Tuesday, 19 April 1994
Dáil Éireann Debate
This year's Finance Bill implements an important range of measures designed to promote and assist the creation of sustainable employment. They do this through enhancing business competitiveness, promotion productive use of resources, and stimulating and rewarding genuine enterprise. In bringing forward these measures, I have taken account of the views of many interested parties, notably the Task Force on Small Business and the Task Force on jobs in Services. Accordingly, this year's package places particular emphasis on improving the climate for smaller and start-up enterprises. It also reflects the Government's conviction that the services sector can continue to make a major contribution to fulfilling our employment needs.
I would emphasise that the measures in this year's Bill should not be viewed in isolation, but rather as complementing and enhancing the initiatives for enterprise and employment enshrined in the 1993 Finance Act. More importantly, they must be seen in the context of the Government's broadly-based strategy for economic progress in the interests of job-creation: the key elements of this are the continued observance of budgetary discipline, the responsible pay arrangements in the new Programme for Competitiveness and Work, and the commitment to reforming the taxation system to make it more employment-friendly.
Among the significant items in the Bill in this connection are: the introduction of a special capital gains tax rate for individuals in respect of shares in most unquoted trading companies, so as to help in attracting investment funds to this area and to reward those who put their funds at risk in developing job-creating business; extension to the wider services  sector of the roll-over relief under capital gains tax for equity investment by entrepreneurs in unquoted trading companies, introduced last year for reinvestment in business in certain sectors; a new business assets relief in capital acquisitions tax, so as to facilitate the transfer of family business and to improve incentives for those trying to build up businesses; an easing of the income qualification test for access to the seed capital scheme which assists new business start ups by employees and the unemployed; an increase in the company-value limit for the purpose of BES investment by the “original entrepreneur”; a raising of the VAT threshold for both goods and services, thus relieving the very small business from the obligations associated with VAT registration; the cash-basis of accounting for VAT is being made available to business in all sectors with an annual turnover of up to £250,000; a new and better focused scheme of incentives for urban renewal, with new incentives for industrial buildings, in the interests of more balanced development in inner city areas; improved annual capital allowances for hotel development and farm buildings, an increased allowance for business cars, and the granting of capital allowances to the purchase of computer software or the rights to use such software; the introduction of a new provision into the relief for investment in films aimed at assisting low budget Irish films; simplification of the payment arrangements, subject to EU approval, for VAT on long term leases of property; a range of relieving stamp duty measures, including a new appeals procedure and a special relief for young trained farmers; modernisation of the tax treatment of businesses' foreign exchange gains and losses; unilateral credit relief for foreign withholding taxes incurred by computer software companies; a range of measures to underpin the further development of the International Financial Services Centre; and amendment of the tax provisions relating to bearer bonds, so as to assist the development of Irish financial markets.
 Section 1, 2 and 3 provide for the major improvements in the mainstream income tax code announced in the budget. The basic personal allowances are being increased by 8 per cent and the standard rate tax band is being extended by 7 per cent. To help those on lower incomes, the marginal relief rate, which is the effective tax rate for many lower paid people, is being reduced by 8 percentage points, from 48 per cent to 40 per cent and the child addition to the exemption thresholds is being improved by £100 per child for all children.
Sections 6 and 7 provide for the phased restriction to the standard rate of tax of the relief for mortgage interest and health insurance premiums. The measures will only affect those taxpayers who claim relief at the 48 per cent rate. Section 6 provides that, in relation to mortgage interest relief, standard-rating is being phased in so that it will not apply fully until 1997-98. For first-time house buyers, for the first five years of their claim, the percentage of mortgage interest qualifying for relief will be 100 per cent and the de minimis exclusion will not apply.
Section 7 provides for the standard-rating of medical insurance premium relief. As the relief is available on a previous years basis, there will be no impact on taxpayers in 1994-95 and full standard-rating will apply to relief claimed in the tax year 1996-97. Relief in respect of unreimbursed medical expenses is not being standard-rated given the unpredictable nature of this expenditure. However, section 8 provides for the thresholds to be raised to £150 for an individual and £300 for a family in respect of expenditure incurred in the tax year 1994-95.
Section 9 reduces, on foot of the fall in commercial interest rates, the rates used for determining the benefit-in-kind charge on preferential loans made to  employees by their employers. Section 10 revises the current list of accountable persons for withholding tax purposes.
Section 12 provides that, in view of the abolition of the 1 per cent income levy, taxpayers paying their preliminary tax for 1994-95 will not have to take the levy into account if they elect to pay their tax on the basis of 100 per cent of their 1993-94 tax liability. Section 12 also provides that individuals availing of the 100 per cent rule for computing preliminary tax may not take account of the relief on investment in film companies under section 35.
To redress an unintended effect of the rule for the seed capital scheme in denying access to some people at whom the scheme was aimed, section 14 provides that there will no longer be any reference to income in the year immediately preceding the establishment of the new business. Moreover, the condition regarding income from sources other than employment will be eased.
Section 14 also provides for an increase from £150,000 to £250,000 in the ceiling which the capital of a company must not exceed if the rules which prevent an individual who, broadly, owns 30 per cent of a company obtaining BES relief, are not to apply. The section also ensures that mushroom cultivation continues as a qualifying trade for the purposes of the BES and the seed capital scheme.
The Finance Bill, 1991 countered the circumvention of the BES company limit by the use of company splitting devices, subject to an exception for transitional cases. The transitional arrangements were intended to be purely temporary and section 15 provides for their termination as and from 30 June 1994.
Section 16 provides for more meaningful public access requirements in relation to the income tax relief on heritage property, bringing them into line with those for the corresponding CAT relief. The property must in future be open to the public for a total of 90 days annually, 60 of which must be in the period May to September. The section further makes it a requirement for claiming the relief in any year that the location/address of the house or garden  and its opening times be notified to Bord Fáilte, so that the details may be published by the board or another tourism promoting body.
Section 17 provides that, subject to certain conditions, the benefit-in-kind charge on works of art or antiques loaned by an employer will not apply where such objects are on view to the public in an approved property.
Unemployment benefit has been made reckonable for tax purposes from 6 April 1994. It has been decided, however, that, in recognition of their special circumstances, workers who on 5 April 1994 were participating in a systematic short-time working arrangement, recognised by the Department of Social Welfare, will be exempted from the new tax arrangements. This exemption will apply in respect of unemployment benefit payments received in relation to systematic short-time working for the duration of an individual's current unemployment benefit claim or to the end of the present tax year — 5 April 1995 — whichever is the earlier. I will bring forward a Committee Stage amendment to this effect.
Section 18 amends the tax relief for investment in Irish film-making companies. It introduces a pilot scheme targeted at promoting investment in low budget films, which will operate for a one year period from 9 July 1994. This will allow a corporate investor to invest up to £350,000 in one or more films certified by the Minister for Arts, Culture and the Gaeltacht on the basis of objective criteria relating to small budget films not exceeding a cost of £1,050,000. As I announced in a press release on 14 January 1994, investment in film companies by way of loans is being eliminated from that date in order to rectify an anomaly whereby investment via a short term loan obtained much more favourable tax treatment than investment by way of shares.
Section 19 increases, with effect from 27 January 1994, the capital value threshold for determining the capital allowances and the deduction for running expenses in respect of cars used in the course of a trade, profession or employment.  The threshold will increase from £10,000 to £13,000 in respect of capital allowances for new cars only, and in respect of allowable running expenses for all cars. The previous £10,000 limit for capital allowance purposes will continue to apply to existing and second hand cars.
Section 20 shortens the writing down period from ten to seven years for capital allowances purposes for expenditure on hotels and holiday camps, incurred on or after 27 January 1994. Section 21 improves the annual capital allowances regime for farm buildings and structures by reducing the write-off period from ten to seven years.
Section 22 provides that where computer software is acquired as an asset of a business, either by outright purchase or under licence, the company will be able to claim plant and machinery capital allowances in respect of expenditure incurred in the acquisition of this software.
Section 25 deals with two issues arising from the removal, by section 38 of the Finance Act, 1992 of the formal liability of non-residents to income tax in respect of Irish dividends. First, it closes a loophole inadvertently created whereby such dividends paid for the ultimate benefit of an Irish resident fall outside the scope of certain anti-avoidance provisions of the Finance Act, 1974. Second, it deals with a problem that has arisen with a number of our Double Taxation Treaty partners. They have taken the view that dividends, being legally exempt from Irish tax, cannot be said to be subject to double taxation if fully taxed in the treaty partner country. However, the stance they have taken ignores the fact that Irish corporation tax is paid on the profits of an Irish company paying dividends to non-residents. In other words, the non-resident shareholder has effectively borne Irish tax.
Both of these problems are being solved by amending the 1992 legislation. While dividends paid to non-resident shareholders will be liable to Irish tax, any tax due will be fully eliminated by way of a tax credit and further relief so  as to purchase a net nil liability to Irish tax.
Section 26 tackles certain abuses of the tax exemption for patent royalty income by refocusing the relief, in line with the original industrial policy thrust of the scheme, on inventions researched and developed in Ireland. The exemption is being maintained where the royalty is paid in respect of manufacturing activity, whether carried on in the State or abroad, and for non-manufacturing patent royalty income arising out of Irish Research and Development to the extent that it arises from third party payments. Dividends paid out of such exempt royalties will continue to be exempt from tax subject to existing requirements. The provisions in the Bill, therefore, fully protect the status quo for our major research and manufacturing companies.
