I move: "That the Bill be now read a Second Time."
The principal function of the Finance Bill is to give statutory effect to the taxation changes announced in the budget statement of 25 January. Some of these changes are rather complex and only a summary description of them was possible in the course of the budget statement. In addition, there are a few significant variations on the earlier proposals. As well as spelling out the full details of the budget items, the Finance Bill also incorporates a number of further taxation changes which are intended to close tax loopholes and to facilitate tax administration.
Initially, the budget was subjected to criticism on the grounds that it was neutral in effect and, it was held, therefore failed to give an adequate stimulus to growth. This criticism of course ignored the fundamental necessity to maintain the policy of restoring order to the public finances. The first requirement for adequate growth in the economy is that there must be sound management of the finances. I would think that by now we must surely have learned this lesson. The budget had to strike a delicate balance in continuing the process of reducing Government borrowing, while at the same time recognising the necessity to promote employment to the maximum extent reasonably possible. In this situation the most rational course of action was to achieve a modest reduction in borrowing as a percentage of our gross national product. The budget was also criticised on the other hand for not achieving a sufficient reduction in borrowing. This cross-current of conflicting criticism strengthens my belief that this year's budget hit the right balance in our present circumstances.
While on the subject of the budget, I want to refer briefly to the first quarter Exchequer returns which were published yesterday. These show that the trends in revenue and expenditure are broadly in line with the budget projections. It is much too early at this point to draw conclusions about the year as a whole. Improvements which I introduced last year into our systems of monitoring both revenue and expenditure will ensure that any adverse trends will be immediately identified, so that the necessary action can be taken quickly.
There is a school of thought which argues for more capital spending on the grounds that this gives a useful stimulus to the economy and, indeed, we heard some exponents of this school of thought in the last few days. Capital spending which does not yield a worthwhile return is wasteful, and unfortunately we have had too much experience of this kind of capital expenditure in recent years. I would not hesitate to support capital projects which would ensure an economic return, but I am keenly aware that capital expenditure is not always necessarily wise. Borrowing for capital purposes is just as expensive as borrowing for current purposes and it is therefore essential that we pick capital projects which yield an adequate return.
The encouragement of more employment is our top priority. The first requirement is to secure the right financial and economic climate for the creation of employment because without this our position will deteriorate further rather than improve. There are other steps that can be taken. Even after taking account of exchange rate changes, we have suffered a 5 per cent loss in wage cost competitiveness in five years. If standards for pay deals are to be set this year by the small number of enterprises which still enjoy a strong competitive position, then more jobs will be lost in the economy and the unemployed will have to wait even longer to find re-employment or, in many cases, to find employment for the first time.
There are provisions in the Bill before the House which are specifically designed to encourage employment and I will turn to these in a moment. There are now grounds for optimism that the worst in this regard is over and that the employment outlook will gradually improve.
I now turn for a moment to general taxation policy. I have said consistently that I consider some tax levels to be too high and that I aim, in particular, to reduce income tax levels and to rationalise our VAT system. Tax reductions must obviously depend upon the overall budget picture and especially on policy in relation to public expenditure. Tax reductions must also presuppose a widening of the tax base and some provisions in today's Bill, which have met with strong opposition from various interest groups, will have this effect. The individual tax reductions in the budget were modest and they had to be matched by increases elsewhere. It is my intention next year and in the following years to make further and more rapid progress towards a better and fairer system of taxation, but I must make the point that this is possible only if expenditure is properly controlled and some tax privileges are curtailed.
The Second Report of the Commission on Taxation has just been published and I would like to take this opportunity to thank the members once again for their work, which has been carried out with great thoroughness and dedication. I will give my views in detail on this second report on another occasion, when I have had the opportunity to study it thoroughly. I would point out, however, that the commission favour the dismantling of a number of tax reliefs and incentives which at present involve a considerable loss of tax revenue and I must say I look forward with interest to see what reactions are evoked by this line of thinking.
I have been criticised by some commentators and, indeed, in this House, for not paying attention to the recommendations in the first report. This simply is not true. There was never any suggestion from the commission that a new tax structure could be introduced at short notice and I have consistently drawn attention to the fact that, especially in view of our high level of taxation, some of the commission's main recommendations are not a practical option at this time. Having said that, however, I endorse the case presented by the commission for lower rates of taxation, for an extension of the tax base and for a much more simplified tax code. This is the strategy that I would like to follow and the fact that the commission's recommendations may not be matched line by line or case by case is not to be taken as an indication that these recommendations are being discarded.
I now turn to individual aspects of the Bill before the House. As it is a lengthy Bill, it would be impractical to go through it section by section, and the explanatory memorandum, in any event, describes the essential features of each section. I intend therefore to concentrate mainly on the more significant items which were not fully detailed in the budget statement.
