I move: "That the Bill be now read a Second Time."
This Bill confirms the taxation changes which I announced in my budget statement of 25 March and I am also using the opportunity to introduce some improvements in the tax code which are aimed at achieving a fairer and a more efficient system. Some of the new tax measures proposed in the budget, though perhaps of relatively minor importance in the overall context, involve substantial changes in existing tax provisions. These changes are incorporated in the Bill and I will clarify them for Deputies in the course of this speech.
Before I speak on the details of the Bill, I would like to refer briefly to the budgetary and taxation strategy which is being followed by the Government. I do not intend today to give a comprehensive account of the Government's overall approach to the economy. This will be contained in the medium-term economic plan which is now being prepared.
In the course of my budget statement I said that the Government's principal concern was to achieve a proper balance between reducing our borrowing needs and improving employment. I also underlined our commitment to a fairer system of taxation. We are making progress this year in reducing borrowing for day-to-day purposes. In our budget projections we are within the limit for the year recommended by the EEC and I am hopeful that these projections can be realised. The PRSI tax concession of £312 which was introduced in April will reduce tax revenue by £45 million this year. I have said previously that this has to be made good. A major review of departmental expenditures has recently been completed and the results of this review are now being evaluated in my Department. It is hoped that this will provide substantial savings but, if there is still a shortfall on the £45 million, then I will consider taxation options.
As regards the budget targets, I would like to remind the House that the quarterly figures this year do not give an accurate reflection of the trend in the current deficit. The pattern of the deficit this year is unusual in that the budget was delayed and interest payments were higher than normal in the first quarter, while a significant proportion of the additional revenue raised in the budget will not accrue until the final quarter. The deficit at the end of March was 58 per cent of the projection for the year as a whole and was in line with expectations. As estimates of receipts and expenditure are not built up on a quarterly basis, it is not possible to make firm forecasts of the precise level of the deficit in each quarter. Broadly speaking, however, the deficit by end-June should be of the order of 100 per cent of the figure for the year as a whole and this figure should be significantly exceeded by end-September. As I have said, the real impact of extra tax receipts will not be felt until the final quarter of the year particularly because of VAT on imports. In that quarter revenue should significantly exceed expenditure and thus ensure that the budget targets for the year as a whole are achieved.
Borrowing for capital purposes must be viewed in a different light. I am not advocating unrestricted borrowing for capital development as this would be entirely wrong. We must be selective but we must at the same time be prepared to borrow at a substantial level for sound investment projects which will strengthen our economy and provide a worthwhile return in due course. I want to emphasise the need for greater selectivity. There is a growing concern that much of our capital investment in the past has failed to produce an adequate return and we must be more cautious in future about the uses to which this borrowing is put. In short, there will have to be much more exhaustive analysis of proposals for capital investment.
I have mentioned already the Government's concern to achieve a fairer system of taxation. I expect that the first report of the Commission on Taxation will be published shortly. The commission have been conducting a comprehensive examination of our taxation system for the past two years; they are representative of different interests within the community and their recommendations should provide a basis for substantial changes in the tax code. The commission's terms of reference require them to make recommendations which will achieve an equitable incidence of taxation. While we are making progress towards a fairer system, the present arrangements leave much to be desired. We must ensure, more so than at present, that the heavier burden falls on those who are in the best position to pay and that the tax net is more widely spread.
This must not be confused, however, with the issue of the overall level of taxation. Many people feel that there is simply too much taxation and this attitude is understandable. While the overall burden of taxation here is high, it is not out of line with taxation levels in other European countries generally. Comparisons are difficult because of the problems of matching statistics from various countries but the general indications are that our overall tax revenue is set at a reasonable level. One of our problems is that the base for collection of this revenue is too narrow. This base has to be broadened and this means that we have to find new tax sources and that those who do not make a fair contribution at present will have to pay more.