Section 27 closes off certain loopholes in the legislation dealing with capital allowances and loss relief in the case of general partnership schemes, by confining them to the partnership income in such situations. A number of schemes have been launched in the past two years which sought to use these reliefs in an unintended and unacceptable way. These loopholes are being closed in the case of moneys invested in a partnership on or after the publication date of the Bill.
Section 28 introduces restrictions in the tax rules for capital allowances for lessors of plant and machinery in order to deal with an unintended use of these provisions through a new type of lease arrangement with serious implications for the corporate tax revenue yield. Under these balloon lease arrangements, the bulk of the lease payments are not received by the lessor until the end of the primary leasing period which can be up to ten or 15 years after the commencement of the lease. The effect of this is that the lessor can use virtually all the capital allowances on the leased assets for offset against his other taxable income over the early years of the lease.
With certain exceptions, therefore, the Bill ringfences the capital allowances in the case of such leases to the lessor's receipts from that particular lease in the  case of leasing agreements entered into on or after 22 December 1993. The new rules will not apply to leasing companies in the IFSC or Shannon or to leases of buildings and the rules are relaxed to allow for seasonal factors in the case of leases of agricultural machinery. Special arrangements are provided in the case of leased machinery or plant the expenditure on which is incurred on or before 31 December 1995 and which is provided for the purposes of certain new projects which have been approved for grant aid and which qualify for 50 per cent accelerated capital allowances under the Finance Act, 1990.
There are two Chapters in the Bill dealing with urban renewal. Chapter III deals with the transitional arrangements associated with the current urban renewal scheme which has a termination date of 31 July 1994. First, expenditure incurred between 1 August and 31 December 1994 on certain projects will continue to qualify for the incentives under the scheme. Second, there will be an additional two year period until 31 July 1996 for the completion of leases to qualify for the double rent allowance.
The legislation also provides for an increase in the maximum floor area size of refurbished accommodation in the Custom House Docks and the Temple Bar areas in the context of the owner-occupier relief and the relief in respect of rented residential accommodation. In addition, the owner-occupier's allowance in respect of refurbishment expenditure in the Custom House Docks area is being increased from 50 per cent to 100 per cent.
Chapter IV sets out the provisions announced in the budget for the new urban renewal scheme which will commence on 1 August 1994 and will operate for a period of three years. The areas qualifying for the scheme, including certain designated streets under a pilot scheme designed to promote living over business premises, will be designated by way of ministerial order.
The scheme will include accelerated allowances up to 50 per cent for certain industrial buildings in the designated  areas and a maximum capital allowance of 50 per cent for certain commercial buildings therein. Subject to specific conditions, these allowances will also be available in relation to the refurbishment of such buildings in designated streets.
In addition, section 23 type reliefs will be obtainable and a ten year double rent allowance will be available for qualifying properties in the designated areas but not in designated streets. For owner occupiers there will be a 50 per cent personal tax allowance claimable over ten years in respect of new construction costs with 100 per cent available for refurbishment expenditure.
Deputies will be aware that, in order to comply with a direction from the European Commission, the Government had to take steps to remove mushroom cultivation from the scope of the 10 per cent manufacturing rate of corporation tax. Section 43 makes the necessary changes.
Section 45 provides that a company entitled to a section 84 loan by virtue of it being included on an IDA list of allowable loans can only get one such loan of the full allowable amount. The Bill also imposes a seven year limit on the duration of a section 84 loan taken out on or after the publication date of the Bill and provides that all loans taken out before that date should be terminated before 11 April 2001, that is seven years after the publication date of the Bill.
Section 47 provides for an exemption from corporation tax for certain payments by the Minister for Agriculture, Food and Forestry to National Co-operative Farm Relief Services Ltd. and to grants made by that body to its member co-operatives for the purpose of engaging contractors to provide farm relief services.
Section 49 deals with a double taxation problem arising from foreign withholding  taxes affecting certain software companies. It provides for the introduction of unilateral credit relief for foreign withholding taxes on payments in respect of software transactions.
Section 51 addresses a number of the most pressing problems in the area of foreign exchange gains and losses facing Irish business engaged in international trade. I have decided to take a minimalist approach targeted on the main current problems and based on accounting practice. This ensures that commercial strategies for reduction or elimination of currency risk are effective after the taxation liability on the transactions have been determined.
Briefly, the provisions in the Bill relate to four basic problem areas as follows. First, foreign exchange gains and losses on long term borrowings incurred by companies, which are currently ignored for tax purposes, will now be deductible or chargeable, as appropriate, in the computation of taxable income.
Second, the foreign exchange gain, or loss, on a hedge instrument associated with a capital borrowing, which, as Deputies may know, are arrangements adopted by companies to protect themselves against exposure to exchange rate fluctuations, will be included in the computation of taxable income and excluded from the computation of capital gains. In conjunction with the proposal on capital borrowings, this will mean that hedging arrangements will be fully effective for commercial purposes after tax as well as before tax.
Thirdly, it is now proposed to allow companies with a non-Irish pound functional currency to compute their capital allowances in that functional currency. Finally, in the case of companies operating in non-Irish pound functional currencies, it is proposed to value any trading loss in such a currency at the exchange rate of the year the loss is offset against income.
I would like to inform the House that it is my intention to bring forward a Committee Stage amendment to provide for an exemption from tax for income of noncommercial State bodies. The exemption will not apply to deposit interest or to fee income, excepting statutory fees and incidental income of this kind. In settling the annual Exchequer allocation for such bodies, account is fully taken of own-resources arising to them so that the interests of the Exchequer will be safeguarded even in the absence of a tax charge.
The Government acknowledges the contribution that services have made and will continue to make towards our overall economic performance, particularly in the creation of much needed employment. In recognition of this, action has been taken in developing an overall strategy for the services sector. Moreover, various policy initiatives being legislated for in this Bill have been consciously directed at the services sector. In addition, the Government has undertaken, in the Programme for Competitiveness and Work, to examine options developed by the Task Force on Jobs in Services and other bodies in the area of the incentives, including tax treatment, afforded to the services sector.
In relation to incentives, Members will be aware that the Taoiseach recently set up a small interdepartmental working group to examine the range of international service activity which can qualify for State assistance including the reduced rate of corporation tax. In the time available to the group, it has not proved possible for them to carry out a detailed study of the matter to enable them put specific recommendations in this regard to Government for consideration in the context of the current Bill.
It would be the Government's intention, however, to consider at an early date any recommendations proposed by this group in relation to the application of State assistance, including the 10 per cent corporation tax rate, to a wider range of internationally traded services.
 To the extent that areas warranting extension of the 10 per cent rate are identified by the group and approved by the Government, the aim will be to make provision for these in the 1995 Finance Bill with retrospective effect to the date of any announcement on the matter.
I would also like to inform the House that I am considering extending the definition of qualifying shipping activities in section 39 of the 1980 Finance Act to include deep-sea tugs. Subject to the resolution of some technical definitional problems, it would be my intention to bring forward a Committee Stage amendment to give effect to this change. If this does not prove possible in the time available, I will make the necessary changes in next year's Bill.
The IFSC has been a great success and I am anxious to ensure that it develops to its full potential. I am proposing certain changes, which are mostly of a technical nature, to assist this. In particular, I propose to put in place the tax legislation which is necessary to complement the legislation on investment limited partnerships which the Minister for Enterprise and Employment has announced he will be introducing to help develop the collective funds sector here. The relevant Finance Bill provision adds certain limited partnerships to the categories of undertaking within the definition of collective investment undertaking in section 18 of the 1989 Finance Act. This provision will only come into effect when the proposed Investment Limited Partnerships Bill is enacted.
I also propose to allow credit for foreign withholding tax paid in countries with which we do not have a double taxation treaty at present. This practice is the norm among OECD countries and its implementation here will help the development of business from the IFSC and the Shannon zone.
Income attributable to non-resident policyholders of IFSC foreign life assurance companies is not liable to tax in the State. Policies written now will, in most cases, mature in years beyond 2005, the year in which the 10 per cent tax concession for shareholders' profits in such  companies will cease. The provision in this year's Bill extends indefinitely the exemption from tax here of non-resident policyholders' income. This is critical to the development of this important and relatively labour-intensive part of financial services activity in the centre.
Capital allowances on leased plant and machinery in the IFSC and Shannon zone are ring-fenced twice, once to prevent the allowances being set against non-IFSC and Shannon income and secondly to prevent them being used against income of IFSC and Shannon companies other than from the trade of leasing. It is considered that this latter ring-fence is too restrictive in an IFSC and Shannon context and it is proposed to relax it in the context of claims for capital allowances at the standard rate only.
There are other provisions of a more technical nature which will also help the development of both the IFSC and the Shannon zone. I do not propose to go into further detail on these at this stage: Committee Stage would be more appropriate for this.
Part II confirms the changes announced in the budget with regard to the increases in excise duty on cigarettes and other tobacco products, alcoholic drinks, road fuels and heavy fuel oil and the reduction in the rates of vehicle registration tax on cars and motor-cycles. Also confirmed is the relief from excise duty on oil emerging from a waste oil recycling process and on the use of marked gas oil in vehicle-mounted cranes and well-drilling equipment. In response to trade representations, this latter concession is being extended to include mobile concrete pumps and conveyor belts.
