EY: Budget 2021 could be seen as ushering in the era of the ‘new reliables’

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In response to the announcement of Budget 2021 today, Kevin McLoughlin, Head of Tax, EY commented:

“Traditionally budgets have been characterised by reliance on the so called ‘old reliables’ to raise taxes, but Budget 2021 could be seen as ushering in the era of the ‘new reliables’:

  • Reliance on the domestic economy for future recovery and on helping businesses retain jobs and survive the impact of Brexit and Covid-19.
  • Reliance on new sectors to deliver growth as demonstrated by the support for the digital gaming sector and the creation of a state-backed equity fund to invest in domestic, high innovation enterprises.
  • Reliance on generating tax revenue in the future in ways that support sustainable development and the state’s commitment to achieving carbon neutrality.
  • And reliance on “saving jobs and protecting our health,” as the priorities to ensure a swift and stable economic recovery.

“This was a budget delivered by a finance minister who is also the President of the Eurogroup:

  • There was clear acknowledgement of the scale of borrowing required to fund this unprecedented quantum of public spending and the need to ensure a prudent approach which is comparable to other EU member states.
  • There was reference to the joint effort required by member states and institutions such as the ECB to ensure an all-EU approach to dealing with the economic fallout from the pandemic.
  • Noting of ongoing processes including OECD negotiations on significant proposed international tax policy changes and their possible impact on Ireland.”

Additional Commentary – Innovation

“The budget was pitched to focus on the immediate challenges, but the Minister clearly had an eye towards the future economy and the critical role that innovation has to play in that.

“It is good news that the knowledge development box that supports R&D has been extended by 2 years to 31 Dec 2022.  The proposal to look at a new tax credit for the digital gaming sector from 2022 is very welcome. In addition, the mandate announced by the Minister to form a group geared towards leveraging European capital with a view to establishing an equity fund to invest in domestic, high innovation enterprises builds on Ireland’s exiting suite of innovation incentives. All this underlines the importance of innovation in Ireland’s future competitiveness.

“Given the increasingly important role of the knowledge economy and the need for Ireland to continue to remain internationally competitive, we would have liked to have seen a 4-year extension to the knowledge development box. This would provide even greater certainty to business and encourage more taxpayers to avail of this regime. We will continue to engage with Government to seek the improvements we feel are still needed here.

  • Ian Collins, Partner, Business Tax Advisory

Hospitality

“Building on the July Stimulus measures including the ‘stay and spend’ incentive, Budget 2021 saw further relief and much needed cash injection measures for the troubled hospitality sector. This included the much-heralded VAT rate reduction from 13.5% to 9% which will run to 31 Dec 2021.

“We also saw a much-needed cash flow injection under the Covid Relief Support Scheme (CRSS). This measure will allow business closed as a result of level 3 and above Covid restrictions apply for a cashflow support from revenue. The amount will be an accelerated tax deduction and will be calculated by reference to 2019 revenue. It will be capped at an amount of €5,000 per week, again highlighting the pace at which Government and Revenue are responding to Covid. It is expected that the first payments under CRSS will be made by revenue from mid-November.”

  • Peadar Andrews, Tax Partner EY

Climate Change Agenda

“Carbon tax will increase by €7.50 annually out to 2029, and a €6.50 increase in 2030, to bring us to €100 per tonne of carbon. This goes even further than the €80 per tonne of carbon set out in the national Climate Action Plan in 2019. This will impact the price of auto fuels and home heating considerably out to 2030.”

  • Lorraine McCann, Climate Change and Sustainability Services Leader

“My take is that the VRT discussed will be revenue raising and only the carbon tax will be ring-fenced as stated last year.  I think that in an ordinary year the government could have been pushed to ring fence all carbon/emissions related taxes to further the green agenda but in the current climate it is understandable why they may not. While not quite a “green” budget the government is taking us in the right direction albeit the pace is still not quite fast enough due in some part to the lack of supportive infrastructure.”

  • Deirdre Hogan, Tax Partner, EY

Economy

“Brexit may have been in the first line but, as expected, this was a firmly Covid related budget in tone and measure. Despite better headline economic performance than most peer economies, the Minister for Finance did not dwell on this, as might have been expected, and instead focussed on the rise in unemployment and the need to spend more to address the pandemic damage. The increase in spending of €17bn is significant. To put in context this is more than annual PAYE returns or nearly three times annual excise tax receipts.  Ensuring that the extra money is spent effectively and avoiding a sharp step up in the cost of public service delivery in future years will be challenges to face in the year ahead.

“In a Budget mostly about the ‘here and now’ there were a few hints about the future direction of the coalition Government. As the Minister spoke about a bridge to a better tomorrow, he referred to the Commission on Taxation on Welfare, a recognition of the need to think strategically about how to meet public sector costs and achieve long term aims through the tax system. There was also a paper on well-being indicators published, further reflecting the move away from headline growth as the measure of Ireland’s success. It was perhaps not surprising then that the GDP numbers did not feature more prominently in the speech.”

  • Neil Gibson, Chief Economist, EY
END