GIVEN the buoyancy in tax revenues as reflected by a 6.6 per cent projected increase in overall tax receipts in 1996, the business community could be forgiven for being optimistic about tax cuts in yesterday's Budget.
Unfortunately, such optimism would have proved unfounded. The Minister has set the promotion of enterprise as one of the principal objectives of his Budgets. But yesterday's PRSI reductions in pursuit of this objective merely reflect a further chipping away at the tax wedge.
The reductions in the 12.2 per cent and 9 per cent rates of PRSI to 12 per cent and 8.5 per cent respectively, and the increase in the lower rate PRSI band from £12,000 to £13,000 is unlikely to reduce sufficiently the financial risk to an employer of creating a new job, to influence his decision.
The Minister's proposal to introduce a recruitment subsidy of £80 per week (which in all likelihood will be taxable) is to be welcomed, but is targeted solely at employees who have been unemployed for at least three years. Given the economic benefit to the Exchequer from moving an unemployed person into taxable employment and the general buoyancy of tax revenues, it is disappointing that this subsidy has not been extended further.
In heralding a reduction in the standard corporation tax rate from 40 per cent to 38 per cent a year ago Minister Quinn announced a Government decision to reduce further the standard corporation tax rate over the next few years as resources allow.
Before yesterday's Budget, additional tax revenues of £745 million almost £500 million in real terms were projected for 1996. Nonetheless, the Minister has restricted further change to the introduction of a new 30 per cent rate in respect of the first £50,000 of taxable profits of all companies.
It will mean an effective tax rate of 34 per cent for companies with annual profits of £100,000 or 36 per cent for companies with annual profits of £200,000.
Whilst the rate continues to go in the right direction, the scale of the reduction is disappointing. The new rate will apply from April 1st next and as such most companies will not benefit until 1997.
The extension of the Business Expansion Scheme, albeit in a modified form, is welcome. The need to satisfy the generally risk averse nature of Ireland's BES investors has seen a significant proportion of BES funds raised in recent years directed at otherwise bankable low risk projects.
Such projects often entail limited potential for capital appreciation and are often looked upon as a means of cheap finance for the investee.
To curb this perceived ill, the Minister proposes the introduction of a certification system for BES investments of £250,000 or more. The real sting in the tail is that provision is being introduced to withdraw BES relief if the investee company's business plan (including presumably its employment projections) are not complied with.
The news that the Section 35 tax incentive for film production is to be extended in a modified way for a further three years will receive a cautious welcome by those involved in the film industry.
The most frequently cited criticism of Section 35 relates to its cost to the Exchequer. Figures for 1994 the last full year for which figures are available quantified the total tax foregone by reason of Section 35 at £19.4 million. Against this, related direct and indirect tax revenues from expenditure on Irish goods, services and labour is estimated at £21 million.
Section 35 affords tax relief to individuals and companies for amounts invested on a risk basis in film production companies. The tax relief operates to reduce the investor's financial risk.
The changes proposed include an increase in the amount that can be invested by corporate investors to £2 million per year (formerly £1.05 million over three years) and a reduction in the requisite holding period from three years to one year.
Whilst these changes are welcome, in future relief will only be allowed on 80 per cent of the amount invested. On first reading, this restriction may be sufficient to dampen significantly the spirit of both corporate and individual investors.
Family owned businesses will be delighted that the relief from capital acquisitions tax in respect of business property is being increased from 50 per cent to 75 per cent but disappointed that the Minister did not see fit to introduce an exemption from CAT for such transfers. In the context of passing on a family business CAT, whilst theoretically a liability of the beneficiary, in practice entails a significant cash drain on the business.
In most cases the resources of the business must be drawn upon to meet the CAT liability which can undermine the viability of the business, possibly forcing it to sell some assets or otherwise depriving it of cash required to maintain and strengthen the business. Hopefully the Minister will see fit to introduce an exemption in 1997.
On a positive note, the Minister has recently included amongst his goals that Ireland should have the most efficient public administration system in the EU. He is to be congratulated for the measures announced yesterday in pursuit of this goal. Within a couple of weeks, the Minister expects to publish an outline of the main features of the Finance Bill to facilitate detailed discussions and debate on its provisions.
This will be welcomed by practitioners. He also proposed to introduce Multi Annual Budgets entailing a three year rolling cycle which should detract from the glamour of Budget Day.