The Bill provides for the legislative framework to introduce a tax stamp regime for cigarettes which I first announced in the 1993 budget. The provisions, which are mainly technical, deal with the control and collection of the excise duty on cigarettes, deferred payment arrangements and related offences and penalties. I consider the proposed regime to offer greater security against the erosion of this significant revenue source from illegal importations within  an internal market devoid of border controls.
A number of amendments are proposed in the vehicle licensing area with the primary aim of safeguarding road tax revenue. The amendments are designed to remove any doubts as to the legal status of the national vehicle file regarding vehicle ownership and related matters and to confirm the validity of information contained in certificates taken from the file for evidential purposes.
At the trade's request, it is proposed to change the high season period of the limited annual licence from 1 March-31 August to 1 April-30 September so as to better reflect seasonal trading patterns. Accordingly, amusement machines so licensed may be made available for play at any time during the six month high season and at week-ends and public holidays during the remaining six months of the year.
The Bill includes an enabling provision which will relieve bets placed at a horse race-meeting, in respect of events taking place elsewhere, of the existing betting duty when the proposed horse racing authority, as envisaged in the Horse-racing Industry Bill, 1994, is established. It is proposed under the latter Bill to apply a levy to such bets at the same rate as the existing betting duty, and this provision avoids the double taxation of such bets. Such revenue, which would normally accrue to the Exchequer, will in future be diverted at source into the racing industry for its direct benefit, in the same way as the on-course betting levy helps fund the industry currently.
Part III deals with VAT and confirms two important measures for business announced in the budget, namely the increase in the VAT registration thresholds and the change in the availability of the cash receipts basis of accounting, as well as the extension of VAT to the services of loss adjusters.
The Bill streamlines the VAT regime applicable to travelling shows and funfairs through providing that all funfairs will be liable at the reduced rate of 12½ per cent with the exception of gaming  and amusement machines which will be standard rated.
The arrangements regarding the payment of VAT on long term property leases are being simplified to eliminate the onerous cash-flow burden on businesses entitled to full VAT deductibility and help developers of shopping and business centres. A facility is being introduced enabling relevant businesses, if they wish, to avoid the current need to pay over a sizeable lump-sum. As this measure requires EU approval, which is now being sought, the Bill provides for an implementation date to be effected by commencement order. In parallel with this concession, the opportunity is being taken to confirm that bad debt relief does not apply in cases where a landlord does not receive payment from a tenant for the VAT due on long term leases. The Bill also provides for a number of technical changes in order to clarify existing law and confirm present practice and also to bring Irish law into line with EU VAT law.
As I mentioned in my Financial Statement on 27 January last, I have reviewed the operation of the VAT monthly control statement introduced in 1992 as an anti-fraud measure, including consideration of the alleged distortion of competition arising between those traders currently subject to the control statement and those who are not. I do not propose to make any changes in the current arrangements which have been fully operational only for a relatively short period. I am conscious of the undoubted success of the initiative in eliminating certain fraudulent practices. However, I also remain mindful of the concerns expressed by traders in the matter. Accordingly, I am asking the Revenue Commissioners to examine ways of further improving the general operational approach, in consultation with trade interests, which will balance the respective legitimate official and business concerns.
Part V reduces the RPT house value threshold to £75,000 and the income threshold to £25,000. The single 1993 RPT rate of 1 1/2 per cent is replaced by  three tiered rates, 1 per cent for houses valued between £75,000 and £100,000, 1.5 per cent on the value between £100,000 and £150,000 and 2 per cent on the value in excess of £150,000. A value banding system is included for houses valued at up to £100,000. The Bill introduces concessions for those over 65 and widowed and incapacitated persons along with a provision to deal with hardship cases and an easy payment scheme. The limit for marginal relief is extended from £30,000 to £35,000 generally and to £40,000 for those over 65.
The Government's strategy of creating conditions which are conducive to enterprise, investment and employment creation was reflected in several provisions of last year's Finance Act. Further substantial progress is made on this front in this Bill, which contains a number of major relieving measures in the area of capital taxation. These aim to improve the risk-reward ratio for entrepreneurs, encouraging them to expand and diversify their businesses. The Bill provides for a reduction in the rate of capital gains tax from 40 per cent to 27 per cent for longer term equity investments by individuals in small to medium sized companies; a widening of the scope of rollover relief under capital gains tax for equity investment by entrepreneurs to include investment in most trading enterprises, and a new relief under capital acquisitions tax for business assets acquired by gift or inheritance.
The new 27 per cent rate of capital gains tax will apply to unquoted equity investments in small-medium sized companies by individuals which are held for at least five years. I would like to emphasise that the 27 per cent rate has a very wide ambit. Trading activities, with the exception of dealing or investing in land, buildings and certain financial assets will be eligible, as will all individual investors, whether they are full-time working directors or non-active minority shareholders. I should add that the reduced rate will apply to quoted shares which were unquoted at the time they were acquired by the individual investor. When account is taken of the indexation relief, whereby  only gains in excess of inflation are taxed, this new rate will generally translate into an effective rate of tax well below 27 per cent. This represents very favourable treatment for such investments, which can only be justified in terms of the risks associated with such business ventures.
The Bill provides for a considerable widening of the scope of capital gains tax rollover relief introduced last year. The relief provides for a deferment of capital gains tax where the proceeds of a disposal of shares in an unquoted company are reinvested in new share capital in another unquoted trading company. In future it will comprehend most trading activities, not just those falling within the scope of the business expansion scheme. The extended rollover relief will continue to be targeted at entrepreneurs who work in a full-time capacity for a business in which they have a material interest, and wish to move out of their present business in order to start up a new venture.
The Bill also provides for a new capital acquisitions tax relief for business assets. This involves a reduction for CAT purposes in the market value of the trade-related assets of a business which are acquired by gift or inheritance. The first £250,000 acquired by a beneficiary will be reduced in value by 50 per cent, while amounts in excess of £250,000 will receive 25 per cent relief. This relief has a wide scope, covering all business activities other than those dealing or investing in land, buildings and certain financial assets. It will serve as an important complement to the reliefs already available which assist the transfer of businesses from one generation to another — for example, the generous CAT exemption threshold for transfers from parent to child and the retirement relief under capital gains tax.
In order to ensure that the new relief is effective in alleviating the impact of CAT on the transfer of family businesses and in promoting enterprise and business development, I have decided to relax a number of the terms and conditions proposed in the budget. I have decided to dispense with the requirement that the beneficiary must work on a full-time basis  for the business for a specified period after the gift or inheritance. I have also decided to modify the requirement that the beneficiary must hold a minimum 25 per cent interest in the business so as to enable a beneficiary with a minimum 10 per cent interest to qualify where his/her family has a controlling interest or where he/she has worked on a full-time basis for the business for at least five years prior to the transfer. The minimum period of ownership of the business assets prior to their transfer by the disponer is being reduced from five years to two years in the case of inheritances. Relief is to be provided for quoted shares which were unquoted at the time they were acquired by the disponer.
The Bill contains a number of measures which will benefit agriculture and encourage the transfer of farms to younger, more enterprising farmers. The measures include a substantial improvement in agricultural relief under capital acquisitions tax, relief in respect of probate tax and a new stamp duty relief for young trained farmers. These measures, when taken together with the EC early retirement scheme and the scheme of installation aid for young farmers, should help to improve the structure of this important sector of our economy.
The House will be aware of the significant improvements in agricultural relief under capital acquisitions tax announced in the budget, benefiting both gifts and inheritances. The Bill also provides for a reduction, by two-thirds, in the stamp duty chargeable on the transfer of agricultural land and buildings to farmers under 35 years of age who have completed an approved training course — for example, a Teagasc certificate. In the majority of cases the relief will entail a stamp duty rate of 1 per cent, down from 3 per cent, for transfers between relatives and 2 per cent, down from 6 per cent, for transfers between non-relatives. The new relief will apply to both gifts and sales and will be operative from 12 May 1994 until 31 December 1996. This fulfils the commitment given in the Programme for Competitiveness and Work.
 The Bill provides for the budget proposal to grant probate tax relief at the rate of 30 per cent in respect of agricultural land and buildings. Farmers will also benefit from the provisions in the Bill giving effect to the budget proposal to fully exempt spouses from the probate tax.
The Bill provides for several measures aimed generally at rendering the administration of stamp duties more user-friendly for taxpayers and their agents. I would like to briefly outline these measures.
The Bill provides that where both stamp duty and VAT are payable on a property sale or lease, the stamp duty is to be based on the VAT-exclusive amount payable rather than on the VAT-inclusive amount. The Bill also provides for a retrospective validation of title deeds that have been incorrectly stamped on a VAT-exclusive basis. The changes in this area will be beneficial for commercial leases.
The stamp duty appeals procedures are to be brought into line with those applying for other taxes. All appeals may in future be heard by the appeal commissioners, whereas currently appeals on issues other than valuation must be initiated in the High Court. Revised procedures are considered appropriate since stamp duty is now on a similar footing to other taxes as regards enforcement and collection.
The Bill provides for a substantial reduction in the surcharges which apply when property transferring by voluntary disposition is undervalued for stamp duty purposes. No surcharges will apply for undervaluations up to 15 per cent, instead of 10 per cent as heretofore, and the rates of surcharge are being reduced by a half.
The Bill also contains provisions which will enable the Revenue Commissioners to revise and update the information requirements — that is, the “particulars delivered” form — in relation to property transfer deeds presented for stamping. The intention is to make the “particulars delivered” form more user-friendly and have a more precise description of the  property. It is also proposed to require the tax reference numbers of the transferor and transferee to be provided, where appropriate, but full consultation will take place between Revenue and the Incorporated Law Society on the operational arrangements before this proceeds.
