While in monetary terms, yesterday's tax concessions were targeted principally at individuals, there was much for Irish business to be pleased about in Mr McCreevy's first budget.
A widening of personal allowances and the standard rate bands had been sought to tackle the so-called "tax wedge". Instead, the Minister chose to focus on reducing both income tax rates by 2 per cent, while introducing specific tax incentives to tackle the wedge that is generally seen as a deterrent to the long-term unemployed returning to work.
These incentives include a £3,000 (plus £1,000 per child) additional tax free allowance for those who were unemployed for 12 months and who take up a job.
The employer in turn will be entitled to a double wages deduction for up to three years in arriving at taxable income. This will have a marginal effect in manufacturing industries (because of the 10 per cent tax rate). However, service sector employers now taxable at 32 per cent (companies) or 46 per cent (traders) will have their wages bill for new qualifying employees subsidised to the extent of between 64 per cent and 92 per cent.
The reductions in corporation tax rates to 32 per cent (in general) and 25 per cent (for small companies) were well signalled before the Budget. Small businesses will be disappointed that the threshold to which the small companies rate applies is not to be increased beyond its current level of £50,000. But this disappointment will be eased by the proposed reductions in general corporation tax levels.
Confirmation of a phased introduction of a single corporation tax rate of 12.5 per cent by the year 2006 is a definite boost to Irish business. Companies currently paying tax at 10 per cent will be pleased that any post 2005 uncertainties have been clarified. Companies in the retail, distribution and services sectors can look forward to considerably reduced tax bills in the future.
Meanwhile, the effects of a single low corporation tax rate for companies will rightly occupy the minds of the business community. At lower tax rates, the cost of debt finance increases, rendering equity finance relatively more attractive. The blanket cut in the capital gains tax rate should further improve the availability of equity.
In line with the rate reductions, the Minister has signalled the abolition of tax credits on dividends and ACT over the next two years. For pension fund managers, dividend tax credits constitute an important part of the cash that is required to fund ongoing pension obligations. The abolition of tax credits will therefore force fund managers to address their annual liquidity requirements, albeit mindful of the positive effect which reduced tax rates may have on share values. This, in turn, is likely to require finance directors to examine their pension funding requirements and in certain cases their dividend policy.
Given that the changes introduced in recent years to the business expansion scheme have resulted in a refocusing of BES towards higher risk projects, it is disappointing that the Minister has reduced the aggregate amount that can be raised by a BES company from its current limit of £1 million to £250,000.
The greater than expected reduction in Capital Gains Tax (CGT) rates from 40 per cent to 20 per cent may, on the other hand, be a catalyst for greater availability of equity for many emerging Irish companies.
Unfortunately, the restrictions to capital allowances for industrial buildings, hotels and other buildings will serve only to severely dent the level of funding available for continued development of areas such as the IFSC and the broader Docklands area. Unrestricted allowances will continue for companies, but reduced corporation tax rates will gradually render corporate investment in these areas ineffective. Unless the anti-unitisation provisions limiting the number of individuals that can invest in any particular building are abandoned, the £25,000 annual allowance proposed may spell the death of designated area investments.
The restrictions will not apply to certain pipeline projects, in particular where the foundation was laid before Budget day or in certain circumstances where a planning application was filed before Budget day.
David Kennedy is a tax partner in KPMG. For further Budget commentary visit the company's Internet site at www.kpmg.ie.