Budget 2011 Presentation The implications for SMEs of the December budget Paul Dillon, Tax Partner 1
Contents Overview of Budget Income tax changes Introduction of Universal Social Charge Pension Changes Abolition of reliefs for certain expenditures Property based reliefs significantly curtailed Business Taxes New BES scheme to be introduced Stamp Duty changes Capital Taxes changes 2
Overview of Budget 2011 Significant Reform of Income Tax system, on average employees pay reduced by 3%-4% Restrictions on property incentives Restrictions on Pensions reliefs for employees, less attractive No property taxes or restrictions on Capital tax reliefs Minimal incentives introduced for SME sector 3
Tax credits from 1 January 2011 Existing Proposed Employee Tax Credit 1,830 1,650 Personal tax credits - single 1,830 1,650 - married 3,660 3,300 Widowed person bereaved in year 3,660 3,300 of assessment One Parent Family Tax Credit 1,830 1,650 Home Carer Tax Credit 900 810 Dependant Relative Tax Credit 80 70 Blind Persons Credit - single 1,830 1,650 - married 3,660 3,300 (both blind) Additional credit for certain 600 540 widowed persons Widowed Parent Tax Credit: - year 1 4,000 3,600 - year 2 3,500 3,150 - year 3 3,000 2,700 - year 4 2,500 2,250 - year 5 2,000 1,800 Age Credit - single 325 245 - married 650 490 4
Standard Rate Bands from 1 January 2011 Existing Proposed Single/Widowed 36,400 32,800 Married One Income 45,400 41,800 Married Two Incomes* 72,800 65,600 One Parent/Widowed Parent 40,400 36,800 *With a maximum transferability between spouses of 45,400 in 2010 and 41,800 in 2011. Age Exemption Limits from 1 January 2011 Existing Proposed Single 20,000 18,000 Married 40,000 36,000 5
Universal Social Charge (USC) Health Levy and Income Levy to be abolished and replaced in 2011 with Universal Social Charge. The following rates and thresholds apply to USC. 0% < 44,004 2% 0 to 10,036 4% 10,037 to 16,016 7% > 16,016 6
PRSI Changes Abolition of the PRSI ceiling of 75,036. Class S (Self-Employed) PRSI rate increased from 3% to 4%. Modified PRSI rates (certain public servants) increased to 4% on incomes in excess of 75,036. Introduction of a 4% PRSI charge for certain Office Holders. 7
Abolition of Income Tax Reliefs from January 2011 which affect SME Sector directly Patent Royalty Exemption abolished for Patent Royalties and dividends, effective from the launch of the National Recovery Plan on 24 November 2010. This affects companies who have given key individuals shares in a patent company Tax relief on Loans to Acquire an Interest in Certain Companies have been curtailed and will be phased out this will directly affect SME s. Tax exemption from BIK for Employer provided Childcare removed. Abolition of tax relief on subscriptions to professional bodies, no longer deductible for tax. Approved Share Options Scheme abolished, effective from the launch of the National Recovery Plan on 24 November 2010, SME need to look at other efficient means of remunerating top executives. Tax relief for new shares purchased by employees. Rent relief to be phased Abolition of tax relief for Trade Union Subscriptions. 8
Ex-Gratia lump sums Ex Gratia payments limited to 200,000. Companies need to review exit strategies for retiring executives in light of changes and possible consider action before 31 December 2010 9
Abolition of property-based legacy reliefs The budget has significantly curtailed the use of property-based incentives such as Section 23/50 relief and capital allowances. Section 23/Section 50 Relief From 1 January 2011, relief will be restricted to income arising from the Section 23/50 property itself, and no longer can be offset against other income or against rental income from another property. At end of 10 year period, any unused Section 23/50 relief will be lost i.e. it cannot be carried forward. If the property is sold within the 10 year period, the new owner will not get Section 23/Section 50 relief even though the seller of the property will be subject to a clawback of relief already given. For new Section 23/50 properties, the 10-year qualifying period will start on 30 June 2011 regardless of the date of the first qualifying lease or when sold. No Section 23 relief will be available after 30 June 2021. Residential owner-occupier relief is unaffected by these changes. 10
Capital Allowances Restrictions- May affect major shareholders in SME Restrictions apply to passive investors. Any unusual capital allowances carried forward beyond the 7 year claim period for allowances will be lost. From 2011 onwards, capital allowances will be restricted to offset against rental or trading income from the property, no ability to offset the losses against any other income. Schemes with a period over 10 years which has not ended will be reduced to 7 years from when allowances are first made. All unclaimed and unused capital allowances, arising after or carried forward from 2014 as well as unused Section 23 relief carried forward from 2014 will not be available after this date. Impact Assessment An impact assessment will be undertaken into the effects of the phased abolition of the property-base measures and the guillotine provision. 11
