Budget 2023 was announced on 27 September 2022 (one month earlier than usual).

This was Minister Donohoe’s sixth budget speech and the third of the coalition government between Fianna Fáil, Fine Gael and the Green Party. This year’s budget was framed against the ongoing conflict in Ukraine, spiralling commodities and energy costs together with significant rises in the cost of living.  The Minister referred to it as a “Cost of Living Budget”.

The recent release of better-than-expected economic forecasts for Ireland allowed the Minister to announce a range of tax and expenditure measures worth €11bn.  Budget 2023 announcements include “once off” measures of €4.1bn and other budgetary measures of €6.9bn.  The Minister noted that tax receipts of €50bn at the end of August 2022 were €10bn higher than for the same period to August 2021.  These “excess receipts” have allowed the government to introduce budgetary measures to ease the cost of living and provide supports to ensure that individuals, families and businesses can survive what is hoped to be a short-term crisis. In total €6bn of these “excess receipts” will be transferred to the National Reserve Fund in 2022 and 2023.

On the international tax front, after getting assurances last year concerning the proposed minimum global tax rate, Ireland signed up to the OECD Pillar One and Pillar Two commitments, supporting a minimum global tax rate of 15%. The Minister emphasised that Ireland’s corporation tax regime together with the 12.5% headline tax rate, forward looking business environment and educated and dynamic workforce all perform a key role in attracting FDI.

As part of the introduction of the minimum global tax rate the government will give serious consideration to introducing a territorial corporation tax system.  The Minister also announced that a review will take place of Ireland’s REIT and IREF regimes to see how such regimes can support the government’s housing policy. The announcement of a fundamental analysis concerning the introduction of an intermediate or third rate of income tax is welcome. This analysis is expected to be concluded by government prior to the publication of next year’s Summer Economic Statement.

In our Budget 2023 briefing, we highlight details of the key budgetary measures, including Ireland’s new temporary business energy support scheme, new vacant homes tax, extensions to SARP and the knowledge development box regimes. Full details will be set out in the Finance Bill 2022, which is expected to be published in late October 2022. As usual, on tax matters, the devil will be in the detail.

Highlights

Budgetary Measures

The Minister for Finance (Minister) announced a total budget package of €11bn comprised of budgetary measures of €6.9bn and a package of once off measures worth €4.1bn. The Minister noted that the tax receipts to end-August 2022 were €50bn which is €10bn higher for the same period to end-August 2021. This has allowed the government to introduce measures to ease the increased cost of living and provide business supports.

Corporation Tax

The Minister highlighted the boost that corporation tax receipts had provided to the Exchequer, noting a figure of nearly €12bn at end of August. It is expected that these receipts may exceed €20bn this year. To avoid an unwise reliance on the excess receipts, the replenishing of the National Reserve Fund has begun, with an injection of €2bn this year and an intended injection of €4bn in 2023. This is aimed at warding against the future fiscal pressures associated with an aging population, the digital transition and climate change.

Ireland’s corporate tax regime was again noted as a core element of Ireland’s economic policy mix. However, it was highlighted that work was continuing to give effect to the Pillar Two minimum effective tax rate. The Minister mentioned that this work will continue alongside a consideration of options for a move towards a territorial corporation tax system.

International

It was announced that the Foreign Earnings Deduction will be extended to the end of 2025.

The Special Assignee Relief Programme will also be extended to the end of 2025 but the minimum income limit for new entrants will be €100,000.

The Knowledge Development Box will be extended for four years resulting in it applying for accounting periods commencing before 1 January 2027. The new effective rate will be 10%.

Finally, the Finance Bill 2022 will introduce changes to the Research and Development tax credit to align it with new international definitions of refundable tax credits. These measures are expected to be broadly cost neutral.

Property

A Vacant Homes Tax is being introduced in 2023. This will apply to residential properties that are occupied for less than thirty days in a twelve-month period.

It was also announced that there will be an extension of the Residential Stamp Duty Refund Scheme until the end of 2025.

Finally, a new levy of 10% will be introduced on certain concrete products at point of first supply.