More fundamentally, however, there is now a wide imbalance between the levels of expenditure and revenue. Either expenditure is too high or taxation is too low. If the overall level of taxation in the broadest sense has virtually reached its maximum potential, then the only conclusion is that the level of Government expenditure is too high and must be reduced and policies must be directed to this end. There is no other option. In this regard I would like to emphasise in the strongest possible terms that there is no question of public expenditure being out of control. Public expenditure is high because of deliberate policy decisions taken by successive Governments. As I have already implied, the reality must now be faced that this high expenditure is at the core of our present financial difficulties.
I would now like to turn to individual items in the Bill. Some of the proposals in the budget have been modified and I will draw special attention to these changes. I will also deal at some length with items of significance which were not spelt out in any detail in the budget.
Sections 1 to 3 are concerned with the changes announced in the budget in the income tax exemption limits, allowances and rate bands. Let me clarify once again the purpose of these changes. They are designed to have substantially the same effect, for individual taxpayers, as the tax credit proposals of 27 January. A comparison of the two approaches shows this very clearly. Both the tax credit proposals and the budget changes involve a redistribution of the income tax burden to the benefit of lower and middle-income groups. In the case of the proposals of 27 January, this was to be achieved by tax credits. In the budget it is achieved by improvements in the personal allowances and adjustments to the 35 per cent rate bands. The budget changes have substantially the same effect as the tax credit proposals of 27 January, but without the administrative difficulties associated with tax credits.
Section 4 deals with the benefit-in-kind from the use of a company car and here there is an important modification of the budget proposal. For the future, the benefit to an employee from the private use of a company car will, for income tax purposes, be calculated as a percentage of the original market value of the car. The percentage will vary from 12½ per cent, where the car only is supplied, to 20 per cent, where all costs are met by the employer. Tapering relief will be available where the business mileage exceeds 10,000 miles. Where the business mileage exceeds 25,000 miles there will be no chargeable benefit. In the case of bona fide car pooling arrangements, there will be no charge to tax in respect of any incidental private use.
The proposal to grant income tax relief to elderly persons in respect of private tenancy rents is contained in section 5. Relief will commence in 1983-84 and will be based on the rent paid in 1982. The maximum amount of rent on which relief will be granted is £500 in the case of single or widowed persons, and £1,000 in the case of married couples jointly assessed. The special PRSI allowance of £312 for those who pay PRSI contributions at the higher rates is confirmed in section 6.
There is a concession in section 7 for those who are obliged to pay excess life assurance premiums because of ill-health. Section 8 deals with loans to employees at preferential interest rates. I gave notice in the budget statement of my intention to look at the tax provisions relating to preferential loans. If no changes were made, those with low interest loans would have a considerable extra advantage vis-á-vis persons borrowing at commercial interest rates. Besides, there would be an extra risk that low interest loans would be used as a means to circumvent the new interest provisions and the new benefit-in-kind provisions for motor cars. In future, the benefit from a preferential loan, that is, the difference between paying interest at the preferential rate and at the specified rate of 12 per cent, provided for in the Finance Act, 1979, will be charged to income tax. The borrower will be treated as having paid interest at the specified rate and will qualify for income tax relief on the interest, subject to the normal rules. Ordinary employees with preferential loans should be largely unaffected by these changes. For example, the new arrangements will not increase the income tax liability of a married man with a preferential housing loan of up to £40,000.
Section 9 exempts, with effect from 1980-81, military service pensions paid to veterans of the War of Independence, their widows or dependants.
Sections 10 and 11 bring the limits which deal with recovery of tax from defaulters into line with the new jurisdiction limits of the District and Circuit Courts, and section 12 extends for a further year the residence-related employment scheme which was first introduced in 1979.
Sections 13 to 16 deal with the measures announced in the budget relating to the taxation of farming profits. The rate of stock relief available to farmers in respect of increases in the value of their stock is being raised from 100 per cent to 110 per cent. The special arrangements for payment of income tax in two instalments by full-time farmers is being extended for another year. The credit for rates against tax on farming profits in 1982-83 will be one-half of the rates paid for 1981 and the remainder will be treated as a deductible expense in computing taxable profits. This follows from the reduction in rates. The tax allowance in respect of capital expenditure incurred on the construction of farm dwelling houses is being removed.
