I move: "That the Bill be now read a Second Time."
This Bill provides a statutory basis for the taxation provisions which I announced in this year's budget and for other tax changes which the Government now consider necessary.
The measures in the Bill are an essential part of the Government's overall strategy for economic and social development.
Everything we are doing is aimed at increasing growth and jobs in our economy.This applies as much to the tax measures we have before us in the present Bill as it does to the expenditure side of the budget, the ongoing implementation of the Programme for National Recovery and the recently published National Development Plan.
All these elements are meshed together in a coherent overall strategy. The problems and development needs of the economy are such that there can be no question of double think or lack of consistency between the different parts of that stragegy. Everything must hang together in a consistent and carefully-targeted approach aimed at securing more growth and more jobs.
In view of last week's comprehensive debate in the House on the National Development Plan, I do not propose today to deal at any great length with the economic situation. Before turning to the main provisions of the Bill, however, I would like to comment briefly on recent trends, to underline again some of the points touched on in last week's debate, and to review the Government's approach to tax reform.
This year's budget won widespread support throughout the community. Developments since the budget suggest that the strategy on which it was based is firmly on course. The Exchequer returns for the first quarter were very encouraging.They support the view that the strengthening in economic activity which was projected in January is in fact taking place. There is a strong recovery in consumer spending. Retail sales in January were up by 7 per cent in volume on the year before. Unemployment in the first quarter of this year was substantially lower than in the first quarter of last year. Manufacturing employment in the final quarter of 1988 — the latest period for which figures are available — shows a year to year increase for the first time since 1980. In the building industry, employment in the larger firms in January and February was some 7 per cent higher than in the corresponding two months of 1988. This, together with the increase of 30 per cent in housing starts in the first two months of the year, is an indication of the substantial recovery which is now under way in the building industry after several lean years.
The trends so far support our expectation of a further substantial balance of payments surplus this year, of broadly the same order as last year. Exports have risen by 24 per cent in value year to year in the first two months of this year. This reflects the continued buoyancy of our export markets and the all important improvements in competitiveness which have been made here. There has also been strong growth in the value of imports. Imports of capital goods are up by 20 per cent — a good omen for investment and future output. As expected, imports of consumer goods are also strong in response to the recovery in private consumption. The challenge to domestic producers is to capture a growing share of this recovery in consumption and not to lose out, through price increases, to overseas producers selling into the home market.
The overall prospect for 1989 remains, therefore, one of strong economic growth. I am confident that the budget time prediction of a 3½ per cent increase in real GDP will be realised and might be bettered.
Everybody is taking heart from these developments. There is a new air of confidence around. It is good to see new investments and projects springing up all around the country. While the problems are still formidable, people now see that the earlier pattern of despondency and economic decline can be broken.
It is no part of my task to dampen down this new enthusiasm — the opposite is the case. I must underline again, however, that in taking satisfaction from the progress made to date we must keep our feet firmly on the ground. Easy options must be avoided. An increase in costs and inflation — even from the low base we have achieved — is no substitute for higher productivity and efficiency. Jobs will be lost, not made, if we do not continue tight control of costs right across the economy.
For this reason it bears repeating that much of the rise in prices in the three months to February — over 1 per cent, leaving aside non-recurring budget effects — originated within our own economy rather than from abroad. If we are not to put at risk our hard-won success in getting inflation down, all sectors must continue the restraint in evidence up to recently and avoid rekindling domestic inflation pressures. Renewed inflation can only do harm to our international trading prospects, diminish our growth potential, and ultimately inhibit the recovery in employment now under way.
The improvement in the public finances over the past few years has been dramatic. The trends so far this year suggest that, yet again, the budget targets may well be bettered. In this area too, however, we cannot allow our guard to slip. The annual addition of new borrowing is still too high. The exceptional overhang of debt still constrains our economic progress and eats up large resources that could be put to much better use. I wonder if this House realises that to secure our national debt involves £40 of every working person's salary or wages. The Government are determined, therefore, to press ahead with the reduction of borrowing and debt.