Temporary Business Energy Support Scheme

The Minster announced the introduction of a Temporary Business Energy Support Scheme (TBESS) to assist businesses with the cost of energy over the winter months. This scheme is going to apply to businesses that carry on Case 1 trading activities, are tax compliant and have experienced significant increases in their natural gas and electricity costs. The TBESS will operate on a self-assessment basis under the remit of Revenue and businesses will have a time limit within which they must register and make their claims.

Consultations & Initiatives

Amongst the miscellaneous consultations and measures, it was announced on foot of the recommendation made by the Tax Strategy Group that an analysis will commence to consider the introduction of an intermediate or third rate of income tax. This is to align with a medium-term roadmap for personal tax reform.

A Revenue initiative was announced whereby Revenue will conduct a range of targeted projects including PAYE compliance interventions with a further focus on share schemes and increased debt management activity. It is noted that this will yield additional receipts for the Exchequer.

A review is going to be undertaken of the REIT and IREF regimes. The review will consider institutional investment in housing and how best housing policy objectives can be supported into the future.

A working group will be established to review the taxation of funds, life assurance policies and various other investment products. The use of Section 110 regimes will also be reviewed.

As part of the recognition of Ireland as a location of choice in recent times for multimedia and digital gaming industries, opportunities will be explored to encourage large players in the ‘unscripted production sector’ to locate here in an effort to boost indigenous businesses.

Personal

PAYE Compliance Interventions

Revenue will carry out a range of targeted PAYE compliance interventions with a focus on share schemes and increased debt management activity. The Department of Finance considers that such projects will increase taxpayer compliance and yield additional revenue of circa €80m for the Exchequer.

Standard Rate Band

The 20% standard rate band has been increased by €3,200 for all earners. The following rate bands will apply for 2023:

Tax Credits

The Personal Tax Credit, Employee Tax Credit and the Earned Income Credit have all been increased by €75 from €1,700 to €1,775.

The Home Carer Tax Credit has also been increased by €100 from €1,600 to €1,700.

Rent Tax Credit

A new Rent Tax Credit is to be introduced. This annual tax credit of €500 will be available to renters in the private rental market who do not avail of any other State housing supports. One credit may be claimed per person per year, and it is proposed that the value of the credit is doubled for married couples and civil partners.

The Rent Tax Credit may be claimed ‘in year’ from 2023 to 2025. The Rent Tax Credit will also be available for the year 2022 (to be claimed from early 2023).

Intermediate Rate of Income Tax

The Minister announced that the recommendation of the Income Tax Strategy Group to introduce a third and intermediate rate of income tax will be considered and a detailed analysis of the practical implications of introducing a third band will commence immediately and conclude prior to the 2023 Summer Economic Statement.

The proposal is to introduce a new intermediate income tax band between the current standard rate of income tax (20%) and the higher rate of income tax (40%). The introduction of a new intermediate rate of tax between the standard rate of income tax and the higher rate of income tax would benefit middle and high-income earners.

The Minister speculated that the third band could be implemented from January 2024.

Universal Social Charge (USC)

The ceiling for the 2% rate of USC will be increased by €1,625 from €21,295 to €22,920. This increase is proposed in light of the 80 cent per hour increase to the national minimum wage as announced by Government in September 2022 which will come into effect from 1 January 2023.

The reduced rate of USC for all medical card holders earning less than €60,000 is maintained for a further year until 31 December 2023. The reduced rates of USC are 0.5% on the first €12,012 and 2% on the balance.

Pre-letting expenses for landlords

A tax deduction was introduced in 2017 to allow landlords to deduct certain expenses incurred before a property is let out. The purpose of the deduction is to encourage landlords in the residential rental sector to return empty properties to the market as quickly as possible.

The cap on the maximum tax deduction available to landlords for pre-letting expenses will double to €10,000, and the required period of vacancy for properties to qualify will reduce from 12 months to 6 months.

Special Assignee Relief Programme (SARP)

SARP is being extended for a further three years until 31 December 2025. The minimum basic salary needed to qualify for SARP is increased from €75,000 to €100,000 per annum. Individuals who are currently availing of SARP are not affected by this change.