The Bill amends the tax treatment of bearer — that is unregistered — bonds with the aim of encouraging greater participation by Irish financial institutions in the issuing of these bonds while at the same time countering as far as possible the use of these instruments for tax evasion by residents. It is normal practice for Eurobonds to be issued in bearer form. With the growth in the Irish pound capital market significant opportunities are emerging in relation to the issuing of Irish pound Eurobonds and the underwriting and managing of Irish pound issues on behalf of international institutions. The provisions in the Bill will enable Irish financial institutions to fully exploit these opportunities.
As I indicated in my Budget Statement and mentioned again in my Press statement on the publication of this Bill, a review of the detailed arrangements governing the question of residence for tax purposes is under way. The objective of this review is twofold. On the one side there is the matter of trying to bring greater clarity, transparency, order and certainty to an area where the current legal position reflects the interaction over a long period of legislative provisions, administrative practice and case law, much of it dating back to the nineteenth century. I am satisfied there is a compelling case for reassessing the provisions governing residency for the purposes of taxation against the background of modern realities. On the other side there is the issue of seeking to ensure that in this aspect of our taxation regime, as in others, we strike the best possible balance between what will help in fully realising our economy's potential and  ensuring that equity in taxation applies not just in theory but also in practice. In this context we need a tax regime that is helpful and hospitable to inward investment in the overall, but we must at the same time ensure that loopholes are closed which may enable Irish residents to escape the tax obligations arising from generating income and wealth in Ireland. Getting this balance absolutely right is my main concern.
This review is an even more complex task than envisaged, thus has taken longer to complete than foreseen at the outset. However, I can assure the House, that I am pressing ahead with it and that I will bring forward my proposals at the earliest opportunity.
Before concluding, I want to make some points on the subject of tax reform. I hope that in this House there will be a greater willingness than among some participants in the debate to face up to what reform is really about and what it means for the taxpayer.
We all need to recognise the very considerable progress in improving the overall taxation system, particularly from an employment perspective, over the past few years, notwithstanding the constraints imposed by budgetary circumstances. Statements made often give the impression that no improvement has been made in the income tax system over the past few years. Any objective analysis will show this suggestion to be totally without foundation. This year's budget sought to address the most important issues in mainstream income tax. The relief given was by any standard substantial, the overall cost of these measures amounting to some £330 million in a full year. The budget also included a major restructuring of the PRSI system which should improve significantly the competitive position of firms with large numbers of low paid employees.
There have been major achievements in the area of corporate taxation. The tax base has been greatly widened, enabling the standard rate to be cut by ten percentage points. This reform has greatly shifted the balance of incentives in favour  of job creation. In indirect taxation the standard rate of VAT has been reduced from 25 per cent to 21 per cent. There has been considerable simplification and consolidation of the rating structure, with a 12.5 per cent rate now applied to a wide range of employment-incentive sectors.
Our overrriding guiding principle in taxation policy will be to do what we judge best for employment. In my Budget Statement this year I set out what I and the Government regard as the guiding principles for a “pro-jobs” taxation strategy. It is from this perspective that the Government will address the board question of tax reform and evaluate any proposed changes to the taxation system. One of my major concerns is to tilt the balance in favour of productive investment. The new initiatives directly assist in this. But logic dictates that we look critically at aspects of taxation that tend to divert effort and resources into other areas which, whatever their particular merits, do not contribute to the creation of long term substainable jobs. The advantages conferred on housing investment have long been criticised from this standpoint and I am satisfied that the steps taken to redress this imbalance are fully justified in terms of our overriding objective to step up the pace of employment growth.
There is a clear responsibility on those who call for major tax reliefs not just to acknowledge their cost but also to state precisely from where they would have the funding come. Regrettably, very few of those who seek tax reductions are prepared to specify with a meaningful degree of precision from where the Government should raise alternative revenues.
Mr. B. Ahern: But revenue foregone in the process of tax reform must for the most part be recouped within the overall area of taxation. If people are willing to accept significant desirable reductions in the income tax area but strongly object to minor necessary off-setting base-broadening  in another area, it does not augur well for the prospects for significant further tax reform.
Tax reform has a role to play in improving employment prospects in the economy but we need to keep the potential gains in perspective. Tax reform has tended to be presented as a panacea for all our employment problems, but even its most ardent proponents would not suggest that on its own it will transform our economic prospects. Moreover, the nature of reform is that it involves choices, trade-offs and setting priorities. The Government recognised in framing this budget that not all of our decisions would be universally welcome but we did not shirk from doing what we judged best for employment. Without confronting such trade-offs, the real benefits of restructuring our tax and PRSI systems, and the consequent improvement in the environment for business and employment, will not be realised.
Mr. Yates: Before getting into the substance of the Bill or the Minister's introductory remarks, by way of preamble might I make a few comments in relation to the current and likely macro-economic position arising out of recent reports, most notably that of the ESRI and its forecast of last week. The public at large could be lulled into a false sense of feel good factor in relation to the economy. On a daily basis people are being bombarded with messages of boom and bloom when in reality what they see in their own lives are higher tax bills and renewed emigration. This economic boom will happen for as long as the Government continues to let the economy run on autopilot. The assumptions made by the ESRI need to be questioned. They say that public expenditure as a percentage of GNP is likely to be reduced from the current 50 per cent to 35 per cent. I do not know how they can make that assumption when the Government, and particularly the Fianna Fáil Party, since 1990 has facilitated a real increase in public spending, allowing for inflation of one-quarter. With that appetite for growth in public expenditure I do not see  how there could be such a sharp decline in the level of GNP absorbed by public expenditure.
In 1989 the ESRI forecast that we would have a current budget surplus of £1.2 billion in 1994. What is the outcome? The current budget deficit has increased this year to almost £800 million. The forecast for unemployment for 1994 was underestimated as unemployment will be 70 per cent higher, or 100,000 people extra. The key assumption we have to reject is that the ESRI, as policy makers, say that emigration will be 100,000 between now and the year 2005. If that is acceptable as a Government strategy in the labour market, I reject it out of hand because it is a target in relation to unemployment that is totally unacceptable to our school leavers.
Undoubtedly, we have the best opportunity in over 20 years for the Irish economy to grow. That unique set of circumstances arise from low international interest rates, which are stable; low inflation for a continuing period; a US and UK economic recovery and the prospect of European economic recovery. As an exporting nation the prospects for this country are very good. However, I warn the public that the Government has an enormous capacity to fritter away this opportunity. My advice to the public is that these forecasts of economic fine weather are such that they would be well advised to bring along their umbrella, given the performance of the Government.
Each year the Finance Bill is the primary instrument of Government economic policy for the implementation of tax strategy. The Finance Bill, 1994, is a major disappointment because it represents a substantial increase in the tax payable by home owners and in some cases will substantially increase the tax take from those in the middle income sector. We will be opposing this Bill because it does not set out any serious strategy to enhance employment prospects through tax reform. At the end of his contribution the Minister gave a lecture on what he wanted in relation to tax reform and the obligations——
Mr. Yates: I saw thinly veiled criticisms of some of my attacks on Government policy and that of the Opposition parties. The Government has hijacked the tax reform debate because the most important aspect of tax reform, as we understand it and as the ordinary punter in the street understands it, is the need to reduce the overall level of taxation. Before dealing with any individual taxes we need to reduce the overall level of taxation.
Mr. Yates: In 1993 public expenditure increased by 9 per cent; this year, before taking into account the revised Book of Estimates — Supplementary Estimates — public expenditure will rise by 10 per cent. In 1993 Supplementary Estimates were of the order of £200 million and in 1992 were of the order of £244 million, so that we are not out of the woods yet. Total tax receipts last year rose by 8.9 per cent and this year independent economists inform me that total tax receipts in 1994 will be up 9 per cent on last year.
It can hardly come as a surprise to the Minister for Finance when he seeks to widen the tax net, that there are howls of outrage because people see additional tax impositions on their meagre after-tax income. There has been a 9 per cent increase in the money coming in through the doors of the Revenue Commissioners on an annual basis, which is well ahead of inflation. Inflation, at 1.7 per cent last year and around 2 per cent this year, is well in excess of economic growth. The total tax as a percentage of GNP is rising. Allowing for inflation, the Government has done a neat job at increasing public expenditure by 25 per cent since 1990 in real terms.
The central and unavoidable issue that the Irish economy faces is that we must convert economic growth into employment growth. Fine Gael believes that will best be achieved by reducing the taxes on unemployment, by stimulating investment  through tax incentives and enhancing the potential of the services sector. Those are three simple strategies. First, competitiveness can be improved in labour costs by reducing the tax wedge and the incentive to go to work can be improved by reducing the tax wedge. Second, we need to stimulate investment — fixed investment has been poor in the last two years — to improve the productive capacity of the economy. This can only be done through the tax code. Third, in Britain and America, where employment rates are higher than the rest of Europe, that employment is in the services sector.
If public expenditure growth is controlled — I am not talking about cuts in public expenditure but about controlling the rate of increase — the extra revenue from increased economic output, and from exports, can be used to reduce taxes. That is the simple formula which we have lost sight of. By simply putting a lid on the growth of public expenditure we have the money to pay for tax reform. In other words, the fruits of economic growth should be used to cut taxes. This is the important priority area if we are to convert economic growth into employment growth.
