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Finance Bill 2017 is Budget 2018 and then some!
Budget night is really a preview of the forthcoming attractions in the Finance Bill. The first draft of the Bill was published on October 19 and it has a long trip ahead of it before being signed into law. The Bill’s Committee stage starts in November and history shows that that stage has produced significant amendments so there may be more law to read through later.
So far we’ve seen the expected provisions for an SME share based remuneration regime and the restriction on tax depreciation on intangible assets that were mentioned in the Budget. But there’s always more in the Bill than the budget. This year’s Bill did not disappoint with new taxing provisions for employees of health insurance companies regarding reduced-cost health or dental insurance policies, amendments to the domicile levy, adjustments to company financing provisions and various anti-avoidance amendments.
So a lot going on but one of the main revenue raisers in Budget 2018 was the increase in stamp duty on non-residential property from 2% to 6% with effect from midnight on budget night and this is being put on the statute books. However, the Bill still allows the previous 2% rate to apply where binding contracts were in place before that Cinderella moment, the instruments are executed before 1 January 2018 and the instrument contains a statement to that effect. The furnishing of an incorrect statement is regarded as a Revenue offence which can give rise to monetary penalties and maybe a “Shawshank Redemption” experience.
The above transitional measure is welcome. The significant duty increase focussed the minds of those concluding transactions when budget day came along as investors saw the price of their acquisition potentially increase. However, the clock is ticking on that transitional relief.
The Tax Strategy Group papers are required reading at budget time. The stamp duty paper (TSG 17/12) notes that in recent years, the rate of Stamp Duty on property has reduced significantly, from rates of up to 9% to rates of 1% and 2% on residential property and 2% on non-residential property. The paper explains that the stamp duty yield on non-residential went from €48.51m in 2012 to €255.92m in 2016. That's almost a 400% increase in yield over 4 years. Not too shabby. The yield from residential stamp duty "only" went from €56.9m to €131.84m in the same period.
Either way things are on the up. And so is the implied trajectory of the stamp duty yield once relevant transactions continue. Therefore one can see why questions have been raised on this déjà vu approach because stamp duty is a transactions tax. As we know tax affects transactions and vice versa! The minister confirmed that reliance has on this stamp duty move is not the be all and end all given that it forms only a small element of next year’s tax take. The strategy paper notes that there is now less reliance on transactions based property taxes because of the Local Property Tax which may not be vulnerable to a fall in the volume of transactions.
The strategy paper also refers to the Staff Concluding Statement of the 2016 IMF Article IV Consultation and Post Programme Monitoring mission which identified the "mitigation of the scope for boom-bust cycles as integral to the policy challenges of completing the recovery and strengthening the resilience of the economy to shocks". It notes that among the Statement’s conclusion was the view that demand pressures in the commercial real estate market needed to be closely monitored and policy tools activated if risks to financial stability emerge. One such tool included increases in the rate of Stamp Duty on commercial property beyond the then rate of 2% with the statement saying the yield from each 1% increase would be of the order of €100m.
This policy tool has now been activated presumably not because of risks to financial stability but to fund the finance bill expenditures such as reduced income tax bills e.g. the full year USC reduction is estimated to cost €206 million.
The stamp duty move has been criticised as potentially impacting investors’ decisions in such property which in turn impacts transactions. As I said in my previous column raising the rate to 4% may have been seen as a more proportionate response as opposed to a 200% increase in the rate overnight. A 400% increase in yield over the previous 4 year period has been followed by a 200% increase in rate at the end of that period seeking to bring increased yield of €376 million (according to the budget documents). The bill has to progress through various stages and the measure may be vigorously debated at those times.
As a form of quid pro quo the minister had announced that a stamp duty refund may be available in respect of land for development of houses under a refund scheme. He mentioned that this would be subject to developers commencing within 30 months of land purchase. This is not in the Bill as initiated so more to come on that one.
Separately, some pre-existing anti-avoidance measures were amended to ensure they won’t interfere with EU law. Restricting a person’s freedom to establish a genuine enterprise in another Member State or to make certain cross border investments less attractive is a red-line for the EU Courts. If a taxpayer is engaged in wholly artificial arrangements then that’s something those courts have no time for at all; the court will rule them out of order from an EU law perspective. You can almost hear Pacino’s thundering “You're out of order! They're out of order! This whole place is out of order!” in “And Justice for All” (1979, gasp!) whenever the “artificial” word is referred to by the Court. This is a welcome amendment in that it seeks to ensure that the innocent do not suffer for the guilty.
So like the budget there was a “little for a lot” in the bill and sometimes “a lot for the few” when it comes to anti-avoidance measures. More to come, watch this space!
This article was first published in the Sunday Independent on 29 October 2017.