Section 17 provides for the abolition, from the date of its inception, of the agricultural resource tax, which was discontinued last year. The tax which has been collected in respect of the year 1980-81 will be refunded. Payments under the employment contribution scheme and grants towards employment in the service industries are exempted from tax under section 18, and section 19 gives effect to the budget proposal to provide tax relief for the cost of repairs to buildings which are of significant scientific, historical, architectural or aesthetic interest. This relief is conditional on reasonable access to the building being allowed to the public. Section 20 disallows business entertainment expenses incurred on or after 26 March as a deduction for income tax or corporation tax purposes.
The new arrangements for interest relief are set out in sections 21 to 23. Because of the serious technical difficulties to which they would give rise, it was not possible to implement in full the earlier budget proposals. Apart from transitional arrangements in respect of loans in existence before 26 March or 6 April, as appropriate, relief will in general be confined to interest on borrowings to purchase, improve or repair the taxpayer's sole or main residence. In the case of other loans, no relief will be allowed for interest on the amount by which the borrowings exceed the specified limits. These limits are £5,000 for married couples, £3,600 for widowed persons and £2,500 for single persons.
For overdrafts and credit card facilities, only the amount of the debt balance on 25 March will qualify for relief and then for the current tax year only. Special provisions will, however, apply where overdrafts or credit card facilities in existence on 25 March are replaced by loans. The existing overall limits on the total amount of interest qualifying for income tax relief will continue to apply. As an anti-avoidance measure the new arrangements are also being extended to companies in respect of their non-trading interest.
Section 24 continues stock relief for a further year. Under the following section, the special arrangements between the Revenue Commissioners and the building societies for determination of tax due on interest and dividends are, broadly, to remain unchanged for 1982-83. However, following the recent agreement on mortgage interest rates between the Minister for the Environment and the building societies, provision is also being made for a decrease in the overall tax payable in 1982-83 by societies which maintain certain interest rate levels on housing loans.
The basic rate of corporation tax is increased from 45 per cent to 50 per cent in section 26. There are consequential adjustments in the small companies' rate from 35 per cent to 40 per cent and in the low rate applicable to certain bodies from 30 per cent to 35 per cent. These increases will take effect as from 1 January 1982 onwards. This section also ensures that the 10 per cent rate for manufacturing companies will remain unchanged. In section 27, the due dates of payment for corporation tax are brought forward by three months and the period of grace during which interest is not charged on overdue corporation tax is reduced from two months to one month.
Arising from the scheme announced by the Minister for Agriculture on 31 March for aiding farmers in severe financial difficulty, there will be a tax credit against the corporation tax payable by the two main banks, Allied Irish Banks and Bank of Ireland. The other participants in the scheme — the ACC, Ulster Bank and Northern Bank — will receive a direct grant and provision has already been made for this in the budget. Section 28 now makes provision for the tax credit.
Chapters VI and VII of the Bill contain the sections relating to the various capital gains tax changes. Section 30 provides for the abolition of tapering relief and for the increases in the general rates of capital gains tax announced in the budget, including the special higher rates for short-term gains. These rates are applied to companies, for corporation tax purposes, in section 31. There has been loud criticism from some quarters about the increases in the rates of capital gains tax and especially the new high rates on short-term gains. The yield from capital taxation has been much too low and substantial increases are fully justified. In section 32, the position of small investors is recognised and there is a substantial concession for them. The present annual exemption limits for capital gains tax are being increased fourfold and the new thresholds will be £2,000 for an individual and £4,000 for a married couple.
Section 33 speeds up the collection of capital gains tax due on disposal by non-residents by bringing forward the tax assessment and payment dates. The procedures relating to the withholding of part of the proceeds on the sale of land and certain other assets are spelt out in section 34. The 30 per cent deduction which came into force on budget day in respect of disposals of development land was an interim measure and will not be continued after the enactment of the Finance Bill. Instead, the pre-budget criteria for clearance certificates will be restored and such certificates will be issued automatically to Irish residents. The section also provides for refunds in regard to the special deductions made since budget day where no liability to capital gains tax arises or to the extent that any deduction made exceeds the capital gains tax liability.