At present all the extra tax revenue and more is being absorbed in increased public spending. All the current economic reports state that if we control public expenditure growth and wages we can achieve substantial prosperity. If we look at the economies during the past two decades that have achieved success and prosperity we find that those countries that awarded themselves minimal pay increases, Japan and Germany, had the best prosperity because they took the long term view. This Government, on its present record, is capable of destroying this opportunity. Labour's socialism and Fianna Fáil's clientelism are a potent cocktail for ensuring that all the fruits of growth are absorbed in increased spending. The tax burden, as a percentage of GNP, should be progressively reduced.
This Government has lost all credibility in relation to tax reform. Its stop-go  approach to individual taxes shows that its approach has been almost schizophrenic. In 1993 the 1 per cent levy was introduced but this year it was dropped. The probate tax was introduced last year but it has been diluted this year. Opposition amendments were rejected but now they are being dealt with retrospectively — an admission of failure. Even between the budget and the Finance Bill, Government policy on residential property tax has oscillated. This Minister's first budget in 1992 systematically abolished a series of reliefs and tax shelters for investments but this year attempts have been made to reintroduce incentives in a limited fashion for small businesses.
Mr. Yates: These U-turns and contradictions show there is no underlying philosophy, policy or strategy in the Government's tax reforms. The Government's economic policy is based on the politics of the latest soundbyte. There are no stated targets for the reduction of the debt-GNP ratio. We have no official transparent Exchange rate policy and we have no target set for the debt-GNP ratio. This Finance Bill neither attempts to improve the competitiveness, efficiency or productivity of our economy nor does it give a dynamic impetus to the labour market. This Government is content simply to coast along on the coat-tails of the recovery of the international economy while interest rates remain low. With net transfers of around £1 billion per annum from Europe and an improvement in our demographic structure, all seems well, but the critical problem remains. We have the highest emigration and the second highest unemployment rate in Europe. Our performance will have to improve dramatically if it is to be considered in any way adequate. This Bill deals only with these issues in the context of closing the odd loophole accompanied by the marginal shifts and technical adjustments.
In so far as the Government has a tax strategy one theme seems to be emerging  and that is that this Government begrudges home ownership. The Minister stated that he wants less investment in bricks and mortar. Last night on “Questions and Answers” I heard the Minister of State “for the shrinking £8 billion” say that she favoured less investment in bricks and mortar. This antipathy to householders is evident in sections 6 and 105 to 115, inclusive. The Taoiseach dropped a bombshell as he came out of the conference in Killarney when he said he will merge the residential property tax with local service charges into a new super domestic tax.
We have a new “foot in mouth” disease. Every time the Taoiseach escapes from his handlers, minders and scriptwriters he puts his foot firmly in his mouth on tax strategy. I can see what he is at. He is telling Mr. Niall Andrews, MEP, and those knocking at the doors in Dublin who are feeling the heat of the residential property tax row that residential property tax and local service charges are being reviewed. It is an attempt to create a smokescreen. The Minister for the Environment openly renounced what the Taoiseach had to say. We were told also that it was not discussed at Cabinet. I am told that Cabinet meetings are so busy trying to patch up the row about proposals in the National Plan not covered by the Community Support Framework that they have not got around to discussing tax.
We are told also that the Department of Finance is busily working on the hidden agenda of introducing rates by the back door. What are we to make of this? Monday's newspapers confirmed that officials of the Department of Finance have been working on this review of merging the residential property tax with local service charges. Some economists have told the Minister that where he went wrong with residential property tax is that he did not go for the big bang scenario and instead of going for a little bit of money he should have gone for a huge pot of money and huge reforms.
Mr. Yates: Householders utterly resent any further impositions. They know if there is to be a change in residential property tax people on lower incomes will have to pay the difference. We know also that for any increased imposition on householders there will be a corresponding cut in the rate support grants to local councils, in other words, it will not be developing more revenue raising powers on local authorities but simply using local councillors to implement the high tax, high spending policies of this Government. Let us leave the utter confusion caused by the Taoiseach's unwarranted attacks on home owners at the weekend and deal with the provisions of the Bill.
Under section 6 there will be a systematic reduction over four years in mortgage tax relief. Those with a hefty mortgage will not get tax relief at their marginal rate but at the standard rate of tax.
Mr. Yates: The Minister referred to this before. He had the advantage on me because in reply to my speech during Private Members' time he raised that issue and I then checked it out. When I  looked at the small print of that budget I found it applied only to new mortgages taken out after that date, in other words, there was some understanding for the people who had made long term financial commitments. What we have here is a universal bang for everybody, particularly for those who have had a mortgage for five years or longer who will be faced with interest relief at the standard tax rate and that is only the start, as section 6 states that their mortgage interest relief will be restricted to 80 per cent instead of 90 per cent of the ceiling of what they can claim. For every £100 only £80 can be claimed against it.
It is a lifetime ambition of young couples to get a house of their own, it is the fruit of all of their work. In spite of their long term financial obligations the ground rules have been changed without notice. Interest rates are low now but that does not mean that will be the case during the lifetime of the mortgage. Economists in the banks are advising people to take out fixed rate mortgages at the current rate. It is utterly unfair to make changes for anything other than new mortgages, although I oppose it in principle.
The poor unfortunates paying PAYE were told by the Tánaiste during one of his brief visits to the country at the height of the residential property tax to wait until they got their revised tax free allowances and they would be better off. People have been shocked beyond belief that the allowances for mortgage interest relief of £3,000 have been gutted by £1,800 because of the cumulative effect of the changes in mortgage interest relief.
Mr. Yates: What people are interested in is their take home pay. If they have a heavy mortgage they believe they have been hit in this Finance Bill. Prior to the last election both Fianna Fáil and the Labour Party gave a solemn promise that they would not tamper with mortgage interest relief and accused each other of being unreliable on this issue. These promises are now being discarded with ease. This shows breathtaking contempt for the electorate.
The construction industry — there has been a decline of one-quarter in general contracting in each of the past two years — is being told that it must suffer because of reduced investment in housing. This is a labour intensive industry and it has been estimated that tax accounts for 33 per cent of the cost of a new house. At 80 per cent we have one of the highest rates of home ownership in the OECD and this has been a unique stabilising force in society. These 350,000 taxpayers who are reeling as a result of the changes in mortgage interest relief feel cheated.
Mr. Yates: I am being generous to the Minister. How can the Minister justify the hassle which has been caused for himself, home owners, Niall Andrews and everyone else for the paltry £3 million when he will get 50 times more or £150 million in extra tax receipts? This unfair and inefficient tax should be repealed. We will table a series of amendments on Committee Stage. If I call a vote on any of these amendments, in a free vote, there would be no competition because the Deputy Callelys, Deputy Shortalls——
Mr. Yates: ——and the Minister's back benchers generally realise that this tax is unjust. The first amendment I would like to see is mortgage interest relief calculated on the value of the house. If the Minister fails to do this the householder will continue to pay tax on behalf of the financial institution. We will oppose the changes in the thersholds in relation to house income and home values which sparked off the revolt. The decision to widen the net has caused outrage, particularly in Dublin where, because of higher residential values, and not luxury homes, people will find themselves in the net.
The Revenue Commissioners should be obliged to accept or reject the value of a house as submitted by the taxpayer; in other words, if a person living in Deans Grange submits a value of £120,000 it is not fair that ten years later the Revenue Commissioners will be able to say that the house should have been valued at £140,000. The Revenue Commissioners should be obliged to accept or reject the value in the year of self-assessment. It is unfair that taxpayers face the prospect that they will be held liable for back tax  if a neighbour's house is sold at a higher value in subsequent years.
Reckonable income for residential property tax should not include the income of the entire household, only the house owner. This anti-family provision is punitive. The definition of gross income is also unfair. Interest from Post Office savings certificates, pre-DIRT interest income, covenant payments and social welfare income of a son or daughter or any other member of the household are included and, at a minimum, these should be disregarded.
Joint home ownership should not be penalised. The same thresholds should be allowed in cases involving separate ownership of houses. I have encountered cases of hardship where people on moderately high incomes and living in very valuable houses were liable to residential property tax. I have said repeatedly — this applies to rates, poll tax or residential property tax — no liquidity or income is available to someone from their house. They cannot go to the attic and get money. In such cases a ceiling should apply to residential property tax liability as a percentage of their income, say, 4 per cent. In other words, someone with an income of £40,000 and living in a very valuable house which they inherited should not be faced with a bill of £5,000, £10,000 or £20,000 in residential property tax.
In the debate on the Finance Bill in 1992 the Minister gave a solemn promise that he would not reduce the thresholds, further having made adjustments at that time. The fear is that the Labour Party and Fianna Fáil will widen the net and increase the rates again in the future. If the Minister is rejecting what the Taoiseach said and is taking the side of the Minister for the Environment, Deputy Smith, I ask him to give legislative effect to his verbal commitments on Committee Stage.
The other major group who are reeling is the middle income sector. This group includes those whose combined income is above the average industrial wage. The budget was designed to put them in their place; the politics of envy and begrudgery  are alive and well at the Cabinet table. Despite the daily news of an economic boom these people are paying more tax.