Foreign Earnings Deduction (FED)

FED is being extended for a further three years until 31 December 2025. FED provides relief from income tax on up to €35,000 of income for employees who are tax resident in Ireland and who travel outside of Ireland to temporarily carry out employment duties in certain qualifying countries (e.g.  Brazil, Colombia, South Africa).

Business

Employment Initiatives

The Key Employee Engagement Programme (KEEP) has been extended to 31 December 2025 to facilitate the buyback of KEEP shares by an issuing company and increasing the company limit to €6 million.

The Special Assignee Relief Programme (SARP) is being extended for a further three years until 31 December 2025. The minimum basic salary needed to qualify for SARP is increased from €75,000 to €100,000 per annum. Individuals who are currently availing of SARP are not affected by this change.

The Foreign Earnings Deduction will be extended to 31 December 2025.

The annual limit for the Small Benefit Exemption has been increased from €500 to €1,000. An employer will be permitted to grant two vouchers to an employee in a single year under the exemption.

Research and Development Tax Credit

The Finance Bill 2022 will introduce changes to the payment provisions of the Research & Development (R&D) tax credit. These changes are intended to align it with new international definitions of refundable tax credits. The changes are stated to be broadly cost neutral, with no adjustment to the quantum of credit that a taxpayer may claim. Under the proposed changes, the payment will now be made by a new fixed three-year payment system.

The existing cap on the payable element of the credit is also being removed. In addition, the first €25,000 of a claim will be payable in the first year to provide a cash flow benefit for smaller R&D projects and encourage more companies to engage with the regime.

Knowledge Development Box

The sunset clause of the Knowledge Development Box (KDB) will be extended for four years to accounting periods commencing before 1 January 2027. The KDB’s new effective rate will be 10%, and it is stated that this will come into effect from a date set by Ministerial commencement order, determined by reference to international progress on implementation of the OECD Pillar Two Tax Rule. It is expected that this will occur during 2023.

Agri-Sector

The following reliefs have been extended to 31 December 2025:

• Young Trained Farmer (Stamp Duty) Relief.
• Farm Consolidation (Stamp Duty) Relief.
• Farm Restructuring (Capital Gains Tax) Relief.

The Young Trained Farmer and Registered Farm Partnerships stock reliefs have been extended to 31 December 2024.

There will be accelerated capital allowances for the construction of slurry storage facilities allowing for 50% of expenditure to be claimed over two years.

VAT

The Minister confirmed that the 9% VAT rate which is currently in place (i) for electricity and gas supplies, and (ii) to support the tourism and hospitality sectors, will continue until 28 February 2023.

The zero VAT rate will be applied to the following:

• Newspapers and news periodicals, including digital editions
• Automatic external defibrillators
• Period products
• All non-oral hormone replacement therapies
• All non-oral nicotine replacement therapies

The flat rate compensation percentage for farmers will be reduced from 5.5% to 5%.

Section 481 Film Relief

Section 481 relief will be extended from its current end date of 31 December 2024 to 31 December 2028.

Excise Duties

There will be a €0.50 increase on a pack of 20 cigarettes with pro-rata increases planned on other tobacco products.

The Minister has confirmed his commitment to the production of cider by stating that he will implement a revised EU Alcohol Directive option to grant up to 50% excise relief to independent small producers of cider and pear cider (known as “perry”).

The Excise Reduction will be extended to the end of February 2023. This is noted as a one-off cost of living package and is not planned to form part of the budgetary tax package for 2023.

Compliance Regime

Revenue will conduct a range of targeted projects including PAYE compliance interventions with a focus on share schemes and increased debt management activity. These projects are expected to increase taxpayer compliance and in turn increase the yield of funds to the Exchequer.

Property

Vacant Homes Tax

A new vacant homes tax (VHT) will be introduced in 2023 and apply to residential properties occupied for less than 30 days in 12 months.

The VHT will be subject to various exceptions for properties which are vacant for a genuine reason, such as:

• Properties recently sold or listed for sale or rent;
• Properties vacant due to occupiers’ illness or long-term care; or
• Properties vacant as a result of significant refurbishments.

