing limits for sub-contracted R&D costs are being increased to the greater of 15% or 10% in the categories as appropriate above or a maximum of €100k.

Use of the credit to reward R&D employees
Companies in receipt of the R&D credit will have the option to use a portion of the credit to reward key employees who have been involved in the development of R&D. This change will be monitored closely.

CAPITAL GAINS TAX

The Capital Gains Tax rate is being increased to 30%. This increase applies in respect of disposals made after 6 December 2011.

A new incentive relief from CGT is being introduced for the first seven years of ownership for properties bought between Budget night and the end of 2013, where the property is held for more than seven years. Where such property is held for more than seven years the gains accrued in that period will not attract CGT. This measure comes into effect after 6 December 2011.

Measures to incentivise timely business and farm transfers
Full retirement relief from CGT for intra-family transfers will be maintained for individuals aged 55 to 66. An upper limit of €3m on retirement relief for business and farming assets disposed of within the family is introduced where the individual transferring the assets is aged over 66 years in order to incentivise the earlier transfer of farms.

The current unlimited amount applies for a transitional period of two years for individuals currently aged 66 or who reach that age before 31 December 2013.

The current upper limit of €750,000 for assets transferred outside the family for individuals aged between 55 and 66 years will be maintained. The upper limit for retirement relief for business and farming assets transferred outside the family is reduced from €750,000 to €500,000 for individuals aged over 66 years.

The current upper limit of €750,000 applies for a transitional period of two years for individuals currently aged 66 or who reach that age before 31 December 2013.

CAPITAL ACQUISITIONS TAX

Rate of tax
The rate of Capital Acquisitions Tax has been increased to 30%. The new rate of tax of 30% applies to gifts and inheritances taken on or after 7 December 2011.

Tax-free thresholds
The Capital Acquisitions Tax Group A tax-free threshold has been reduced to €250,000. The reduced tax free threshold of €250,000 applies to gifts and inheritances taken on or after 7 December 2011.

The Group B tax-free threshold has been reduced to €25,000 and the Group C  tax-free threshold to €12,500.

The tax-free thresholds that apply to gifts and inheritances taken on or after 7 December 2011 are therefore as follows:

EXCISES

Mineral Oil Tax (MOT)
The rates for petrol and auto diesel are increased with effect from midnight on 6 December. These increases, when VAT is included, amount to just under 1.5 cent on a litre of petrol and just over 1.5 cent on a litre of auto diesel. The new MOT rates are €587.71 per 1,000 litres for petrol and €479.02 per 1,000 litres for auto-diesel. The rate for aviation gasoline, which is aligned to the petrol rate, and the rates for heavy oil used for non-commercial navigation and flying, which are aligned to the auto-diesel rate, are increased accordingly.

Tobacco Products Tax
Tobacco Products Tax rates are increased with effect from midnight on 6 December. The increase amounts to 25 cent, inclusive of VAT, on a packet of 20 cigarettes, with pro rata increases on other tobacco products.

Motor Tax
Motor tax rates will increase across all categories with effect from 1 January 2012.

A review and public consultation is to take place in relation to the current CO2 bands and rates used for VRT and motor tax purposes. It is anticipated that this process will be completed with a view to adjusting the bands and rates with effect from 1 January 2013.

Betting Duties
Betting Duty of 1% will be extended to remote betting and a Betting Intermediaries Duty will be introduced to cover betting exchanges. It is intended these changes will come into effect in the second quarter of 2012.

STAMP DUTY

There is a very positive change in relation to stamp duty on commercial property which has been reduced to 2% with effect from midnight on 6^th December 2011.  This was 6% on property over €80,000 and will mean that Ireland has a very competitive stamp duty rate.  The UK rate is 4% on property over £500,000.  This combined with the new exemption from capital gains tax mentioned above should encourage international investors to purchase Irish commercial and residential property. 

The reduced stamp duty rate for transfers between family members will be 1% but will be abolished at the end of 2014

Non-Residential Property
A new lower rate of 2% that has been introduced applies to non residential property. The single rate will apply to the entire amount of the consideration and the current exempt threshold of €10,000 has been abolished.