We are already considering how best to achieve necessary further savings in expenditure in 1990, so as to make room for new investment within an overall improving budgetary trend. This work will be advanced in the coming months. It must take account, among other things, of the fact that the carry-over costs from the 1989 budgetary concessions on social welfare and personal taxation alone will add some £160 million to the opening position for next year.
One of the key elements identified by the Government in their strategy for bringing order to the public finances was the absolute necessity to control the growth in the public service pay bill, which accounts for such a large proportion of total Government expenditure. For this reason, the position that is developing on special increases in the public service is of particular concern to the Government.
It should be borne in mind that already this year I had to provide an extra £70 million for the cost of the general pay increase under the public service pay agreement, £28 million for increments, £12.5 million for the Defence Forces' special increases plus £15 million for the carry-over cost of increases from the 1986 pay agreement. In addition to these very substantial amounts, I provided £30 million for special increases this year as the Government accept that there are legitimate expectations that some payment will be made in respect of certain special increases processed under the current pay agreement.
However, the number and cost of the increases which have been processed, or are being processed under the agreement, to say nothing of further claims which may be made, is a cause of serious concern. The Government are determined to take a resolute stand on this issue. This means, first, that the £30 million provision cannot be exceeded this year and, secondly, that commitments cannot be made which would increase the pay bill in 1990 and subsequent years to such an extent as to place in jeopardy the considerable progress which has been made under the Programme for National Recovery.
I announced in my budget speech my intention to invite the Irish Congress of Trade Unions to discussions on the whole issue of special increases. I met with Congress on 8 March and informed them of the financial and budgetary problems which the Government face in relation to the build-up of special increases in the public service. I asked them to consider the issues involved and to meet with officials to see if a mutually acceptable solution could be reached. Since then, a number of such meetings have been held and talks are continuing. It is my earnest hope that the good sense and concern for the national interest which was so evident in the discussions which led to the Programme for National Recovery will also inform these talks and that a satisfactory solution will emerge.
Much progress has been made in the past two years in the reform of the tax system. Talk of reform could only be talk so long as the public finances were in such disarray. The actions taken in the past two years have created scope to make a significant start on the process of reform and we have availed of this to the full. As is indicated clearly in the National Development Plan, the process will be pushed forward until we have a fairer and effective system with a considerably lower burden of personal taxation.
The phased programme for tax reform has been pursued by the Government without compromising the overall reduction in Exchequer borrowing which has been so crucial to economic recovery. The programme last year included sizeable reliefs in personal tax; major improvements in tax assessment and collection arrangements, such as the introduction of self-assessment and the hugely successful amnesty to clear arrears of tax; a sustained attack on the tax evasion which for so long has exploited the general body of taxpayers, and a major revamping of the corporation tax system in line with international trends and to remove the bias towards investment in machinery rather than jobs.
The programme of reform continues this year, as is reflected in the present Bill, with further sizeable reductions in personal tax including a highly significant cut in the actual rates of tax; new development incentives and, at the same time, measures to ensure that earlier incentives are not abused; and further improvements in tax administration and reasonable measures to counteract transactions which are aimed primarily at tax avoidance and which, if not curbed, could prove so costly to the Exchequer.
It is only by effective tax administration and a broadening of the tax base, combined with savings on Government expenditure, that we can achieve the lower level of personal tax that we all want.
Finally, I should mention the implications for tax reform of the 1992 indirect tax harmonisation proposals. There are now clear indications, confirmed by the proceedings at the EC Finance Ministers meeting that I attended yesterday in Luxembourg, that the earlier set of proposals put forward by the Commission will be revised. I expect those revised proposals will be put on the table next month by Commissioner Schrivener. This confirms the wisdom of the Government's approach in not rushing to implement the earlier proposals. We have, of course, taken the prospect of harmonisation into account by reducing our reliance on increases in indirect taxes so as not to worsen the problems we face. I stressed again at yesterday's meeting that the process of harmonisation will involve a huge tax revenue loss for this country and that the Commission must address this problem as part of its revised approach.
