SUMMARY

What did this budget do for business? Brian Cowen faced a completely different economic climate on 5 December 2007 than he did in 2006. Faced with a sharp slow down in tax revenue, this budget was going to be a difficult one for Mr. Cowen. Up to a week before the budget the Minister stated that there would be no move on stamp duty. The exchequer figures released on 29/11/2007 showing the tax receipts for November were much less than expected, even taking into account the recent slow down. With this additional information the Minister had to do something.

The construction industry contributes more than just stamp duty to the exchequer. With activity in construction seriously reduced there was also a large fall off in receipts from VAT, PAYE/PRSI, Income Tax & Corporation Tax. Faced with this the minister did a u-turn and changed the rules for stamp duty on RESIDENTIAL property.

STAMP DUTY

The small movement in stamp duty reform is welcome, however it is only a small movement. The new regime is detailed below. I feel that the new rate should have been set at a lower level. 5% would not have been asking for too much considering how much property currently costs.

However, this new regime does not cover commercial property where the 9% rate still prevails. In other words, if you are working hard, building your business and need to move as a result, YOU, yes YOU have to give the government 9% of the value of the new premises - for WHAT??

9% when the country was a basket case and you could be a sizeable property for 40K was sufferable. But know, when you get very little for less than €500k, 9% is beyond a joke. 

The table above shows that it is not until you go to the larger houses that a real benefit kicks in, and it is probably in this market, where first time buyers are trading up to a family home that it may just help kick start the sector.

CAPITAL ALLOWANCES (AND EXPENSES) FOR BUSINESS CARS

A revised scheme of capital allowances and leasing expenses for cars used for business purposes is being introduced.  The revision will link the availability of such allowances and expenses to the CO2 emission levels of the vehicles. Cars will be categorised by reference to CO2 emissions with the emissions bands being broadly consistent with the new VRT system, as follows:

Cars with CO2 emission levels in Category A/B/C above will benefit from capital allowances at the current car value threshold under the existing scheme of €24,000, regardless of the cost of the car. Cars in Category D/E will receive allowances of 50% of the current car value threshold or 50% of the cost of the car, if lower. Cars in Category F/G will not qualify for capital allowances.

As regards leasing expenses, cars in Category A/B/C will benefit from a proportionately higher deduction than the actual leasing expenses where the cost of the car is less than €24,000. Cars in Category D/E will get 50% of the leasing expenses they would otherwise benefit from under the current scheme. Cars in Category F/G will not qualify for a deduction for leasing expenses.

The revised scheme will come into effect in respect of cars purchased or leased on or after 1 July 2008.

VAT

REGISTRATION

The VAT registration thresholds are increasing to €37,500 from €35,000 for supply of services and to €75,000 from €70,000 for supply of goods.

This increase is ahead of inflation but still falls short of a realistic level of where the threshold should be. Rates of €75,000 and €150,000 would be more realistic.

VAT ON PROPERTY

A new VAT system will be introduced from 01 July 2008. This will replace the current system which has been in operation since 1972. The main provisions of the new systems will include:

• long lease (a “freehold equivalent”) - will be taxable only while the building is considered “new”. For this purpose, a building will be regarded as “new” for a period of up to five years following completion. The first supply of a building within five years after completion will always be taxable.  Subsequent supplies within five years after completion will also be taxable except where the building has been occupied for two years or more at the time of supply.  An existing building that is substantially refurbished or is adapted for materially altered purposes will be considered “new” following such work and sales of those buildings will be subject to the rules for sales of new buildings.
   

• The supply of “old” buildings will be exempt from VAT, but there will be an option to tax such supplies.  Where the option to tax is exercised, VAT will be charged on the actual consideration, subject to any specific anti-avoidance rules that deal with artificially reduced considerations. The option will be exercised jointly by the vendor and purchaser.  VAT will be accounted for by the purchaser, under the reverse charge mechanism.
   

• The supply of “building land” will be taxed in the same way as it is taxed currently.  The VAT treatment of undeveloped land (e.g. farm land) will not be affected. Land that is sold in connection with a contract to develop it will continue to be taxable.
   

• Most leases will be exempt from VAT but leases that represent effective ownership will be treated in the same way as supplies of the freehold.
   

• There will be an option to tax rents on commercial buildings where the landlord and tenant are not connected persons.  The option may be exercised by the landlord and provision will be made for cancellation. Where the option is cancelled while the building is still subject to the CGS, a CGS adjustment will apply.  Anti-avoidance measures will ensure that no unjustified advantage arises on the cancellation of an option.  ‘Connected persons’ will be given a broad definition so as to prevent abuse of the option to tax facility.
   

• A Capital Goods Scheme will be introduced. Deductibility for input VAT relating to a property will be initially allowed by reference to the use of the property for the first twelve months of full use. The CGS will require an annual review by the taxpayer of the use to which a property is put over the following twenty years (in terms of taxable or exempt use).  Where there is a change in use, an adjustment of deductibility will be required.  The adjustment will reflect the difference between the use in the initial twelve months of use and the use in the year in question. Ultimately, the proportion of VAT allowed to be deducted will reflect the actual use of the property over the twenty-year period

MOTOR TAXATION

7 new categories of VRT will be introduced from 01 July 2008. These will replace the 3 current rates and will reduce the cost of environmentally friendly cars. The proposed rates are:

INCOME TAX CHANGES

Income tax bands have been widened by €1,400 for single persons and married persons with one income and by €2,800. This widening covers the increase in inflation. Other movements are along the same line.

Tax Individualisation which was introduced by Charlie McCreevy still penalises family's where one spouse stays at home. A Married couple with one spouse working earning over €70,800 is paying €5,544 more tax than a Married couple where both spouses are working and the second spouse is earning more than 26,400.

Examples of savings are outlined in the breakfast budget briefing.