The new rate applies to instruments executed on or after 7 December 2011. Transitional arrangements will apply where, as a result of the new rate, a taxpayer is disadvantaged compared to the stamp duty treatment applicable prior to 7 December 2011. The transitional arrangements will apply where an instrument is executed on or after 7 December 2011 and before 1 July 2012 solely in pursuance of a binding contract which had been entered into prior to 7 December 2011. Consanguinity relief, which reduces the stamp duty liability by

50%, will cease to apply to non-residential property for instruments executed after 31 December 2014.

FARMER TAXATION

Stock Relief for Registered Farm Partnerships
An enhanced 50% stock relief (100% for certain young trained farmers) for registered farm partnerships is being introduced and will run until 31 December 2015 subject to clearance with the European Commission under State Aid rules.

Changes to CGT retirement relief
In order to incentivise the timely transfer of farms before the current owners reach 66 years of age, changes are being made in respect of retirement relief from CGT. Please see the Capital Gains Tax section in above for further details.

OTHER TAX POINTS

VRT
A new scheme all the refund of VRT on second-hand cars that are sent for export is being introduced.  There were no other changes announced in the Budget.

New BES/EIIS Scheme
The Finance Bill will also include a small number of amendments to the Employment and Investment Incentive and Seed Capital Scheme.  The Minister announced on the 25 November 2011 that state aid approval has been received from the European Commission and that the scheme would commence with immediate effect.

Special Assignee Relief Programme
The Minister has announced the introduction of a Special Assignee Relief Programme to allow multinationals and indigenous companies attract key people to Ireland.  It is hoped that the relief will encourage the expansion of businesses and the creation of jobs in Ireland.

Mortgage Arrears
Additional measures proposed by a Government group to help those in mortgage arrears will be announced “shortly”.

RELEVANT CONTRACTS TAX (RCT)

There were no changes made to relevant contracts tax (RCT) system in the Budget.

Household Charge
The previously announced household charge of €100 will apply from 2012. An exemption will apply to those in receipt of a mortgage interest supplement and for those residing in certain categories of unfinished housing estates. An instalment arrangement will also be available. The charge is a temporary measure and will be replaced with a full property tax in 2014.

Foreign Earnings Deduction
A Foreign Earnings Deduction is to be re-introduced where an employee spends a minimum of 60 days developing export markets in Brazil, Russia, India, China and South Africa – the so called BRICS countries.  A Foreign Earnings Deduction was previously allowed against employment income.  It had the effect of removing the employment income attributable to qualifying days spent outside of Ireland from Irish income tax subject to a maximum of €31,750 for the 2000/2001 and subsequent tax years.  The relief was terminated on 31 December 2003.

NAMA Rent Reviews
NAMA today published its “policy guidance” for dealing with tenants’ difficulties arising from upward only rent reviews. This “policy guidance” provides an opportunity for NAMA to approve rent reductions where it can be shown that rents are in excess of the current market levels and viability is threatened. The policy also provides for the appointment of an independent valuation of market rent where necessary.

NAMA has also advised the Minister for Finance, Michael Noonan that they can be contacted directly (and these queries will be dealt with speedily by them) where the tenant is not satisfied with their negotiations with the NAMA landlord.

As NAMA is now concentrating fully on the active management of the assets under its care, the Minister plans to appoint a group to advise him on “NAMA’s strategy and its capacity to deliver on that strategy through property disposal and the ongoing management of assets”.

The advisory group will help the Minister identify candidates with entrepreneurial and property skills. Recommendations will also be provided by the group on strategies for NAMA to attract international capital to Ireland and to provide advice in respect of lessons to be learned from asset management agencies in other countries.

The Minister plans to issue a direction order under the 2009 NAMA legislation to establish the advisory group.

Disclaimer

The material in this guide is provided for general information purposes only. It does not constitute professional advice and should not be construed as such. It is, of necessity, delivered in a condensed form. It should not be regarded as a basis for ascertaining the liability to tax in specific circumstances. Readers are strongly advised to seek professional advice with regard to their particular circumstances and factual details concerning specific tax matters before taking any decision or course of action.

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