Sections 36 to 40 contain the provisions dealing with the taxation of disposals of development land. The provisions will apply to disposals made after 27 January, the date on which the measures were first announced. The rate of tax applicable to transactions which took place between that date and 26 March will be 45 per cent. The new 60 per cent and 50 per cent rates will apply as and from 26 March. Special provision is made for the disposal by an individual of small sites where the total consideration for all such disposals in any one year does not exceed £15,000. These disposals will be taxed under the general capital gains tax rules rather than under the special development land arrangements.
Indexation relief will apply only to the current use value of development land on the date from which the gain is computed. Roll-over relief will not apply in the case of disposals of development land but an exception is being made where the land in question is being disposed of by sports clubs. While these clubs will continue to be allowed to avail of roll-over relief, they will otherwise be subject to the arrangements for development land transactions. Only development land losses may be set off against development land gains. Losses on other disposals may be set off only against gains arising on non-development land disposals. This prevents the manipulation of losses to reduce the special tax liability now being imposed on disposals of development land. In addition, companies will be charged to capital gains tax rather than corporation tax on gains from development land disposals. If a disposal constitutes trading in development land by a builder or land-developer, the tax charge will, as at present, be to corporation tax or income tax and the new provisions relating to the special capital gains tax on development land will not apply to this situation.
Chapter VIII makes provision for the establishment of the employment incentive scheme. The sections in this chapter provide that a deduction of £10 a week will be allowable in computing profits chargeable to corporation tax for each week in which a new employee, taken on by a company between 1 July 1982 and 30 June 1983, is retained in employment. The base period for measuring the increase in employment will be the previous 12 months, that is from 1 July 1981 to 30 June 1982.
Sections 49 to 57 make provision for the scheme of income tax relief announced in the budget, for shares given to employees under profit-sharing arrangements. The sections provide that ordinary shares appropriated to an employee up to a maximum value of £1,000 in any one tax year will qualify for tax exemption if they are held for seven years. If the shares are disposed of within seven years the full tax charge may be reduced depending on the number of years they are held. This is an entirely new development and I hope that it will make a useful contribution to the evolution of a better industrial relations environment.
There was a strong commitment in the budget to deal more effectively with tax evasion and tax avoidance. In accordance with this commitment, the rate of interest charged in back duty settlements is being increased from 1.25 per cent to 2 per cent from 1 November next and section 58 provides for this. The monetary penalties for a range of offences are being increased in section 59, and section 60 is designed to strengthen existing measures which counter tax avoidance through dividend-stripping.
I announced in the budget that the proposal of the previous Government to impose a charge of £20 on each person leaving the State on a chartered aircraft would not be implemented. I announced that it was proposed instead to spread the tax over all fare-paying travellers by applying a charge of £2 per passenger on cross-Channel sea routes and £3 per passenger on all other sea and air routes. Section 62 of the Bill implements the proposal which will apply to tickets purchased in the State on or after 1 September 1982. The charge will, however, not apply to travellers going to Northern Ireland. As regards disabled persons, the charge will not apply to those who because of physical handicap are transported in wheelchairs or on stretchers, and invalids in general will be exempted when travelling to a recognised place of religious pilgrimage.
Section 63 confirms the budget increases on petrol, road diesel and auto-LPG. It provides that the increase will not be passed on to scheduled road passenger services and that excise duty will be repaid on oil contained in goods which are exported. The section also extends the present duty repayments scheme for excise duty on oil used by the horticultural sector, by providing on a temporary basis for repayment of the total amount of excise duty.