The early sections relate to the budget decisions on income tax, including the changes in allowances, rate bands and exemption limits and the increase in the specified amount of tax payable by the self-employed from 80 to 85 per cent. There are no changes of any significance from the budget proposals in this respect. In relation to the increase in the relief for an incapacitated person, in section 8, I would like to point out that the maximum deduction will be determined by the net cost incurred, subject to a ceiling of £2,000. In order to shut off a tax avoidance loophole that was in danger of being exploited, I am providing in section 9 that, where there is doubt as to the bona fides of a sports club, income tax exemption will be subject to the approval of the Revenue Commissioners. Genuine sports clubs which apply their income for the sole purpose of promoting sports will not be affected by this change.
One of the major items in the Bill is the proposed income tax relief of up to £25,000 a year over a three-year period for long-term risk capital. This is the subject of Chapter III of the Bill. In the budget statement I indicated that the relief would apply in respect of investment in new manufacturing enterprises. This restriction was proposed in order to ensure that investment will be directed towards areas of greatest initiative and highest risk. If, however, the relief were confined to new ventures, it is unlikely that the scheme would have a significant impact. Consequently, the area of eligibility is being extended, in section 16, to include new and existing trades in manufacturing and certain services, provided that the investment is used to create or maintain employment and fulfils a number of other criteria related in a very direct way to development.
I have great hopes for this new incentive. It is directed for the benefit of manufacturing and international services, which are among the sectors of the economy with the highest risk levels and which have consequently had little attraction up to now for investors who prefer a safer investment. I see this as a particular opportunity for groups of workers who become redundant and experience difficulty in raising finance to start a new venture.
In order to ensure that the scheme makes a genuine contribution to the generation of new employment rather than being used as a tax avoidance device, a number of important safeguards are built into the proposed legislation. Relief will not be available under the scheme to paid directors or partners of the company or their close relatives or to persons holding more than 30 per cent of the share capital of the company. The shares must be held for a minimum of five years. To be eligible the shares must be ordinary shares in an unquoted company and satisfy certain other conditions as set out in section 12.
The scheme should be attractive to small and large investors alike as relief will be given either for direct investment greater than £500 or for investment through a designated fund without a lower limit in the case of investments through the firms. This should encourage many small savers to begin to invest directly in industry. The conditions which funds must satisfy in order to be designated in accordance with section 27 are not to be interpreted as an assurance or guarantee of the viability of a particular fund but are intended to establish the fact that investment through that fund is eligible for the relief proposed here.
The scheme is a radical new departure which, if successful, could significantly influence investment patterns to the overall benefit of the economy. The limit of £25,000 on the tax relief may appear to be on the generous side but I am convinced that such a limit is fully justified if the aims of the incentive are to be realised.
It has been said to me since the publication of the Bill that these new tax provisions are perhaps too complex. A degree of complexity is inevitable and results directly from the fact that I want to ensure that the measure has the desired effect. It is essential that we define very carefully the qualifying companies and trades and the conditions under which the relief is available. The degree of specification in the legislation is no more than is necessary to ensure that it achieves its purpose.
In this connection I expect to hear the criticism of complexity being voiced in the next few days and during the passage of this Bill but the point I wish to make in advance of all that, and one that I should like people who might so criticise the Bill to take into account, is that we have here a measure that has a very specific aim. We wish to ensure that that aim is achieved. It is an aim related directly to increasing employment and to improving the productive base of our economy. I do not wish to see a situation in which any of the benefits of this measure would leak out to uses which would not make a contribution either to development or to employment. The measure is worded in such a way as to ensure that it hits the target we have set for it.
I have seen criticism of the Bill from the trade union movement on the grounds that it is weak on anti-evasion and anti-avoidance provisions. I should like to make it very clear that I reject this criticism. A number of such provisions are contained in the Bill and perhaps the most prominent is in section 29 which deals with the practice of bond washing. The announcement of this new measure in the budget led to a strong overreaction which temporarily disrupted the gilt market but the market has settled down and is functioning normally, having absorbed the change. It is, of course, one of the functions of a market to adjust to changes in conditions.
Sections 30 to 38 of the Bill contain various tax provisions which have for the most part already been signalled in the budget. In section 31 the scope of profit-sharing schemes is being extended. To date interest in these schemes has been rather disappointing and I hope that the extensions in this Bill will generate a bigger response. Profit-sharing schemes can do much for the improvement of industrial relations and I should like to see both employees and trade unions taking a more active involvement in the development of these schemes. There is a provision in section 32 for tax relief of these schemes. There is a provision in section 32 for tax relief on donations to certain bodies for the advancement of subjects related to the arts. The intention here is to encourage donations for schools of music, art, drama and so on.