The ongoing discussions in the Community on the question of introducing a common withholding tax on interest payments is also something that we have to take into account in our work on tax reform.
I would now like to turn to the approach underlying individual sections of the Bill and to draw the attention of the House to the more significant items. Full details of the individual sections are contained in the Explanatory Memorandum which has been circulated with the Bill.
The early sections of the Bill deal with income tax and provide for implementation of the package of tax reliefs announced in the budget.
Section 1 increases the general and age exemption limits. The general exemption limit is being increased from £2,750 to £3,000 in the case of a single person and from £5,500 to £6,000 in the case of a married couple. For single persons aged 65 years or over, the new limit is £3,400, and for single persons aged 75 years or over, £4,000; these limits are of course doubled as appropriate for elderly married couples.
The section also provides for the introduction of the addition of £200 per child in conjunction with the exemption limits. This addition is aimed specifically at improving the position of low-income families and its impact on the tax burden faced by such families can be dramatic. To take one example, a married couple with three children, one spouse working with an income of £6,600 and taxed under PAYE, will save up to £495 compared with their 1988-89 tax bill. Of course, this exemption and child allowance also applies to people in small businesses and indeed to the small farmers.
Section 2 provides for the changes in income tax rates and bands. The top rate of tax is being reduced to 56 per cent and the standard rate to 32 per cent. This reduction in the standard rate, which is the first for over 20 years, also applies to the deposit interest retention tax and to the withholding tax on professional fees. The income tax bands are also being widened: the 48 per cent band is being extended to £3,100 for a single person and £6,200 for a married couple, while the standard rate band is being extended to £6,100 for a single person and £12,200 for a married couple.
These income tax changes have three objectives. The increase in the exemption limits and the introduction of the child addition of £200 per child is aimed, as I have said, at improvement of the position of low-income families. The extension of the standard and 48 per cent rate bands is aimed at reducing the progressivity of the system and maintaining, at nearly 63 per cent, the proportion of taxpayers paying tax at no more than the standard rate. Finally, the reduction in the standard and top rates underpins pay moderation in the economy and begins the process of driving down income tax rates and fully restoring the incentive for enterprise and effort.
The Government have thus given a clear signal of the direction in which we wish to go in future reform of personal tax. The overall cost of this year's income tax package is over £200 million in a full year. Taken together with the concessions introduced by my predecessor in 1988, reliefs costing well over £700 million on a cumulative basis over the period of the Programme for National Recovery have been provided by the Government, compared with the commitment of £225 million contained in the programme.
Section 3 of the Bill continues the £286 PRSI tax allowance for the current year, while section 4 deals with the benefit-in-kind taxation of preferential loans. Following the fall in interest rates in the past two years it reduces to 10 per cent the specified rate which is used to assess the benefit-in-kind charge on preferential mortgage loans; it also provides that, where an employer makes a loan to an employee at less than the specified rate, the loan will not be regarded as a preferential one provided it is made on an arm's length basis at normal commercial rates.
Sections 5 and 6 deal with the restrictions on life assurance and mortgage interest relief which I announced in the budget. Life assurance relief is being confined to 80 per cent of its previous levels, while the percentage of mortgage interest within the relevant ceilings which will qualify for relief is being reduced to 80 per cent from 90 per cent, at which it has stood since 1987. The yield from these measures is £16.8 million in 1989 and £27.9 million in a full year. This has met part of the gross cost of the major package of personal reliefs.