The first assault was on the entitlement of insured workers through the PRSI system. They are being asked to pay more in PRSI for fewer entitlements. There was an aborted attempt to means test contributory widows' pensions. Pay-related benefit has been abolished for those who become ill or unemployed. Couples, one of whom is working, and those who work short time, have been devastated by the taxation of unemployment benefit. I encounter cases of hardship on a daily basis where people who have retired due to illness, who work on a week-on, week-off basis or who are engaged in seasonal work have been gutted by a cut of £7 or £27 a week in take home pay. I welcome the modest changes the Minister proposes to make on Committee Stage for those who work short time but they need to be built into the system. Where one spouse is on social welfare and the other is on low pay the tax free allowance will be eaten up in terms of disability benefit. They will be worse off and will say at Deputies' clinics that it will not pay them to work. This is very wrong.
This group will also be hit by having to provide for their own health care costs. As they do not have medical cards they are among the 1.3 million people in the VHI. They have to pay their own doctors' and pharmacy bills. In section 8 of this Bill the threshold for bona fide medical expenses is being raised for a single person from £50 to £150 and for a family from £150 to £300. Under this nasty measure refunds in respect of medical care will be restricted. This can only be construed as a tax on illness. The provisions in section 7 to standardise VHI tax relief over the next three years is another attack on self-reliant people. It will make membership more expensive at a time when the VHI faces the prospect of competition and increasing charges by the Government for private health facilities in public hospitals.
The effect of the combined mortgage  and VHI standardisation provisions is to send a clear message to people on middle incomes, that they could and should pay more tax. No future changes in the tax bands for the standard rate of tax have been promised for the next four years to match the drop in VHI and mortgage interest relief. During the last election Fianna Fáil promised that only single people with an income in excess of £20,000 and in excess of £40,000 for a married person would have to pay income tax at the top rate. Fine Gael will be tabling amendments to ensure that the first £10,000 of taxable income for a single person and the first £20,000 for a married couple will be taxed at the 27 per cent rate.
I regret that the Minister made no move to change the tax treatment of benefit-in-kind, particularly for cars. The provisions of the 1992 budget were savage and I have met many sales representatives who, through the implementation of the changes at the time have seen all their pay increases lost, there is no sympathy for them in public service circles where payment is made on the basis of mileage. The elderly are amazed that there has been no increase in the age allowances or exemption limits and an increasing proportion of their pensions will be absorbed in tax.
Any review of the tax system over the last decade will show that the impact of the income tax code on parents has been particularly harsh. Combined with the social welfare system, the income tax code discriminates against those in employment. Poverty traps have been created through the entitlement to fringe benefits based on gross pay. However, the gross and net income of people on social welfare is the same. Social welfare payments are incrementally increased with each child dependant. There is no recognition in the income tax code of the cost of rearing children. The role of the spouse who has given up employment to work full-time in the home is ignored in the tax treatment of the spouse at work. These factors need to be changed. Families should be supported through tax reforms with the cost to families of rearing  children formally acknowledged in our tax system. Fine Gael will, therefore, be proposing the restoration of tax free allowances for dependent children at the rate of £400 per child per annum. This is separate from the cosmetic changes in the exemption limits which leave the vast majority of people unaided. Where both spouses are working, tax relief on child care expenses up to £1,000 per annum should be allowed. Similarly, no change has been made in the case of a dependent relative allowance of £110. Fine Gael believes this should be raised to £1,000 per annum as the cost would be minimal.
A special yearly tax allowance of £1,000 should be given to a couple where one spouse is working full-time in the home, conditional on providing care for an adult or child dependant. I again ask the Minister to consider the position of cohabiting couples who should have the same tax treatment of dependent persons as married couples. I know someone living with a common law spouse who can claim for that dependent spouse under the social welfare system. That person took up a job under the social employment scheme but was unable to claim for the dependent partner under the tax system. This is very unfair and a disincentive to work.
The Government is only partially implementing the recommendations of the task force for small businesses. It is estimated that three out of every four new jobs created will be in small enterprises. It is a great pity that the Government could not have lowered the rate of corporation profits tax for companies with a profit of less than £80,000 to the standard rate of 27 per cent. Similarly no concession was made in the case of dividend income of up to £7,000 per year for full-time directors. The modification of capital gains tax on business assets held over six years is wholly inadequate. Fine Gael will be proposing four simple measures to help entrepreneurs in small businesses: (a) a new 27 per cent rate of corporation profits tax for profits less than £80,000; (b) an income tax exemption on dividend income to full-time directors up to £7,000 per annum; (c) a  reduction to 20 per cent in the rate of capital gains tax on the appreciation in the value of company shares or business assets held over six years; (d) raising the ceiling of tax relief on pension contributions from 15 to 30 per cent to encourage further private pension provisions among the self-employed.
I regret that the amendments proposed by the Opposition to last year's Finance Bill relating to the seed capital scheme were rejected. Last year I contended it would have been easier to get six numbers in the Lotto than to avail of this scheme because it is bound up in red tape. Will the Minister say how many people have applied? I am told the number is very low.
Mr. Yates: I am told that six is not too far off the numbers applying under the seed capital scheme. I do not know if the Minister thinks that six people availing of a scheme makes it a success, but I remember asking him on Committee Stage of the Finance Bill last year how many applicants there would have to be for him to consider it a success. He did not answer.
Universal experience of economies with high level of employment is that job growth comes in the service sector. However, this Government treats the service sector as glorified tax collectors. There is a 40 per cent corporation profits tax, a 40 per cent capital gains tax, PRSI at 21 per cent and VAT at 21 per cent. There is no strategy in this Bill to progressively enhance employment prospects in services over the next four years through phased tax reductions.
Individual sub-sectors have enormous  potential. The hotel industry has sought a 10 per cent corporation profits tax rate to enhance tourism investment. We are opposed to the 40 per cent corporation profits tax rate on the mushroom industry which I will deal with in detail on Committee Stage. It is clear that the most imaginative change the Minister could make is to have a three-tiered rate of corporation profits tax comprising rates of 40 per cent, 27 per cent and 10 per cent. That would allow the Minister to select service sectors with job potential for the 27 per cent rate of corporation profits tax, if he could not afford the 10 per cent rate. It would be a half-way house and it matches existing taxes.
The tax treatment of investment still militates heavily against enterprise. Our rate of new businesses established annually is half that in Europe and America. The favourable tax treatment of Government investment products such as gilts and post office saving certificates is in stark contrast to the regime of restricted capital allowances, corporation profits tax and capital gains tax.
I will turn now to value added tax which remains our second most significant tax with receipts of over £2.5 billion this year. I regret the Minister has still not seen fit to give any concession to the clothing and footwear industry despite its employment at retail level of 30,000 people. The top rate of VAT at 21 per cent is simply too high. It depresses demand and creates an incentive for black economy operators. The Minister will have enormous problems with VAT harmonisation in 1996 if the current proposals are implemented and progress is not made in reducing the top rate.
Will the Minister investigate a number of anomalies in the health care area? Generally speaking, medicine are zero rated for VAT. However, I have received representations about the anomalous effect by virtue of the 21 per cent rate of VAT applying to the following health care items: vaccines, ointments, incontinence pads, bandages, syringes and suppositories. Will the Minister clarify why the general principle of health care products  being VAT free does not apply to these products? We will be seeking to have them zero rated on Committee Stage. Similarly, the 21 per cent VAT rate on crèche facilities and childcare services is causing problems for an area with obvious employment potential. Of continuing concern is the deaf ear the Minister has turned to the representations of the newspaper and the flour and confectionery industries to reduce the 12.5 per cent VAT rate, despite the threat of further import penetration and subsequent job loss.
During the Committee Stage debate on last year's Finance Bill a strong case was made to widen the eligibility threshold for VAT refunds for non-profit making organisations, with particular reference to fund raising to provide health and education facilities which otherwise would have to be provided by the State. It is absurd that voluntary work should be penalised in that way. Will the Minister widen the eligibility threshold for such refunds as promised last year?
We will be opposing section 92 of the Bill which applies 21 per cent VAT to loss adjusters' fees. Many of us have received representations from people claiming this will increase insurance costs, affect employment and undermine fully registered professionals in the insurance industry.
Section 94 deals with the issue of travelling fairgrounds. It is my understanding that people involved in those fairgrounds want the 19 day rule extended to 30 days to provide for facilities such as Funderland, but instead the Minister imposed the 12.5 per cent VAT on all travelling fairgrounds. Will he extend the 19 days to 30 so that such facilities are eligible for the VAT exemptions?
Mr. Yates: Section 90 deals with cash receipts and will assist small service companies with an annual turnover of less than £250,000. Will the Minister extend that turnover threshold to £1 million? Will he also consider increasing to  £250,000 the weekly prize limit for charitable lotteries which is frozen at £10,000 under section 33 of the National Lottery Act, 1986? Charitable lotteries are in serious difficulties. I understand the Taoiseach referred the matter to the Ministers for Justice and Finance. The buck passing should stop and the maximum individual prize should be £100,000.
Luncheon vouchers have been frozen at 15 pence per day under the benefit-in-kind scheme. Canteen facilities are 100 per cent tax allowable for corporation tax purposes and companies who issue vouchers are going out of business. I welcome the changes in respect of the probate tax, but it should be scrapped altogether. Its yield is too low to justify it. The threshold of £10,000 and the lack of relief are unacceptable.
Will the Minister consider providing tax free allowance for university teachers? I understand in other countries teachers have bona fide expenses in respect of their work on which some allowance should be given.
A review of the position of disabled drivers was undertaken and there has been correspondence between spokespersons in that regard. I would like the finalisation of that process published before Committee Stage. Also, I would like the Minister to ensure that those with one arm or one leg are included for the relief and the 20 per cent condition on the minimum vehicle adaptation cost for disabled passengers should be reviewed.
