We’re nearly done with the July stimulus law so let’s talk about the upcoming Budget
Tom Maguire Business Post Column
I’ve been writing in this column about tax measures required to escape the current Jurassic economy for some time now. Last week saw the publication of the Financial Provisions (Covid-19) (No. 2) Bill 2020 (Covid Bill). This contains the draft law behind tax bits of the July stimulus package. However business had asked for more than what it currently says. The Rolling Stones famously sang “you can’t always get what you want”, but they continued “if you try sometimes, well, you just might find you get what you need”. So let’s try and have to look at Budget 2021 for adjustments.
My last column was about the Help to Buy (HTB) Scheme and some of the difficulties that taxpayers have had when they tried to use it in acquiring a house. Less than a week later, we saw the Covid Bill seeking to improve that scheme. A Mulder and Scully moment?
The Covid Bill’s suggested change provides for increased relief up to the lesser of (i) €30,000 or (ii) 10 per cent of the purchase price of the new home or the completion value of the property for self builds or (iii) the amount of Income Tax and DIRT paid over the four years prior to making the application. Before the Bill’s suggested change, the €30,000 figure was previously €20,000 and the reference to 10 per cent was 5 percent, so not too shabby on the changes.
This new and improved relief is only available for the period from 23 July 2020 to 31 December 2020. From 1 January 2021, the Help to Buy relief reverts back to the pre 23 July 2020 position. So a clock was put on this measure with the idea of course being to increase activity in housing and fast. However, the difficulties I mentioned in my previous column have yet to be addressed but they need to be so that the scheme can do what is says on the tin.
Increased activity is what this Covid Bill is all about. The Bill’s reduced VAT rate seeks to increase commercial activity in retail and generally and the “staycation credit” wants to increase activity in the hospitality sector. You can see the point but you can also see the hospitality sector’s view on these measures and especially their call for a significantly reduced VAT rate for that sector. Unfortunately that went unanswered. It will be some time before we will be able to assess the success or otherwise of the Covid bill’s amendments.
Okay, I get that there is only so much water in the fountain and scarce resources must be used wisely. More generally though significantly reducing tax rates does not necessarily mean a reduction in revenue where that is met with increased sectoral activity; and that, mes amis, is where Exchequer and Business needs align.
For example, it was widely reported that a reduction in the rate of Capital Gains Tax was put to one side as part of developing the Stimulus package. Such a reduction is something that I have been going on about in these pages a number of times previously. Capital Gains Tax (CGT) applies to disposals of assets generally. There are exceptions (with various T’s and C’s applying). The CGT rate on capital gains is currently set at 33% which is recognised as one of the highest rates in the OECD. Let that sink in for a minute.
Michael McDowell SC kindly wrote a foreword to my Capital Gains Tax (CGT) book last year and he explained that when the Minister “in 2002 halved the 40% CGT rate and quintupled the yield on CGT, it became very clear that the rate of CGT hugely influenced its yield in a manner quite different from other forms of taxation”. Granted Michael wrote that just over 12 months ago, which seems like a century now, but nonetheless we are at an inflection point when everything should be on the table for review. If a tax change has the capability of increasing tax yield then it is something that needs to be reconsidered in Budget 2021 in October.
Looking at late night TV commentary programmes lately I have been really struck by the number of times I heard the John Maynard Keynes quote that “when the facts change I change my mind, what do you do?” It’s up there with the now ever-constant use of the word “unprecedented”. Right now, we are very much in fact-changing times. If the CGT rate was brought down to 20% (or at least 25% as seems to have been advocated recently and in pre-election manifestoes) then, “hoarded” assets could be brought to the market with a view to crystallising the gains that have built up in the asset over time. It could encourage increased activity in the area and that is what the stimulus is looking for.
According to the recently published Annual Report of the Revenue Commissioners, the yields from CGT in 2019 and 2018 were just over €1 billion in each year. Compare that with Income Tax collected in those years which comprised €25.5 billion in 2019 and €23 billion in 2018. Any multiple of those CGT yields would go a long way to reducing the cost of the €7 billion stimulus package. If we were to reduce the rate by a couple of per cent then the yield impact would just not be as significant, we need to think about the results that such a move brought about the last time around i.e. a significant rate reduction increasing activity with potential for significant gain.
Such an approach could convert “hoarded assets” into liquid assets which could be used for further investment in the economy. Readers may recall my column a few weeks ago with business leaders outlining their views of dealing with the Jurassic economy. What screamed from that column was leaders’ clear view of getting cash into business fast with an absence of complexity.
As others have said, we were asked to shut down our economy, so quid pro quo right now i.e. Ask not, what business can do for tax but what tax can do business and a reduction in the CGT rate would have been an appropriate measure.
Please note this article first featured in the Business Post on 2 August 2020 and was re-published kindly with their permission on our website.