Organisations representing small businesses and employers in Ireland have presented a mixed response to Irish Finance Minister Brian Lenihan's December 7 budget, the toughest in the Republic's recent history.

The budget follows on from the announcement of the - inevitably outgoing - government's austerity programme in November, compiled in response to the European Union and International Monetary Fund bail-out, and which flagged up increases in personal income tax liability and value-added tax rates.

The plan, which ran to almost 150 pages, outlined the basis of a EUR15bn public expenditure savings package, equivalent to 11% of the country’s annual output.

The Budget unveiled this week echoed the commitments made in the austerity package, and despite maintaining the 12.5% corporate tax rate, contained a number of measures likely to make both corporate and individual pips squeak over the coming years (if, indeed, they had not already been doing so, with the previously announced spending cuts and reduction in the minimum wage!)

Among other changes (being introduced for the most part on January 1, 2011), the Finance Minister announced that:

• The personal income tax thresholds would all be revised downwards by 10%;
• The health levy and income levy are to be replaced by a single Universal Social Charge;
• The Relevant Contracts Tax system is to be revised, with a 20% rate to be introduced for tax-registered contractors with good compliance records, and the existing 35% rate for non-registered contractors to be maintained;
• The social security (PRSI) rate for the self-employed is to increase from 3% to 4% (and more generally, in relation to PRSI, the ceiling of EUR75,036 is to be abolished);
• Personal tax credits are to be reduced from EUR3,660 to EUR3,300 for married couples, and from EUR1,830 to EUR1,650 for single tax-payers.
• The upper limit for tax relief on pension contributions is to be reduced from EUR150,000 to EUR115,000; one of a number of reforms to the tax treatment of pensions;
• Withholding tax on domestic interest payments (Deposit Interest Retention Tax, or DIRT) is to be increased from 25% to 27%;
• The standard Value Added Tax rate is to increase to 22% in 2013, and 23% in 2014;
• With immediate effect, stamp duty on property transactions will be imposed at 1% on property transactions of up to EUR1m, and 2% on the value over EUR1mn. In addition, various previously available stamp duty reliefs (such as first time buyer relief, and exemptions for properties valued below a certain amount) are being abolished;
• Various excise taxes are to be increased;
• The amount that businesses are permitted to raise under the Business Expansion Scheme (BES) is set to be increased, subject to EU approval;
• The current scheme permitting qualifying small start-ups exemption from corporate income tax and capital gains tax for the first three years of trading from 2009 and 2010 (up to a EUR40,000 annual limit) is to be extended to such businesses commencing trading in 2011, but is to be limited to the equivalent of EUR5,000 employer PRSI liability; and
• Various changes will be made to the treatment of capital allowances, including a stipulation that (with immediate effect) allowances carried forward beyond the seven or ten year period in which they were made will be lost, and that in future, allowances can only be offset against income from the property to which they relate.

A number of other measures were announced in the 2011 Budget, including with regard to expenditure (with cuts being made in almost all social welfare payments) and future policy in various areas, but small business and employer groups such as the Small Firms Association (SFA) and the Irish Business and Employers Confederation (IBEC) were quick to issue responses relating to their key areas of concern.

Commenting on behalf of the SFA, Chairman Dr Aidan O'Boyle welcomed the "greater certainty" for the small business sector in particular, and the wider community in general, likely to be generated by the Budget, the continued commitment to the 12.5% corporate tax rate, and the continuation of initial benefits for small start-ups, albeit in a substantially slimmed-down format.

However, he slammed the government for its failure to address one of the key areas of concern for Irish small businesses, namely access to credit.

“This Budget has ignored the fact that many viable small businesses lack two key ingredients to access financial support from the banking system: they lack collateral because of the property bubble collapse and associated high negative equity and they lack a good track record over the past two to three years because of the worldwide economic recession and loss of consumer confidence and spending at home,” the SFA chief observed, continuing:

“The banks are commercial entities and will not move from risk assessment criteria about what is a viable business and therefore we will still require government intervention to breach this gap, with some form of risk sharing scheme between government and the banks. We, small business, are the life blood of this country and it is time this was recognised. Time is running out - we need action.”

Dr O'Boyle also criticised the increase in the PRSI rate for the self-employed, arguing that “the raising of the PRSI rate for the self employed owner manager is not encouraging for small business development at a time when job creation and retention should be our primary objective”.

IBEC, meanwhile, argued that although the scale of the measures announced in Tuesday's budget was necessary (and indeed the IMF/EU bailout is conditional on such sweeping changes being made), the emphasis was wrong, and was likely to prove damaging to the Republic's employment and growth prospects.

IBEC Director General Danny McCoy explained that:

“The scale of the budgetary adjustment is required, but how it is achieved is just as important. More should have been done to reduce current expenditure, which remains too high given the major fall in tax revenue. The size of the public sector is out of line with the size of the economy and more action is needed to address this imbalance. Business is disappointed that there is little in the budget to help job creation or to restore the competitiveness of the Irish economy."

However, he went on to observe that:

“The budget should give consumers greater certainty about their future incomes and encourage a resumption of more normal spending and saving patterns. Despite the large scale of the budgetary adjustment, the economy remains on track to recover in 2011, largely on the back of a stronger contribution from the export sector.”

Mr McCoy also welcomed the newly announced Skills Development and Internship Programme, suggesting that from the point of view of Irish employers:

“The proposed internship programme is a good idea. It will help get graduates connected to employment opportunities and limit the increase in emigration.”