Budget 2021

There's an old Russian proverb: "Be grateful, as this year will be better than next, even if it's not as good as last."

This time last year Minister Paschal Donohoe described Budget 2020 as without precedent and "developed in the shadow of Brexit". A year later, the world is in the grip of a coronavirus pandemic, Brexit looms and the people of Ireland must endure varying degrees of social and economic confinement.

The Minister delivered Budget 2021 today with the unenviable task of tailoring the tax system while navigating current events, climate change and global tax trends.

Details of the main Budget 2021 provisions are summarised below.

A new scheme (called the 'Covid restrictions support scheme' or 'CRSS') has been introduced with immediate effect. The scheme will provide cash payments of up to €5,000 per week to businesses either forced to close or to trade at significantly reduced levels due to Covid-19 restrictions.

The CRSS will generally apply when Level 3 or higher restrictions are imposed in line with the "Plan for Living with Covid-19". The scheme will operate from the 13th October 2020 until 31st March 2021.

Currently, the scheme is aimed at businesses in the accommodation, food, arts, recreation and entertainment sectors.

At the time of writing, it is not clear how the scheme will operate. Based on information available, payments will be calculated based on:-

• 10% of the first €1m in (VAT exclusive) turnover, and
• 5% thereafter.

Note: businesses claiming this scheme will be subject to Revenue enquiry and audit. Businesses must show that turnover has been severely impacted (turnover does not exceed 20% in the corresponding period in 2019).

The special 9% VAT rate which previously applied to tourism operations will be re-instated for hotels, restaurants and others in the hospitality sector with effect from 1st November.

The reduced rate will apply until 31st December 2021.

No further commitment was announced regarding the temporary reduction in the standard VAT rate from 23% to 21% (introduced with effect from 1st September 2020 and due to end on 28th February 2021).

As widely expected, the Government has overhauled the rates of VRT and motor tax on new and imported vehicles.

These changes were resisted by the motor sector, which generates 20% of all VRT and VAT for the State.

Nonetheless, changes were inevitable given the importance of climate measures to the Green Party in Government, consumer sentiment following various emissions scandals and greater awareness of real time vehicle performance versus marketed performance (as carried out by the International Council on Clean Transportation and others).

While the Tax Strategy Group had advocated an upper VRT rate of 39%, the Government introduced a new upper rate of 37% (see table).

To address the fact that used imports (pre September 2018) have been subjected to an older and discredited emissions test, future imports will be taxed based on WLTP equivalent CO2 values.

Equivalent changes are being made to annual motor tax changes.

The VRT changes are likely to increase the cost of new and second-hand imported SUVs by upwards of €1,800.

The Knowledge Development Box will be extended until the end of 2022 (more information).

Work is merely slated to begin in 2021 on the development of a tax credit for the digital gaming sector.

This sector has been crying out for support for many years. See John Kennedy (the former editor of Silicon Republic) here and a Forfas report here putting the case for tax measures to support the gaming sector.

The fact that no outline proposal yet exists for granting relief is disappointing.

• There are no changes to income tax rates or tax bands.
• The dependent relative tax credit is to increase from €70 to €245.
• The 2% USC band has been increased from €20,484 to €20,687.
• The weekly income threshold for the higher rate of employer's PRSI will increase to €398 (previously €394) for 2021.
• The earned tax credit is to increase to €1,650 and interestingly the increase will also apply for the entirety of 2020, i.e. the increase has been backdated to 1st January 2020.
• An extension of the Sea-going Naval Personnel Tax Credit to 31st December 2021 and an increase in the credit to €1,500 (previously €1,270).

Existing debt warehousing provisions will be extended to include the 2019 balance of tax and 2020 preliminary tax payments for self-employed individuals.

The warehousing measures were introduced in May to support SME businesses and larger businesses experiencing cashflow and trading difficulties.

Note: for SME's the measures apply automatically. Larger businesses must make an application.

Under the existing warehousing arrangements interest on late payments is suspended for one year.

Unpaid tax liabilities outstanding after more than a year will attract interest at a rate of 3%.

• Farm consolidation which allows for a 1% rate of stamp duty (as opposed to the general rate of 6%) where the land transactions qualify for a “Farm Restructuring Certificate” has been extended until 31st December 2022.
• Consanguinity relief is being extended from its current expiry date of 31st December 2020, to 31st December 2023. This relief provides, under certain conditions, for a 1% rate of stamp duty on the transfer of agricultural land (by sale/purchase, exchange or gift) to certain close relations, such as a mother to son or uncle to niece. The standard rate of stamp duty applying to the transfer of agricultural land is 7.5%.
• The Residential development relief scheme for stamp duty is extended to 31st December 2022 and the period for construction is extended from 24 months to 30 months. This scheme provides for the refunding of stamp duty paid for non-residential land where it is subsequently redeveloped for residential purposes so that the effective rate of duty paid is 2%.

Recently published Tax Strategy Group papers presented a cogent argument for overhauling the rate of CGT in Ireland (see here) and worryingly presented arguments for the abolition of Entrepreneur Relief.

Notably, contrary to previously published positions, the Group acknowledges that a "reduced rate could make the capital tax system more competitive (both with the UK and other jurisdictions) and allow for reform of specific CGT reliefs".

None of the recommendations were taken up by the Government at this time. The Finance Bill will need to be monitored for any stealthy limitations in CGT. The only measure announced in relation to Entrepreneur Relief is a technical change to enable broader entitlement to relief.

This is to be achieved by relaxing a holding requirement for shares (further details to be announced).

• The rate of recovery under the Farmers Flat Rate VAT Scheme is to be increased from 5.4% to 5.6% for 2021. This scheme enables unregistered farmers to recovery of VAT on certain costs.
• Increased relief for regional film projects is extended until 31st December 2023. Currently projects produced in regions outside Dublin, Wicklow and Cork city and county qualify for a 5% uplift above the base relief rate (32% of eligible expenditure). The uplift is to be phased out in 2024 by phased reduction (3% uplift in 2022 and 2% uplift in 2023).
• The tax scheme of accelerated capital allowances for energy efficient equipment is extended until 31st December 2023. This scheme enables a sole trader, farmer or company to deduct the full cost of qualifying energy efficient equipment against taxable profits in the year of purchase. The equipment purchased must be new and bought for use in a trade. It cannot be leased, let or hired to any person, body or organisation.