In section 33 provision is made for the continuation of the existing stock relief scheme for farmers. The requirements of stock relief in agriculture are different from those in the construction industry which gave rise to the new scheme set out in Chapter VIII of the Bill. On reflection I have concluded that we should retain the essential nature of the existing scheme for agriculture. I will however, bring forward amendments on Committee Stage to provide that the period of liability for clawback should be ten years following the year in which the relief is given and to improve the provisions relating to succession.
A number of capital allowances which were due to expire at the end of March this year are being renewed for further periods. These include allowances for plant and machinery, industrial buildings, multi-storey car parks and toll roads and bridges. I am extending also the scope of the industrial buildings allowance to include expenditure on laboratories used for analysis work connected with mineral and oil exploration.
The Bill provides in section 39 that, with effect from budget day or 1 March where appropriate, capital allowances on leased machinery or plant may be written off against leasing income only and not against all income as was previously the case. It provides also that the allowances will not be available for group relief purposes. These restrictions will not apply where machinery or plant is leased as part of a grant-aided incentive package by one of the State industrial promotion agencies. This embodies the budget decision to continue the present treatment of leased assets only in the case of grant-aided industrial projects.
Changes in the treatment of new section 84 loans and artificial preference share arrangements are contained in Chapter VI. The provisions are based on the terms of the budget announcement subject to certain exceptions from the withdrawal of tax advantages on section 84 loans subsequently decided on by the Government. These exceptions comprise manufacturing companies, certain service activities and subsidiary companies of agricultural or fishery co-operatives. The loss of the tax advantages under section 84 lending in these sectors would have meant a substantial additional cost burden for many businesses which are seriously affected by the present recession. In recognition of the difficulties facing industry at present, the Government have reviewed the budget proposal and decided on the modifications which I have mentioned. These are contained in section 40 of the Bill. In section 44 the transition period within which advance corporation tax will be payable at 50 per cent of the full rate is being extended up to the end of this year. This concession will cost the Exchequer about £5 million in 1985.
Chapters VIII and IX contain the new provisions for stock relief for qualifying traders other than farmers. The new system will broadly relate relief to price changes only and relief once granted will, in general, not be liable for clawback in subsequent years. In addition, relief granted under the old system which would have been liable for clawback due to decreases in stock levels in the year to 5 April 1983 or in any subsequent year will not be withdrawn. While clawback may still arise under the old or new system in exceptional circumstances, such as on a cessation of a trade, there are now provisions ensuring that clawback will not operate in cases where a qualifying trade changes hands as a going concern.
The amount of relief to be provided in the first year of operation of the new system will be based on 3 per cent of the value of a trader's opening stock. This gives effect to the budget decision that in order to control cost relief equal to 33? per cent of the price increase in the basis period will be given. The percentage to be used for calculation of relief this year will be subject to review in later years.
Section 64 provides for a restriction of the relief from capital gains tax which is available on the disposal of a principal private residence. Where such property is disposed of at development land prices, the relief will be confined to the gain on its existing use value as a residence and any development land gain will be taxed at the appropriate rate.
I now turn to indirect taxation. There are no major changes under the heading of customs and excise apart from those already announced in the budget. The provisions in sections 73 and 74, however, which deal with evasion of betting duty, have generated considerable interest. More effective measures to deal with arrears of duty and further penalties for illegal bookmaking are being introduced as well as penalties for fraudulent involvement of bookmakers' assistants. Additional grounds for refusal of certificates of suitability of bookmakers' premises are also proposed.
While some bookmakers have expressed dissatisfaction that the legislation does not go far enough to penalise those who engage in illegal bookmaking, the principal difficulty is to identify those acting illegally; once identification is made, the statutory penalties are considered to be adequate. I can give an assurance that the Revenue Commissioners will in future adopt a more aggressive approach to the pursuit of offenders under the new powers.
The main item in the Bill under the heading of value-added tax is the imposition of the 8 per cent rate on clothing. Regulations will be made to defer, until 1 September, the payment of VAT at point of importation on clothing materials which are currently zero-rated. Representatives of the clothing industry have informed me that seasonal factors in their business create a situation in which the earlier application of payment at point of importation on clothing materials would cause difficulties. These difficulties can be avoided without significant loss of revenue and regulations will be made to enable materials, at present benefiting from the zero rate, to continue to be imported by registered persons up to 1 September without payment of VAT at point of entry.
As I indicated to the House on budget day, the continued zero-rating of certain children's clothes will be operated on the basis of appropriate sizes of clothes, not on the age of the particular child involved. It is intended that clothes for children of average build under age 11 years will be zero-rated. Since then discussions have taken place between the Revenue Commissioners and the clothing industry to determine what the appropriate sizes should be. Details will be published soon by the Revenue Commissioners and suitable regulations will also be made.