Section 7 makes significant changes in the business expansion scheme. As Deputies are aware, there has been widespread concern in this House and elsewhere at recent developments in relation to this scheme. The original intention was to encourage the provision of equity capital for high-risk companies which offered the prospect of substantial gains to the economy in terms of output and jobs. In return for the provision of risk capital to these companies the general body of taxpayers made available an attractive relief for investors. The recent developments to which I refer have been diverting the scheme away from this very desirable objective.
The Government had to weigh the position carefully so as to ensure that action taken to restrict relief under the scheme would not interfere with BES funding for deserving projects.
Section 7 is intended to redirect the scheme back to its original purposes. The section introduces five measures, as follows: it provides that, where BES money is being used for the purchase of a ship, that ship must represent a beneficial addition to the Irish shipping register; it imposes a limit of £2.5 million on the amount of money a company or group of companies can raise under the scheme; it excludes from the scheme international leasing and related financial services; it also excludes self-catering accommodation in the city or county of Dublin and the urban areas of Cork, Waterford, Limerick and Galway; and finally, it provides that BES relief will not be available on shares in relation to which options or guarantees are held which provide for sale at other than market value at the end of the five-year period for which shares must be retained under the scheme. I am satisfied that these provisions will help to restore the scheme to its original purposes.
Under the section the new measures will apply in respect of shares issued on or after the date of publication of the Finance Bill.
Deputies will recall my budget announcement that annual accounting for PAYE-PRSI and VAT would be introduced for small scale employers and traders. The change in relation to PAYE-PRSI has been given effect through regulations already made by the Revenue Commissioners on 23 March under existing legislation. The change in relation to VAT is provided for in section 52 of the Bill.
I want to stress that the purpose of the annual accounting facility is to ease the administrative burden on small traders and to release resources in the Office of the Collector General for other purposes. Moving to the new arrangements is an option for the traders and employers concerned — it will not be obligatory and they can stay with existing periodic payments if they wish. Even for those wishing to change, the final decision will rest with the Collector General who will have regard to the track record of the traders concerned and can if necessary impose a procedure for payments on accounts within the 12-month period. The amounts of revenue involved in these cases are not significant. I believe that the new facility will be useful one but the Revenue Commissioners will of course closely monitor how it operates in practice.
Section 8 is a consequential provision arising from the introduction of annual accounting for PAYE. It relates to Revenue preference for PAYE in a company liquidation. The intention is simply to retain the existing Revenue entitlement in the event of a company on an annual accounting basis going into liquidation. The opportunity is also taken in section 8 to put beyond doubt the Revenue Commissioners' entitlement to take into account PAYE deducted by the company for the income tax month in which liquidation occurred.
Section 9 gives effect to the measures on stock relief for farmers, which were announced in the budget, by extending the scheme for a further two years and reducing the clawback period for destocking in respect of stock increases occurring from 6 April 1989 onward. This will help to promote the build-up of the national herd.
Section 10 increases from £6,000 to £7,000 the threshold applied to capital allowances and deductible running expenses for cars.
Section 16 and 17 introduce new taxation arrangements for unit trusts and similar investment funds. Fund management activity represents an area of great opportunity for this country. This opportunity and job potential will be focused in the International Financial Services Centre in the Custom House Docks Area and the Government are confident that a significant number of quality fund management projects can be attracted into the centre. The Government have already announced the special tax régime which will apply to funds which establish in the centre, and section 16 gives effect to this.
In line with the position in certain other countries competing for the business these funds will not be subject to taxation on their income or capital gains provided that they are under management by a company in the centre, are established for the benefit exclusively of persons resident outside the State and are subject to the new regulatory régime for such funds which is being put in place by my colleague, the Minister for Industry and Commerce, on foot of the EC UCITS Directive.
I am happy to inform the House that the same tax arrangements are being made in section 16 for funds which locate in the Shannon Airport Zone.
