The first budget statement delivered on December 3 1997 by the new minister for finance, Charlie McCreevy, was also the first budget to be delivered before the start of the financial year. The minister used the opportunity presented by very high economic growth rates, and the resulting tax buoyancy, to make a number of significant tax changes.
Business tax
The minister has confirmed that with effect from January 1 2006, the standard corporation tax rate applicable to the trading profits of non-manufacturing companies (including financial services companies operating in the Dublin docks area whose 10% tax rate expires on that date) will be 12.5%. A higher rate of 25% will apply to the non-trading income of those companies. Manufacturing companies will continue to benefit from the lower 10% manufacturing tax rate until it expires at the end of 2010.
While the minister has not set a timetable for gradual reduction towards 2006, this is expected to emerge when discussions with the European Commission have been concluded. In any event, the current standard rate of corporation tax is reduced from 36% to 32%, with effect from January 1 1998. The lower rate, which applies to the first I£50,000 ($70,000) of taxable profits, will be reduced from 28% to 25%, with effect from the same date.
In line with developments which have taken place in the UK, the minister also announced that tax credits and the related advance corporation tax (ACT) are to be reduced over the next two years and abolished with effect from April 6 1999. Dividends paid on or after December 3 1997, out of income taxed at the standard rate, will be reduced from the current level of 21/79 to 11/89. This reduced rate for tax credits will apply until April 6 1999, when the tax credits and the related ACT will be abolished.
All scrip dividends issued by companies will be taxable as income with effect from December 3 1997, and the deemed dividend will carry a tax credit (and related ACT) that would have been appropriate if a cash dividend had been paid. The base cost of the shares acquired by way of scrip dividend will be the amount of the cash dividend that has been foregone.
Capital gains tax
The standard capital gains tax rate of 40% has been halved to 20% for disposals of assets other than disposals of development land, which continue to be liable to the 40% rate. This lower rate takes effect from December 3 1997. The current annual allowance available to an individual of I£1,000 a year (I£2,000 for a married couple) has been reduced to I£500.
Personal taxation
Personal allowances have been increased by modest amounts, and the bulk of the funds available to the minister for tax reduction has been used to reduce the tax rates. The standard income tax rate is reduced from 26% to 24% and the top rate from 48% to 46%. The new rates will apply from April 6 1998.
In line with the reduction of the standard rate of income tax, a similar reduction also applies to the rate of tax applicable to various investors, such as policy holders in life assurance companies and unit holders in collective investment schemes. The rate of withholding tax applied to deposit accounts is also reduced to 24%, but the rate of withholding tax applicable to special savings accounts has been increased from 15% to 20%, thereby reducing the attractiveness of such deposits.
Anti-avoidance
A number of anti-avoidance measures have been announced by the minister, and while the specific details will be included in the finance act, the measures are particularly designed to reduce the attractiveness of investment by individuals in property assets which qualify for capital allowances. The principle restriction is the introduction of a limit of I£25,000 a year on the amount of capital allowances which an individual can offset against non-rental income in respect of expenditure incurred on buildings other than hotels.
The budget also proposes to restrict completely the set-off of excess capital allowances by individual investors against non-rental from hotel projects. The business expansion scheme is also being amended to make it more focused on smaller enterprises. The total amount which can be raised through the business expansion scheme in any company or group of associated companies is reduced from I£1million to I£250,000.
As in previous years, we can expect changes to some of the restrictions announced by the minister when the finance bill is published in the next month or so. It is also likely that new measures not announced in the budget will feature in this bill.
Ambrose Loughlin
McCann FitzGerald, Dublin
