Comment:Maybe Brian Cowen felt it was a case of if it ain't broke, don't fix it, writes Colm Kelly
Boosted by considerably higher than expected tax revenues, many commentators were predicting that this would be one of the most generous budgets in the history of the State.
However, most of the action happened on the personal taxation and social welfare sides with very few changes in business taxation. There was some good news, though, for the small and medium enterprise (SME) sector. There are also some changes proposed to enhance research and development credits, which may be of interest to the multinational sector.
The Minister estimates that there are approximately 250,000 companies in the SME sector which account for about 40 per cent of the total employment in the country. In the Budget he has sought to reduce the burden and cost of tax compliance for SME's. From a corporation tax perspective, a company is obliged to pay at least 90 per cent of its tax liability approximately one month before the beginning of an accounting period. "Small companies" relief applies where a company's tax liability for the previous year is €50,000 or less.
In these circumstances, the company may opt to make its preliminary tax payment based on 100 per cent of the previous year's liability. It has been proposed to increase the corporation tax liability threshold for "small companies" from €50,000 to €150,000. The Minister estimates that over 97 per cent of Irish companies will benefit from this more straightforward system for making preliminary tax payments.
The Minister is also introducing a measure where new start-up companies will not have to pay preliminary tax in respect of their first accounting period. This is a welcome reversal of a change in practice announced by Revenue last month. There were also a number of VAT related changes that may impact SME's and start-up companies. The annual VAT cash accounting threshold for small firms is being raised from €635,000 to €1 million from March 1st, 2007, so as to simplify administration and reduce working capital requirements.
This allows smaller firms to pay VAT on receipt of payment rather than at the time a sale is made. Also, the small business VAT registration turnover thresholds are being increased from €27,500 per annum for services and €55,000 per annum for goods to €35,000 and €70,000 respectively from March 1st, 2007.
It is estimated that this measure could take up to 8,000 businesses out of the VAT system. The frequency of VAT payments and submission of VAT returns for smaller firms is being reduced from six per year to three per year where the annual VAT liability is less than €14,000 and to two per year where the annual VAT liability is less than €3,000. This will provide a cash flow boost and significantly reduce compliance costs.
The Minister has also introduced favourable changes to both the Business Expansion Scheme (BES) and the Seed Capital Scheme (SCS). The former was introduced to allow individuals a tax deduction for the cost of investing in certain Irish companies with the express purpose of encouraging investment and creating employment in such companies.
The SCS relief was introduced to encourage employees to start up their own businesses. Broadly this relief provides that someone who starts their own business, may claim a refund of tax paid on income earned in previous years in respect of their investment in the new business.
Both of these measures, which have been very successful, were due to end on December 31st, 2006. The Minister has extended these reliefs for a further seven years. Furthermore, Mr Cowen has doubled the level of funding that a company can raise from €1 million to €2 million for either scheme. The maximum relief that an individual may claim in any tax year for investing in a BES and/or SCS is to be increased from €31,750 per annum to €150,000 and €100,000 per annum respectively.
In 2004 an additional relief was introduced for expenditure on R&D. The relief which was primarily aimed at the multinational sector, provides for a tax credit of 20 per cent on incremental R&D expenditure. This is in addition to the normal tax deduction for such expenditure at the company's effective tax rate.
At present the legislation specifically excludes R&D expenditure on subcontractors except in limited circumstances. However, from January 1st, 2007, expenditure by companies on sub-contracting R&D work to unconnected parties will qualify for the additional 20 per cent tax credit up to a limit of 10 per cent of qualifying R&D expenditure in any one year.
Mr Cowen has also introduced a VAT measure specifically for the hotel and tourism industry. It is proposed to allow deductibility of VAT on conference- related accommodation expenses.
In summary therefore, it was a quiet Budget on the business front. Maybe the Minister felt that it was a case of if it ain't broke, don't fix it.
• Colm Kellyis head of tax and legal services at PricewaterhouseCoopers