In a seasonal mood, the business sector might be tempted, on hearing the Minister's speech yesterday, to think several Christmases had arrived at once. Not only did he announce general corporation tax reductions, coming into effect on January 1st, 1998, but he also indicated that there would be further reductions in future years.
So what's in the detail? Unfortunately the seasonal mood isn't all-pervasive. Certainly, the 2 per cent reduction in the general rate of corporation tax will come into effect from January rather than April, which had been the pattern with rate reductions in previous years. However, in cash-flow terms the benefit will be noticed by the vast majority of Irish companies, those having December 31st year-ends, only when they come to make tax payments as far away as June 1999.
While the lower corporation tax rate has also been reduced from 28 per to 25 per cent, many small and medium-sized businesses may be disappointed that the profit threshold for the lower rate remains at £50,000.
A corporation tax rate reduction invariably has several knock-on effects, including a reduction in the rate of tax credit applicable to dividends. This time the results are much more dramatic than the tax rate reduction itself. In relation to dividends actually paid on and from today, other than out of income which had been taxed at 10 per cent tax, the credit will be slashed from approximately 26.58 per cent of the amount of the dividend to around 12.36 per cent.
This is a most unwelcome result and goes totally against the trend of general reductions in the personal tax rates. For instance, for a top-rate taxpayer in receipt of dividend income prior to today, the effective rate of tax on dividends, after credits, was just over 34 per cent.
In respect of dividends received during the rest of the current tax year, the effective rate rises dramatically to about 41.6 per cent. After April 5th next, it will be 39.3 per cent. Worse is to come. Tax credits are to be abolished entirely from April 6th, 1999.
Scrip dividends from quoted companies, received on or after today, will be taxed as income with the appropriate tax credit. This will make such dividends quite unattractive because the recipient will have to find the tax cost from his or her own resources, not having received any cash to fund the liability.
On a more positive note, the corporation tax rate reduction will make it possible for Irish companies with overseas interests, particularly in the US and many mainland countries in Europe, to repatriate dividends without an incremental tax cost in Ireland.
Other technical spin-offs from the rate reduction will include an impact on certain tax-based lending structures. Finance leases in particular are often written on the basis that the lessee will receive a constant pre-determined rate of return over the period of the lease. A tax rate reduction will have an impact on this, likely to be positive for the lessee.
In contrast, the rate of interest on any Section 84 loans still in existence will increase because of the manner in which interest is calculated and the significance in that calculation of the after tax cost of funds to the lender. Business will benefit slightly from the increase from £15,000 to £15,500 in the car value threshold which applies for capital allowances and allowable running expenses. This change takes effect immediately.
As has become usual in recent years, the impact of the Budget on employment costs will be mixed.
The ceiling below which the employer's full-rate PRSI contribution is payable increases from £27,900 to £29,000 per annum. This will result in an additional cost of approximately £132 per annum of employing somebody paid in this range.
However, the reduced employer's PRSI contribution rate of 8.5 per cent will now be applied where earnings are less than £270 per week, up from £260. This, plus the double wage deduction which is being introduced for employers taking on a long-term unemployed person, will be of most benefit in those sectors where pay rates are at or below the average industrial wage.
Finally, there is one piece of unreservedly good news for business people. After many years of lobbying and complaining by long suffering victims, actual or potential, the capital gains tax rate has been reduced at a stroke from 40 per cent to 20 per cent, except in the case of gains on disposal of development land. Furthermore, this reduction applies with immediate effect, to gains on disposals from yesterday, December 3rd.
For some entrepreneurs, it may be that many Christmases did indeed arrive at once this year.
Enda Faughnan is the National Director of Taxation Services at Craig Gardner/Price Waterhouse