Deloitte's Emma Arlow offers expert insight on what we're likely to see from the upcoming 'cost of living Budget'
Budget 2023 will likely be a far cry from Budget 2022, and with good reason.
Budget 2022 was set against strong GDP growth quarter on quarter with indications from the Government that “as our society returns to normal, so too must budgetary policy”.
Just over 12 months later and the backdrop could not look more different. Risks to European energy supplies, capacity constraints and inflationary pressures not seen since the 1970s have created a challenging atmosphere in which to operate, and Budget 2023 will undoubtedly be reflective of this.
With a core budgetary package of €6.7 billion, of which €1.05 million is allocated for tax measures, Budget 2023 is likely to be primarily a “cost of living Budget”.
Income tax measures
There are now more people in employment than ever before, a rapid recovery from where we were two years ago as businesses grappled with public health restrictions on their activities. However, increased cost of living pressures mean we are more focused than ever on our net take-home pay.
Commitments made in the Programme for Government note that from Budget 2022 onwards, credits and income tax bands may be index-linked to earnings as wages begin to rise post-pandemic. Last year this translated to income tax band changes and increases to the main tax credits.
Will we see such changes reflected again this year? Only time will tell, but what is notable is that the Summer Economic Statement has suggested that guarding against higher taxation on workers is to be a priority.
There are several ways in which we might see income tax changes introduced — for example, full indexation of rate bands and credits to either 3 per cent or 4 per cent could result in a surplus of between €516 - €695 per year for single income households with children.
It is unlikely we will see a last-minute introduction of the “middle income” tax rate of 30 per cent, given the significant political opposition in recent months. While a middle-income rate would give a benefit of anywhere between €500 and €1,000 for single individual and married single income households, this proposal may be a step too far.
Tax relief travelling cross-border
Aside from the issue of tax rates and credits, workers in Border counties may need to plan accordingly for their tax bills in the coming year.
Trans-Border Workers Relief provides relief from income tax for individuals who are resident in the Republic but travel daily or weekly to work in another tax regime, most often to Northern Ireland.
Such relief is not available to those who work from home in Ireland but was allowed on a concessionary basis during the Covid-19 pandemic where movement of individuals was limited. This concessionary basis expired on March 31st 2022, but workers hoping for an official extension in Budget 2023 may find themselves disappointed.
Based on the Tax Strategy Group (TSG) papers, an extension to the concessionary relief for remote workers is not part of their recommended measures — so taxpayers who have previously relied on the relief should take note of this for their future tax bills.
Corporation Tax, R&D and Innovation
The corporation tax landscape has experienced a significant shift in recent years, underpinned by the recent agreement at OECD level on a global minimum corporation tax rate of 15 per cent. While any agreement on a minimum taxation Directive at EU level remains pending, we expect that Budget 2023 is unlikely to contain many surprises for corporation taxpayers of all sizes.
However, some reliefs and incentives currently available to corporation taxpayers may either be extended or modified to ensure their continued effectiveness.
The R&D credit relief, which provides companies with a tax credit equal to 25 per cent of their qualifying R&D spend, is one of the most valuable incentives in driving R&D expenditure and innovation in Ireland. This may be reviewed as part of Budget 2023 to ensure its continued workability.
Similarly, consideration will need to be given to appropriate amendments and extensions to the Knowledge Development Box (KDB) regime which gives an effective rate of tax of 6.25 per cent for companies engaging in innovation and qualifying R&D activities. With an end date of December 31st 2022 for the KDB, we may expect to hear of an extension from the Minister on Budget Day.
This extension would be welcome given the usefulness of the KDB in encouraging the development of the knowledge economy in Ireland, albeit with a low uptake for the relief since its inception.
Carbon tax on the "old reliables"
Rising fuel costs and potential risks to European energy supplies driven by the conflict in Ukraine has focused everyone’s attention on the green agenda in recent weeks. The issue of climate change and a move to more renewable sources of energy remains a long-term focus for the Government — the question is now how the tax system can be leveraged to move Ireland to a low carbon economy while keeping taxpayers’ wallets for the most part intact.
As previous Finance Acts made a binding commitment on the Government to increase carbon taxes out to 2030, we can expect further increases in Budget 2023 on the “old reliables” — petrol, diesel, peat, kerosene and natural gas. In terms of real numbers, that equates to an additional €1.28 or €1.48 per 60-litre fill of petrol or diesel respectively.
Budget 2020 previously enhanced the Diesel Rebate Scheme to support the road haulage sector in the face of Brexit uncertainties, a relief which has been the subject of criticism in the past for creating additional carbon dioxide emissions. With no further improvements which can be made to this relief, the Diesel Rebate Scheme may therefore have run out of road, so don’t expect any major changes in this arena.
The last area on everyone’s minds is the rising cost of electricity — the bad news here being that a gradual phasing out of fossil fuels could leave a shortfall in carbon tax revenue with the balance needing to be made up somewhere.
It is possible, although not confirmed, that Budget 2023 could provide for electricity tax increases. The good news is that considering Government policy soundings on Budget 2023, we may also see an increased energy tax credit and further grants for energy efficiency improvements.
As the Minister gives his Budget address on September 27th, a focus across the country will be on the real-world impact of the changes, both to taxpayer’s wallets and companies’ bottom lines. We can expect to see a range of positive income tax changes to support households who have been hit by rising costs, but blanket reductions across the board are unlikely.
Even in the face of a tax package that has doubled in size compared to last year, the focus will likely instead be on targeted measures aimed at individuals and groups where it will have the most impact.
While we don’t predict any game changers on corporate tax, companies cannot afford to rest on their laurels and instead should focus on preparing for future complexity in this space. Only by preparing for uncertainty can companies move forward in a challenging economic landscape with confidence and clarity
For more perspectives on Budget 2023 and to see the impact on your take-home pay on Budget Day visit: Deloitte.ie/Budget.
Emma Arlow is a Director in Deloitte’s Tax Technical and Policy team. The team provide in-depth technical expertise on a range of emerging issues including Irish and international developments and complex legislative changes.