WHILE yesterday's Budget will generally be seen as friendly from a business perspective, Corporate Ireland could do worse than noting that the apparent tax concessions to the corporate sector have been self financed.
Yesterday's corporation tax reductions are estimated to cost £52 million in a full year. The Government yield from corporation tax in 1996 was £1.426 billion, some £136 million ahead of the original Budget estimate. In 1986, the total corporation tax yield was only £258 million, reflecting a 550 per cent increase in the yield from corporation tax over the last 10 years.
The business community will, nonetheless, be pleased with the proposed reduction in the corporation tax rate. Apart from Germany (45 per cent), Sweden (28 per cent), and Finland (28 per, cent), most EU countries have standard corporation tax rates in the range 33 to 40 per cent. Before yesterday's Budget, Ireland's 38 per cent rate was the third highest in the EU. Yesterday's reduction will be seen as continuing Ireland's drive towards a converging EU corporation tax rate of around 33 per cent and will principally benefit the services sector (in particular the financial services industry), and distributive and retail traders.
The changes to the small companies rate, while welcome, are disappointing. The proposed 2 per cent reduction had been widely flagged. However, a strong case exists for a considerable increase, in the threshold to which the small companies rate applies from its present level of £50,000. This would cost relatively little to effect. The application of this rate significantly enhances the competitiveness of small Irish businesses, in particular relative to their counterparts in the UK.
In the UK a 23 per cent small companies rate applies on profits, of up to £300,000 sterling.
The income tax measures announced will be seen by business as generous relative to similar concessions in recent years. In particular, the 1 per cent reduction in both the standard income tax rate and the standard rate of PRSI, and the increase in the standard rate band, will put some dent in the tax wedge and should help improve competitiveness. The tax wedge, however, is only one of the barriers to reduced unemployment.
Social welfare fraud and opportunities in the black economy continue to put pressure on employment costs. The Minister's failure to make specific provision in yesterday's Budget to combat tax and social welfare fraud is disappointing.
Supporters of the Developing Companies Market (DCM) of the Irish Stock Exchange, which is aimed at attracting smaller companies with growth potential to the market, will also be disappointed with the range of tax concessions announced. Creating a favourable tax regime in which the DCM itself can develop would have the effect of encouraging investment in the DCM and of enhancing the liquidity of its shares On first reflection, the Minister's proposals fall well short of what is required.
He has indicated that BES status will be extended to qualifying companies that obtain a DCM quotation, on the same terms as existing BES companies. While somewhat ambiguous, my reading of this proposal merely suggests that a company that would otherwise qualify to raise BES funding will not be disqualified solely by obtaining a DCM quotation. The extension of the favourable 10 per cent tax treatment afforded to special portfolio investment accounts (SPIAs) to DCM companies is welcome but was expected.
Increasing the limit for investment in SPIAs by £10,000 to £85,000 per individual to facilitate DCM investment, is a relatively small concession. So, too, is the extension of CGT roll over relief to shares obtaining a listing on the DCM.
Effective tax measures to encourage the DCM would have included confirmation that the 26 per cent capital gains tax rate (down from 27 per cent), would apply to gains made on the DCM market and the extension of existing interest relief to employees - and directors on borrowings to finance investment in employer companies quoted on the DCM. Such concessions would merely be bringing the tax regime applicable to the DCM into line with the corresponding Alternative Investment Market in the UK where, in addition, subject to certain conditions being met, losses on investment can be set off for tax purposes against other income.
The increase in the percentage relief from capital acquisitions tax from 75 to 90 per cent of the value of business property, will be applauded by family owned businesses. In practical terms, the payment of capital acquisitions tax on the passing on of a family, business can entail a significant cash drain on the business. Major assets of the business might have to be sold or investment may have to be delayed in order to meet the liability, undermining the viability of the business.