Section 83 contains two changes to tighten up the application of annual turnover limits for VAT registration purposes, and in sections 86 and 87 the powers of VAT inspectors are being extended to enable them to carry out their duties adequately in the course of their periodic visits to traders' premises. Section 92 provides for the reduction of the VAT rate from 23 to 18 per cent in the case of short-term hire of cars, caravans and boats. This reduction is being made to benefit the tourism industry.
Part IV of the Bill deals with stamp duty and the bank and insurance levies. The provisions for the calculation of the levy on the banks are broadly similar to those used in previous years and are designed to yield £25 million in as fair a manner as possible. The basis on which the levy is charged in the case of life insurance business is being altered. This change was requested by the insurance industry and it will have no effect on the yield. I am providing in section 95 for the extension for a further year of the stamp duty relief in respect of the transfer of land to young trained farmers. This relief would otherwise have ceased in July.
The changes in capital acquisitions tax and the new tax on discretionary trusts, which I announced in the budget, are the main items in the final sections of the Bill. It is difficult to legislate adequately in the case of discretionary trusts and to reach a proper balance which will avoid penalising trusts set up for genuine purposes while at the same time minimising the opportunities for avoidance or evasion. I am confident that this legislation secures a reasonable balance and that it will not cause hardship. The reorganisation of the capital acquisitions tax is overdue. The spread of tax rates was confusing, to say the least, and the complete aggregation of benefits is a sensible and fair arrangement.
Last year I announced that provisions would be incorporated in this Bill to counteract abuses in relation to insurance-linked investment schemes. I have accordingly prepared appropriate legislation. As an alternative to this legislation, the industry has proposed the negotiation of a code of practice and in view of this I have deferred the question of legislation for the time being.
The terms of a code of practice are still under discussion but, if it is to be effective, it must apply in respect of all new investments from the date of its introduction and remove the potential for abuse by requiring that these investments conform to certain rules. I hope that the matter can be settled before we debate this Bill in Committee. If a code of practice is agreed, it will be put into operation shortly after the enactment of the Bill.
Arising from the suspension of the system of certificates of reasonable value, I will be providing on Committee Stage that as from the date of enactment of this Bill a CRV will no longer be required by purchasers of residential accommodation for the purpose of claiming tax relief under section 23 of the Finance Act, 1981, as extended in the Finance Act, 1983.
This Bill is an important piece of legislation which provides for substantial improvements in our tax code. In the course of my Budget Statement I set out the principles that will determine the Government's approach to tax policy over the next few years. We are working towards a more equitable and more efficient taxation system based on a wider tax base and lower rates of taxation. We have a long distance to go yet before we can claim that these objectives have been achieved but progress is being made and the Bill before the House is evidence of this.
During the course of this debate I am quite sure that a number of suggestions will be brought forward to relieve taxation in this or that area, to provide for greater levels of incentive and, in fact, to do a great many things which would alleviate the tax burden on different groups or different individuals in our society. I have to say, as I said a few moments ago, that I have every sympathy with that general approach and every intention of taking opportunities which present themselves of alleviating the tax burden on business, or our productive sectors and ordinary individuals. We must, nevertheless, bear in mind the fact that our total tax revenue today, even with our present rates of taxation, is nowhere near adequate to cover the total expenditure which we have provided for during the course of this year. That is a single fundamental point which is very often missed in discussions on taxation or on public expenditure. If we were now covering our expenditure requirements, even our current expenditure requirements, from tax revenue, we would all feel that we had a great deal more leeway to adjust the incidence of our tax system, to redistribute the incidence, or even to alleviate the total burden. Since we are not in that position it seems to me that simply to make the case for alleviation of taxation, while we might all agree with it, is not enough in itself.
This Bill, as I said, is designed to give statutory effect to the provisions of this year's budget. Since the budget was announced and passed by the House no new factors, no new circumstances, have come to light which would in any way lead me to change the overall thrust of budgetary policy which as I said at the time and again today, is carefully constructed to fit in best with the circumstances in which we find ourselves this year and to leave us in a position where we can continue during the course of this year to make the progress which we made during last year in terms of total production, total exports, and to put ourselves in a position to benefit from the further buoyancy which we expect to find in world trade during the course of this year so that we can, by the measures which are set out in this years budget, and indeed by other measures, get whatever benefit is available that we can direct into the expansion of employment in our economy.
This Bill, as I said, is intended to give statutory effect to those provisions. The Bill is what results from the budgetary policy we have had this year. It is in that sense, and in the context of those overall objectives, that I will approach the debate on this Bill, which I commend to the House.