Pensions Employee PRSI on pension contributions From 1 January 2011, employee contributions to occupational pension schemes and other pension arrangements will not be subject to relief from employee PRSI and the Universal Social Charge relief. Employer PRSI on pension contributions The current employer PRSI exemption for employee contributions to occupational pension schemes and other pension arrangements will be reduced by 50% from 1 January 2011. Contribution limit The annual earnings limit is being reduced from 150,000 to 115,000 for 2011, this will directly affect contributions paid in 2011 in respect of 2010. Maximum Allowable pension funds The maximum allowable pension fund on retirement for tax purposes is to be set at 2.3 million with effect from 7 December 2010. This will affect self directed pension schemes. Grandfathering rules may apply to existing arrangements. 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 from 3% to 5% in respect of asset values at 31 December 2010 and future years. This reduces attractions of retaining funds in ARF s. Retirement lump sums The overall life-time limit on the amount of tax-free retirement lump sums that an individual can take from pension arrangements is being reduced to 200,000. The excess over this amount will be taxed at the standard tax rate up to 575,000. The excess of retirement lump sum payments over that amount will be taxed at the taxpayer s marginal rate of income tax. 12
Tax on savings Deposit Interest Retention Tax and Exit Taxes on Life Assurance Policies and Investment Funds The rate of retention tax that applies to deposit interest, together with the rates of exit tax that apply to life assurance policies and investment funds, are being increased by 2 percentage points in each case and will now be 27% for payments made annually or more frequently and 30% for payments made less frequently than annually. The increased rates will apply to payments, including deemed payments, made on or after 1 January 2011. 13
Income Tax implications for SME Make pension contributions before 31 December 2010 for 2010 income tax year for maximum relief. Review exit strategy of individuals for purpose of pension and ex gratia lump sum before year end. Incorporate business? Review other tax efficient means of remunerating employees given the restrictions on approved share options and pensions introduced. 14
Corporation Tax Exemption for Start-Up Companies Extended The exemption for start up companies extends to companies commending to trade in 2011. The relief is to be amended so that the value of the relief is linked to the amount of employer s PRSI paid in the period subject to a maximum of 5,000 per employee. If the amount of employer s PRSI is lower than the deduction in the corporation tax liability otherwise applicable relief will be based on the lower amount. Possibly less attractive in start up cases where employment numbers are low initially. 15
Reform of BES The current Business Expansion Scheme is being replaced with a new Employment and Investment Incentive Scheme (EIIS). Under the scheme the limit a company can raise under the scheme will be increased from 2 million to 10 million. The amount that can be raised in a 12 month period will be increased from 1.5 million to 2.5 million. The new incentive will expire in 2013. The new scheme is subject to EU approval. 16
Reform of RCT The current RCT rate of 35% has been replaced with a two-rate system. A withholding rate of 20% will apply for subcontractors registered for tax who have an established compliance record. The 35% rate will apply for subcontractors not registered for tax. 17
Capital Allowances for energy efficient equipment Accelerated capital allowances of 100% in year 1 on qualifying energy efficient equipment has been extended for an additional 3 years to end of 2014. To qualify the equipment must meet energy efficient criteria and a list is available on Revenue website. 18
Capital Acquisitions Tax The current group tax free thresholds are being reduced by 20%. This reduction applies in respect of gifts or inheritances taken from midnight on 7 December 2010. The new thresholds are as follows: Class A 332,084 Class B 32,208 Class C 16,604 There has been no change to business relief in the Budget which allows the tax efficient passing of a family business to next generation. 19
Capital Gains Tax No changes to Capital Gains Tax at budget stages. No changes to retirement relief in the Budget allowing shareholders exit a business 20
Excise Taxes- Direct cost for many SME s Amending the Air Travel Tax to a single rate of 3 A single rate of Air Travel Tax of 3 will come into effect on 1 March 2011, on a temporary basis. [Minister may revise upwards] Vehicle Registration Tax (VRT) Extension of the Car Scrappage Scheme. Extension of VRT relief for Hybrid Vehicles and Flexible Fuel Vehicles. Car scrappage scheme is being extended for the period 1 January to 30 June 2011. 21
Stamp Duty Transfers of residential property Reduction in rate for transfers of residential property to 1% on properties valued up to 1 million, with 2% applying to amounts over 1 million, in respect of instruments executed on or after 8 December 2010. Abolition of various reliefs and exemptions, in respect of instruments executed on or after 8 December 2010, as follows: First time buyer relief Exemption for new houses under 125 sq m in size Relief on new houses over 125 sq m in size Consanguinity relief for residential property transfers Exemption for residential property transfers valued under 127,000 Site to child relief 22
Summary for SME s Corporation Tax rate of 12.5% preserved. Little incentive package for Corporates. Start-up exemption for 2011 may be difficult in practice. New BES style relief may aid investments. Patent schemes eliminated. Approved share options eliminated Capital allowances for energy efficient equipment extended Pensions for Directors curtailed. Interest relief to be phased out. 23
Questions Contact Details Paul Dillon pauldillon@dcon.ie www.dcon.ie Duignan Carthy O Neill 84 Northumberland Road, Ballsbridge, Dublin 4. Ph: 01 668 2404 24