The rate of duty on motor vehicle parts and tyres is reduced by one-third from 1 October 1982 in section 64. The reduction should help to encourage a higher standard of maintenance of the existing motor vehicle stock, adding to its useful life and improving safety levels. I am happy to be able to propose the implementation of this constructive measure which is expected to cost about £5 million in a full year. At the request of the trade, I am reviewing the proposed arrangements for implementation. In section 65 the rate of duty on dance hall licences is reduced. The duty is reduced from £100 to £75 for the annual licence and from £15 to £10 for the monthly licence. This should be of benefit to community halls in particular. I would like to remind Deputies that for dances where drink is served after normal hours the budget in fact provided for a substantial increase in the duty on special exemption licences. This is provided for in section 70 below.
Section 66 increases penalties for betting duty offences. The penalty is increased from £500 to £800 for non-payment of duty or for breach of regulations and for unlicensed bookmaking. The penalty of £50 for obstructing an officer of customs and excise in the course of enforcing betting duty provisions is being increased to £500. Penalties for excise duty offences may be mitigated by the courts to one-quarter of the full penalty at present and, in section 67, this threshold is now being raised to one-half. These changes are being made to take account of the fall in the value of money and to maintain the impact of the penalty provisions.
Sections 68 and 69 provide for the changes in road tax announced in the budget and for increases in the fines for certain road tax and vehicle registration offences. In section 70 a number of orders made under the Imposition of Duties Act, 1957 are being confirmed in accordance with the required procedure including the orders made by the Government which came into effect on 13 March increasing various excise duties.
In the value-added tax provisions in the Bill there are no significant changes from the budget proposals. Section 72 provides for the application of the 18 per cent VAT rate to auctioneers' and estate agents' fees in respect of the purchase and sale of land and buildings. Section 73 is a technical provision relating to the application of VAT to barristers' fees. Section 74 confirms the budget increases in the VAT rates, as from 1 May, from 15 and 25 per cent to 18 and 30 per cent respectively, and maintains the 3 per cent effective rate on building and certain agricultural contracting services. It also extends, from 1 September 1982, this 3 per cent rate to auctioneers', estate agents' and solicitors' fees relating to the purchase and sale of agricultural land and farm accountancy and farm management services. Section 75 confirms the increase, from 1 May 1982, in the flat-rate addition for farmers from 1.5 to 1.8 per cent, maintaining the compensation to farmers for the increase in VAT rates on their business requirements.
Sections 76 and 77 provide for the imposition of VAT on imports. The Revenue Commissioners have already issued an advance public notice giving details of the new system which will take effect from 1 September. The essential feature is that it will apply to all goods whether for immediate use or for warehousing. Sales of goods in warehouse will also become liable to VAT in the normal way. While the new system will to some extent increase the working capital requirements of industry, its dampening effects on economic activity generally will be far less than that of the alternative of increased taxation. It will also help to curb losses from tax evasion, arrears and insolvencies and will remove the advantage imported goods are seen to have at present over domestically produced goods. These arguments apply to consumer and industrial goods alike which is why no exceptions to the scope of the new measure have been allowed. In line with this change, the ordinary domestic system of charging VAT will apply to sales by registered persons in Shannon to persons elsewhere in the State. The monetary penalties for VAT offences are increased in section 78 in line with similar increases for other taxes.
Sections 79 to 81 amend the various schedules to the VAT Act, 1972 to give effect to the decisions to apply VAT to fees of the legal and accountancy and related professions from 1 September, and the reductions in VAT on furniture and joinery, furnishings, floor coverings and books from 1 May. The reductions have been extended to include the application of VAT at the 18 per cent rate to a number of minor items with effect from 1 May.
Provision is made in section 82 for the deferment until next January of the increase in the 15 per cent VAT rate in respect of tourist services to non-residents in accordance with fixed price contracts entered into before 1 January 1982. This concession is expected to cost nearly £1 million and should be of considerable benefit to those sections of the tourist industry with long-term commitments to overseas tour operators.
I would now like to turn briefly to the sections in the Bill dealing with stamp duties. Section 83 provides for the imposition of the levy of £20 million on the banking sector. The base for the levy will be, as last year, the current and deposit accounts of each bank, subject to certain adjustments. The duty will be calculated by reference to the average level of accounts at stated dates in September, October and November 1981. The rates of duty will be 0.2 per cent on the first £100 million of taxable resources and 0.35 per cent of the remainder. A levy of 1 per cent on certain insurance transactions is introduced in section 84. The base for the levy will be gross direct premium income of insurance companies from within the State with certain specified exemptions. There will be no levy in respect of insurance business written abroad as this would affect competitiveness in foreign markets.