I did not agree with the 45 minute limit on contributions to this debate. It is ridiculous for a Bill with 147 sections. Our main reason for opposing the Bill on Second Stage is that the tax strategy of this Government on home ownership is unfair and we are learning from statements made in Killarney and elsewhere how penal it will be. The standardisation provisions will hit the middle income sector, self-reliant people providing for home ownership and medical expenses. We lack a tax reforming strategy, particularly to assist families in low paid employment and there is no overall strategy to reduce the tax burden in times of  economic growth to facilitate an improvement in our competitiveness and allow us convert economic growth and good fundamentals into additional employment opportunities.
Mr. Cox: I read with interest the reported remarks of the Minister for the Environment, Deputy Smith in today's Irish Press. I removed the front page, placed it in my file and much to my consternation I noted on page three the headline “Cork man jailed for taking cash out of man's trousers”. The Minister and the Government are digging so deep into men's trousers and ladies' pockets that he may have to do porridge for a prolonged period if the fate of the Cork man befalls him.
The political context is clear. We have a Government with the largest majority in the history of the State and, therefore, a Government with an enormous political capacity to see through whatever strategy it plans to address the fundamental problems of our economy. Added to that dominant political reality — a crushing reality in the workings of this House from time to time — is the economic growth rate which is relatively good compared with many other EU States. The predictions, regardless of nit-picking, suggest that there is as good, if not better, around the corner. Given the large majority and the relatively good performance and predictions, the real test of this Government's resolve will not be found in the number of schemes it leaves as a legacy in terms of the tax code or the number of agencies it establishes through the Department of Enterprise and Employment, but rather in how it addresses the fundamental structural problems of our economy. That is a core test we are entitled to apply to measure the success of the Government. This Finance Bill, similar to last year's, does not even set out to remedy the key structural defects in the economy. It is my contention, and that of the Progressive Democrats, that tax reform of substance is still absent from the Government's agenda. That is the Bill's core defect.
In the two budgets public expenditure  was targeted to increase by up to 17 per cent. Inflation has been measured at less than one-fifth of that figure. Therein lies one major structural flaw. Since the Government took up office an additional £1.5 billion in public spending has been planned. That will require an additional £1.5 billion in taxes either now or by way of deferred taxation through borrowing. That growth in public expenditure, substantially greater than the rate of inflation, is a core structural flaw which automatically transfers into higher taxation or deferred taxation through an increased debt rate. By far the easiest way to fund fundamental tax reform is by sustained control of public expenditure. Serious control of public expenditure would enable us to enjoy the fruits of economic growth. This would be far better than fiddly arrangements that cause enormous political fallout and angst to families, such as the proposed changes in the residential property tax this year, originally designed to bring in an additional £5 million.
The Minister set out in his budget speech six principles for tax policy or strategy which he hoped to follow. The third principle was to focus available resources to widen the tax band. In the Programme for Government and the Minister's speech that target measure, has been given an extremely soft focus. No expressed target has been set and we have nothing against which to measure progress. I set a target last year, one recommended in Culliton. I will run through it again this year to see how well we have jumped the fence. The Government stated it accepted the recommendations of Culliton, and different Ministers at different times said they were implementing them. The target set out in Culliton is clear: it states that no more than 20 per cent of taxpayers should be paying tax above the standard rate. Last year the Government moved one-twentieth of the way in the direction of Culliton. Unless it is anticipating a 20 year life cycle of the partnership formed, it seems a most unambitious target for  those who claim to espouse the Culliton tax philosophy.
Mr. Cox: If the Minister studies the features of Table G, accompanying the budget on 26 January, he will see that the greatest contributory factor to that sum results from the abolition of the 1 per cent income levy, which he should not have introduced. If he is trying to explain away that measure as if it were a stabiliser so that he would not fall off his bicycle, that would say more about his technical cycling merits than about the need for stabilisers that were not required.
Mr. Cox: It cannot be palmed off as tax reform. It was nothing more or less than I described in my response to the Minister's budget speech. It was an act of tax repentance for something that should never have been introduced and it proved to be wholly unnecessary during the year, as was seen in the outurn. The principles of tax policy are interesting and the best way to judge them is to look to the Government's two Finance Bills, the major instruments of economic policy, introduced last year and this year and judge them on the basis that actions speak louder than words. The 1 per cent levy was to be a temporary measure but it applied for a longer period than one year. There was some knotty bargaining about it during negotiations on the Programme for Competitiveness and Work and the Minister insisted it would remain but that it would be wound down progressively over several years. Then it was abolished. In terms of tax strategy that was designed, as initially presented by  the Minister, as a stabiliser so that he would not fall off his bicycle last year. It was a stabiliser he wanted to keep on his bike for several years. The position ended up being one of stop-go. I am pleased it was abolished, but it is an interesting example of a one step forward, one step back tax strategy.
The probate tax strategy was introduced last year but in a sense it was not new; it was the death duty revisited, reheated and recycled. It set out blatantly to disregard the right of inheriting spouses and its implications for inheritance after death in relation to agricultural land were extremely vicious. The Minister steadfastly refused to drop the tax or amend it in those areas and this year he amended it. I welcome the amendment but we will oppose the tax this year and propose its abandonment as a bad tax. Death duties should not have been reintroduced when three capital taxes, introduced to replace death duties in the mid-1970s, remain on the Statute Book. They should be relied on in respect of death duties. Again, in terms of strategy, that tax represented one step forward, stop-go and two steps back, in so far as the Minister last year espoused a more vigorous form and argued for it on Committee Stage of the Finance Bill and other debates. That tax and others do not represent tax strategy but something nearer to tax tactics. It is as if the Government wishes to try taxes out to see how they work and if they do not work well it will pull back. Government action has not demonstrated tax strategy in respect of the fundamental problem but a series of hit and run tax tactics, to hit the people with a tax this year and run from it next year if it is reeling from political pressure. That is a bad basis on which to make policy.
I do not know who will be left holding the baby in respect of the residential property tax but the baby is well wrapped up at this stage. It is something like passing the parcel at a child's party. The Government is passing it around. Fianna Fáil Deputies say it was a Labour proposal and those at the upper end of the management reaches of Fianna Fáil are  of the view it is inequitable, bad news for Dublin people, should not have been introduced, and others do not wish to contemplate the alternatives. Will the Tánaiste and the Labour Party or the Minister for Finance and his departmental advisers be left holding the baby? I wonder where the parcel will end up? It is fascinating to observe the characters and characterisation that make up the story. At an ECOFIN meeting in Brussels the Minister for Finance mounted what the Irish papers described as a spirited defence of the measure. He talked about hysterical reaction to it. He dismissed suggestions that tax discriminated against Dublin people.
Mr. Cox: He gave a performance full of bluster and bravado. The Minister said he was sticking to his guns and he rejected the substance of the criticism. Then he paused for thought. I will stay with the Minister for the moment because any character introduced in a decent novel develops some characterisation to show more than one dimension. The day after St. Patrick's Day the Minister introduced a Government Information Service press release from the Department of Finance. He announced the various changes, his stop-go policy on the residential property tax, the one step forward two steps back for this year. He said the Government remains satisfied that the RPT, as extended, is fully justified. The travelling funfair moves to the IMI conference in Killarney where the Taoiseach made personal comments. The Taoiseach has had a great weekend unburdening himself. A great sense of liberation must have overcome him during his visit to Cyprus because he has been unburdening himself of personal thoughts since then. The Taoiseach is reported in the papers as favouring the replacement of the residential property tax with a new service charge. One of its key characteristics is that it will be more equitable and he said — at least in the papers I read — that  the people in Dublin will be hardest hit and that people feared being clobbered twice. Before I spoke about the Cork man jailed for taking cash out of a man's pocket I read the front page story in The Irish Press, which reported the Minister for the Environment as saying, that anything that looked like rates could not be proposed and that a super domestic tax, such as that proposed, would be unacceptable to the public. At one time a certain gentleman was berated in this House for being uno duce, uno voce, but we have now gone a full circle and have multo duce, multo voce. It is interesting in this new multo duce, multo voce Government to figure out who will carry the can and what will emerge.
The residential property tax has been disowned by the Taoiseach. Fair play to him, he told it as he saw it, he spelled it out. It is an inequitable tax, clobbering people twice, with those in Dublin hardest hit. The Taoiseach wants to get rid of this tax but the Minister insists that it be imposed. Deputy Yates is trying to render it more toothless by proposing a series of amendments. The Progressive Democrats will oppose the sections on an extension of the odious residential property tax and propose its removal. This kind of Lanigan's Ball economics of stepping in and out and complicating matters has left everybody confused.
I was amused at the Minister's call, without a trace of irony, for a meaningful degree of precision about raising alternative revenue. I presume that was addressed to people on the Government benches. The Minister could hardly have the temerity, in the context of the multiplicity of voices from the new Tower of Babel to ask the Opposition——
The Minister for Finance should seriously consider, when this Bill becomes law, approaching his colleague, the Minister for Arts, Culture and the Gaeltacht, to raise finance under section 18 to make a movie of the Bill. It would be one of the smash comedies of the year and might even qualify for Oscar winning performances.
Mr. Cox: That would be a good start or “Honey I Shrank their Income”. My impression of the Government, having introduced two Finance Bills, is that it is committed to a radical ad hoc approach but not to any clear strategic thinking. That is the fundamental flaw in the last Finance Act and this Bill.