The VHT will operate on a self-assessment basis and apply to all properties considered residential properties under the Local Property Tax (LPT) regime. The tax will apply at a rate of three times the current base LPT payable on the property.

Rental Tax Credit

A new annual tax credit of €500 will be available for taxpayers who rent their principal primary residence and are not in receipt of any state housing support. The credit will be available from 2023 and will also be claimable in respect of 2022.

Help-to-Buy Scheme

The Help-to-Buy scheme (HTB) will be continued at its current “enhanced” rates until the end of 2024.

The HTB helps first-time buyers of newly built homes to buy a new house or apartment. The scheme only applies to properties costing €500,000 or less. The HTB refunds income tax and Deposit Interest Retention Tax (DIRT) paid in Ireland over the previous four tax years.

The government has commissioned a report on the HTB, which will be published shortly and contains a number of recommendations to be considered in the future.

Living City Initiative

The Living City Initiative (LCI) was introduced in 2015 and allowed various tax reliefs for money spent on refurbishing or converting residential and commercial properties in designated “special regeneration areas” in Irish cities.

The LCI will be extended until the end of 2027 and the allowable deduction for owner-occupier relief under the LCI will be increased from 10% of eligible expenditure per year to 15%. This means that eligible expenditure can be reclaimed over seven years instead of ten years.

Zoned Land Tax

Maps being prepared by local authorities in respect of the zoned land tax (announced in last year’s budget) will be published on 1 November 2022. Once the maps are published, people will be allowed to appeal the zoning status of their land by applying to the relevant local authority. The Finance Bill 2022 will introduce measures to streamline the administration of the zoned land tax.

The zoned land tax will apply to land zoned suitable for residential development that is serviced but not developed for housing. The tax will target land in zoned residential areas or areas which are zoned for a mix of uses, including residential use.  The tax will operate on a self-assessment basis and will be at a rate of 3% of the market value of the land. The zoned land tax replaces the vacant site levy.

Pre-letting expenses for landlords

A tax deduction was introduced in 2017 to allow landlords to deduct certain expenses incurred before a property is let out. The purpose of the deduction is to encourage landlords in the residential rental sector to return empty properties to the market as quickly as possible.

The cap on the maximum tax deduction available to landlords for pre-letting expenses will double to €10,000, and the required period of vacancy for properties to qualify will reduce from 12 months to 6 months.

Stamp duty refund scheme

The partial refund available for stamp duty paid on non-residential land that is subsequently used for developing dwelling units will be extended until the end of 2025.

Defective concrete products levy

The mica redress scheme announced in 2021 for individuals affected by defective building products will be supported by a new levy on the construction sector. The levy will apply at a rate of 10% of the cost of a variety of specified concrete products (including pouring concrete) from 3 April 2023, broadly being:

• Products primarily used in the construction of buildings;
• Products primarily of a structural nature; and
• Products composed primarily of concrete.

Other points to note

The Minister for Finance welcomed recommendations by the Commission on Taxation and Welfare on the Local Property Tax and a Site Value Tax and indicated that the government would consider reforms in the future.

The Minister also indicated a review of Ireland’s IREF (Irish Real Estate Fund) and REIT (Real Estate Investment Trust) regimes would be undertaken to determine how they could best support housing policy in the future.

Financial Services

Bank Levy

The bank levy will be extended to the end of 2023.

Review of REIT, IREF and Section 110 Regimes

The Minister committed to commencing a review of the REIT and IREF regimes, noting that institutional investment has played a key role in the provision of housing in recent years. The review will consider these structures and their future role in continuing to support housing policy objectives. The Minister also confirmed the intention to commence a review of the use of Section 110 regimes (together the Review).

The Minister noted that the Review will include the establishment of a working group to consider the taxation of funds, life assurance policies, and other investment products.

The Review will be supported by the Department of Finance, Revenue, and the Central Bank of Ireland. The Report of the Commission on Taxation and Welfare has previously commented that a more in-depth look at the tax status of IREFs, REITs, and Section 110 companies was expected based on public commentary and feedback to the Commission’s consultation.

No further details of the scope of the Review were provided.