Stamp duty on gifts of land to young trained farmers is being removed for a two-year period under section 85. In order to avail of this concession, which will apply from the date of enactment of the Finance Bill, a farmer must be under 35 when the deed of transfer is executed and be in possession of an appropriate training qualification. It is hoped that the concession will go some way towards ensuring that land will pass more quickly into the hand of those who are best equipped to work it with maximum efficiency and skill.
In section 86 provision is made for various increases in stamp duties as well as for the introduction of a fixed duty of £1 for all new insurance policies other than policies of life insurance. Transactions between close relatives, which are at present liable to a maximum stamp duty of 1 per cent, will in future be liable at half the normal rates which range from ½ per cent to 6 per cent. These changes were announced in the budget. The following two sections provide for the continuation of two stamp duty measures which were implemented by Government orders in 1981.
Part V of the Bill — that is sections 90 to 94 — is concerned with capital acquisitions tax. There is a provision that the upper limit on the special agricultural relief for farmer beneficiaries will be increased by £50,000 to £200,000 in regard to gifts or inheritances taken on or after 1 April 1982. Gifts and inheritances received by a beneficiary from different sources on or after 2 June 1982, the date of publication of the Finance Bill, will be aggregated to determine a beneficiary's capital acquisitions tax liability on a particular benefit. This changes the previous arrangements whereby only gifts and inheritances acquired from the same disponer were added together. From now on all gifts and inheritances taken by a beneficiary from all disponers of the same class will be added together for tax purposes but there will be no aggregation of benefits across the four classes in the tax.
There are a few matters which do not arise in the text of the Bill but on which I would like to make some comment. In the budget it was indicated that steps would be taken to ensure that certain earnings paid by way of fees or commissions would be subject to taxation. This is a complex issue because of the wide variety of payment methods. It is, however, under continuing examination and I hope to be able to introduce legislation at a later date to close any loopholes that are used for tax evasion.
Deputies will recall that during the course of my Financial Statement of 25 March last I indicated the Government's intention to introduce taxation on derelict sites and on certain office developments with a view to ameliorating dereliction in urban areas. The Bill before the House does not provide for these taxes.
The main purpose of the proposed taxes is to make a positive contribution to eliminating the environmental blight of urban areas — particularly the inner city areas — by making it less profitable to hoard unsightly areas in anticipation of development and by extracting a levy on completed office developments. The principal public authority agents of urban renewal are, of course, the local authorities and I would, therefore, see whatever revenues might arise from these taxes accruing to the local authorities. The Minister for the Environment, who of course has responsibility in the area of urban renewal and also for the construction industry generally, is at present examining the possibility of developing these taxes on the lines of local authority taxes.
In line with the increase in the basic rate of corporation tax from 45 to 50 per cent, the normal tax credit will be changed from 30/70 ths to 35/65 ths in relation to distributions made on or after 6 April, 1983. I will provide for this in next year's Finance Bill.
I also have under consideration the question of taxation of motor car allowances. In some instances these allowances are extremely generous by any standards. In view of the increase in the benefit-in-kind provision where an employee has the use of a company car, it is only proper that we should consider the benefit where an employee uses his own car for business.
In a few areas the Bill contains significant modifications of proposals made in the budget. These modifications are being introduced either because of technical problems, as in the case of the interest proposals, or because on further examination it became clear that the original proposals were imposing too severe an extra burden on some taxpayers. To put these changes in proper perspective, I should point out that their overall effect on revenue this year will amount to a reduction of approximately £2½ million.
I have outlined for the House in, I hope, reasonable detail the main features of this Bill. Because of the various important changes being made in our tax arrangements, the Bill is quite complex. As I said at the outset, I see it as a significant step forward towards a fairer tax system. I recommend the Bill to the House.