I wish to refer to a general point and I urge the Minister, in the event of the Department or the Revenue Commissioners lacking the manpower resources to deal with this matter, to consider it. Taxation is a minefield, even for experts. Deputy Yates talked about giving allowances to academics, presumably to buy books. I invested in a few hefty tomes last year, one of which, Butterworths Tax Acts, is not comprehensive. The last time we consolidated income tax legislation was 1967, 27 years ago. This book, which contains about 2,000 pages, is a brief summary of taxation in those 27 years.
Butterworths published an equally impressive tome on VAT, which was introduced in 1972 — a summary of the non-consolidated VAT changes in the meantime. We have made no progress on capital taxes, particularly those introduced in the mid-1970s. The consolidation of taxation legislation is a substantial but necessary exercise. It is so difficult to go from A to B in our tax code, and even to read this Bill as it is presented, that some Act of consolidation is long overdue and must be contemplated.
Mr. Cox: Even if the manpower resources do not exist within the system consideration should be given to this matter because there is an enormous number of highly qualified tax experts in the marketplace who are up to date in this area.
Mr. Cox: The Minister might find some unlikely allies among them. The Progressive Democrats will be putting down the Culliton test amendment and a number of others to the first part of the Bill. One of the main proposals for simplification of the legislation is the last of the six principles referred to by the Minister in his budget speech.
Section 10 covers the withholding tax scheme and additional accountable persons are referred to. The Progressive Democrats will be proposing the phased abolition of withholding tax because the basis on which it was introduced has been by passed. There has been self-assessment since 1987. Taxation of the self-employed is now assessed on an actual year basis rather than on the basis of the previous year's figures, many public sector agencies demand tax clearance certificates. This is a double attack on income, which is no longer justified, particularly in the context of the degree of revenue buoyancy. If the cash flow effect is too great in one year it should be spread over several.
Section 17 exempts works of art as  benefit in kind. I am not clear what the Minister has in mind on the 90 days' viewing access for the public and the four hours a day provision. I understand this proposal in the context of a big corporation placing a work of art in the lobby and people wishing to view it there, but does the proposal extend to persons placing items in their office? If so, what is meant by four hours a day, 90 days access and so on?
I am pleased the Minister proposed an increase in the capital allowance in respect of cars. When this allowance was introduced in 1973 it applied to cars such as the Ford Granada. As a result of last year's changes the allowance applied to cars such as the Ford Fiesta. The proposed changes will mean that the allowance will apply to cars to the value of the Ford Escort. I intend putting down an amendment to cover the middle executive car which is valued a little higher and used by many people who claim this allowance. I welcome the Minister's proposal in this area but further progress is required.
Under section 28 the Minister deals with “balloon leases”. If ever I saw a section with plenty of air, this is one. I pose a challenge to the Minister and his advisers. Is it possible for a Government committed to pursuing simplification and streamlining of tax legislation to bring in an amendment which is not eight pages long, containing five separate formulae for calculation?
There should be a George Bernard Shaw prize for drafting this Bill. The Minister will recall that that gentleman once wrote to someone, “My apologies that this letter is so long but unfortunately I did not have the time to write a short one”. Could those who drafted this Bill not have taken a little more time and written a shorter balloon lease than the one before us?
Mr. Cox: There is certainly rolling up of many of the dates but the Minister backtracks over a whole series of Bills. Consolidation is where one can read all the basic data in one chunk and not have to jump back and forth over a series of Bills. It is a move in the right direction but substantially short of consolidation.
Section 34 deals with ministerial designation by street of the new urban renewal incentive. We will be proposing some process of consultation with chambers of commerce. There is need for transparency. I am not saying that the Minister or the Minister for the Environment, or whoever will be involved in these orders, would necessarily ever want to favour any street in their own constituency. Far be it for me to suggest such, but it is proper that this scheme be operated in a transparent way. Some of the existing urban renewal schemes have displaced business in the traditional business districts of towns and have forced traders to lease a second premises so as not to lose market share. There are problems in this area which need to be addressed and we will be tabling amendments in this respect.
In regard to corporation tax and mushroom growers, I realise the Minister is bound by a European Commission direction following a complaint by the United Kingdom. He is wrong, however, to introduce a calamitous and sudden change. He should tell the Europeans he will introduce this on a phased basis. If that is his intention he should insist, if needs be, on bringing a case to the European Court of Justice. The Minister can fight against implementation on 1 June 1994 even if he believes he is bound by some European direction. It is unfair for any tax authority to suppose that one can simply turn off something on which business plans have been made the way one would switch off a light. It is unfair for any authority, including a European  authority, to insist that that should be done regardless of whatever treaty basis they cite for the decision. I will be tabling an amendment on this matter.
Section 51 deals with foreign currency transactions. There are a number of points in that section which time does not permit me to develop in detail but section 12A.—(1) (a) (ii) refers to auditors certifying various figures. That will have to be changed because my understanding of current practice is that auditors no longer certify but they do venture to give what is called an “opinion”. Several references in that subsection will need to be changed consequently on that.
In subsection 14A.—(1) (a) (ii) there is a phrase “in the State”. I do not have time to develop my argument but that phrase in some respects in meaningless because it refers to transactions in a foreign currency in the State in which one engages in them in this State. This requires redrafting. There is also a reference to certification which will need to be changed.
In regard to services, I am glad to see that there is some progress reported but unfortunately there is little established in the Finance Bill regarding taxation for services. I tabled an amendment last year suggesting a 10 per cent tax rate for third country consultancy services outside the EU and I will be retabling that amendment.
I would like to deal with a number of points concerning capital gains tax, but in particular I will be tabling an amendment in regard to section 60. There is reference to something which I think is useful, namely, £25 million company allowances. I do not want to go into detail at this stage but if one were to take the contemporary figure of £25 million, some question must be raised as to whether there should be some backward indexation. I will explore that with the Minister when I table detailed amendments.
On vehicle registration tax, I propose an amendment to the differential rates, but not in terms of scrapping the rates as requested by the Society for the Irish Motor Industry, which I think is asking for too much. Anyone who can afford a  top of the range car can afford to pay the additional taxation in the price. I am in favour of environmentally friendly changes to cars, particularly the fitting of catalytic converters which require larger engine sizes. There should be some upward adjustment of the cubic capacity on the lower rate and I will be tabling an amendment to that effect.
I want to signal to the Minister my intention to raise a topic which I was dealing with yesterday in the Economic Committee of the European Parliament in Strasbourg and which is a cause of considerable concern here, namely, an EU proposal on a minimum threshold for VAT refunds for tourists from third countries outside the EU. As the Minister is aware, we have no minimum threshold and many small retailers, tourism interests and people in the service sector here, who have the management systems for cash-back here and in the UK, would suffer serious employment consequences if there was a downturn in this sector. I hope that under Article 99 procedures in Europe, the Minister will refuse unanimity if the EU insists on the 175 ECU threshold. I tabled a number of amendments to the proposal yesterday and we have refused to give it the urgent treatment requested by the Commission.
On VAT, I refer to problems raised last year concerning golf clubs. Some golf clubs pay VAT on green fees and some do not. Large amounts of Structural Funds have been allocated to the development of private clubs in order to sell them as a tourism product and it is stupid to have them on an unlevel playing field with members clubs. I realise this is to do with the corporate form of the club but some equitable arrangement will have to be worked out.
I am glad Deputy Yates intends to table an amendment which would follow the amendment tabled by me last year, and which I intend to table again, concerning voluntary activity in the education and other sectors.
I understand a study has been carried out in regard to disabled drivers. I would like to see that detailed in some way on Committee Stage. I do not believe that  giving a tax break to disabled drivers will create an incentive for people to become disabled. It does not, therefore, have the classic incentive mechanisms where, as in some kind of Islamic republic, someone would cut off an arm or a leg in order to get a VRT refund on their car. We should be quite generous on that definition.
In regard to stamp duties, I am glad that the Minister agrees with my suggestion of last year to involve the Appeals Commissioner in stamp duty matters. I tabled an amendment to that effect last year and I am happy to claim some credit for the change this year.
Section 100 refers to stamp duty not being required to be paid on the VAT content of a lease or a transfer. That is welcome but the Revenue Commissioners screwed some people for that in the past few months and I believe that, in equity, they should get back the stamp duty on the VAT part of the lease or transfer. Some people have been caught in this regard and they are entitled to some return.
I dealt at length with the question of residential property tax. We want to repeal the 1983 basic legislation and get rid of the odium that followed. We intend to do the same in regard to probate tax because we believe it should never have been reintroduced.
When a Minister for Finance introduces a 100 per cent increase in any tax the alarm bells ring. Section 135 provides that trusts should have a tax increase from 3 to 6 per cent. I have tabled a parliamentary question requesting details of the extent of this. I do not have one and, therefore, will not bleed over this myself but when I see the rate of taxation on anything being doubled, I want to know why.
Taking the Act of last year and the Bill of this year, this is a Minister for Finance  who is well and truly qualified to dance at Lanigan's Ball. On every significant tax that he has brought in, it has been a case of one step in, one step out again. On that basis, and on the basis that this Government cannot speak with one voice by party or one voice by Minister, or even one voice by leader, the Minister should take my advice. He should not dig so deep into our pockets that he suffers the fate of the Cork man jailed for removing cash from a man's trousers this week. He should clearly consider asking his colleague, the Minister for Arts, Culture and the Gaeltacht, for some funding to bring us the movie of this tax debacle which the Minister has the effrontery to describe as a tax strategy.
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