Section 16 also introduces new tax arrangements for domestic Irish funds of this kind so as to ensure that the tax treatment of these funds will be broadly consistent with the tax treatment of funds in the IFSC and with continental European practice in the taxation of these funds. The changes will help the funds in question to maintain a competitive position vis-á-vis foreign funds selling into the Irish market. Such funds will no longer be liable to tax in their own right, but Irish-resident unit holders in a fund will be taxed on income and gains of the fund.
Section 17 deals with the acquisition by Irish residents of units in a fund established in another EC country under the UCITS Directive. While welcoming this development as positive progress towards a single European market in financial services, it is necessary to safeguard against possible infringements of our taxation system. Income received from the foreign fund by an Irish resident is, of course, subject to tax in Ireland and to facilitate the collection of this tax, section 17 provides for disclosure to the Revenue Commissioners of information in relation to the acquisition by Irish residents of units in a foreign investment fund. The information is to be provided by persons acting in the State as intermediaries between the Irish investor and the foreign fund.
Section 19 restricts the cost to the Exchequer of domestic-sourced section 84 loans. Despite the measures taken in the 1984 and 1986 Finance Acts, the cost of these loans to the Exchequer has increased considerably in the last three years. This increase is due both to a 60 per cent rise in the overall volume of these loans over this period and to the increasing use of high interest rate section 84 loans. These loans are taken out in currencies such as the Greek drachma and the Australian dollar and are much more costly to the Exchequer than normal section 84 loans.
The section limits the cost to the Exchequer of domestic sourced section 84 loans in three ways. First, no new section 84 lenders will be allowed on and from 12 April, the date of publication of this Bill. Secondly, existing section 84 lenders will be allowed to increase their total loans volume only by a maximum of 10 per cent in the case of each lender and provided that such an increase is solely for loans to manufacturing companies.Thirdly, non-manufacturing companies located in the Shannon Airport Zone will not be allowed to borrow any new domestic sourced section 84 loans as from 12 April 1989. These companies, which borrow the vast bulk of the very costly high interest rate loans, will be allowed until 31 December 1991 to phase out all their existing section 84 loans. The changes will put these Shannon companies on the same footing as companies in the International Financial Services Centre in regard to section 84 loans. Finally, it should be mentioned that the provisions do not affect foreign sourced section 84 loans, which will continue to be available to Shannon and other companies.
Given the escalation in the cost of section 84 lending, these restrictions are necessary and reasonable. The Government will be monitoring carefully future developments in this area.
Sections 21 and 22 amend the new rules introduced last year for the distribution by companies of dividends from different types of profits. There is no change in regard to the key rule that dividends are treated as coming proportionately from the mix of profits of the year or years in question. This rule reflects the underlying commercial reality of companies with a mix of profits. The main change is that a company will now be able to pay the dividends out of the mix of profits of any one or more preceding year in the past nine years. Where such profits are exhausted, the company can go back earlier than nine years. A company will, consequently, have much more flexibility in regard to dividend distribution as compared to the previous proposal which obliged companies to pay dividends in the first instance out of the mix of profits of the immediately preceding year.
The Bill contains a number of new or improved incentive measures to help build up various sectors of the economy.
Section 15 introduces a major incentive for private sector investment in toll road projects. The existing 50 per cent capital allowance relief for expenditure on such projects, which expired recently, is now being replaced by a provision to allow the write-off in full of this expenditure against toll income. In addition, pre-trading interest which arises on capital borrowed to fund this expenditure will also qualify for relief. The new concession will run for a period of three years and will encourage the active participation of the private sector in a significant way in the future development of toll roads.
At present, data-processing and software development services qualify for the 10 per cent rate of corporation tax. In order to reflect recent developments in the computer industry, certain related consultancy and technical services will also qualify in future. This extention is provided for in section 20.
Section 25 contains measures specifically designed to increase the overall investment in film projects, to maximise the initial investment in an individual film project and to encourage reinvestment in such projects. The existing ceiling on investment of £100,000 in one year is now being increased to £600,000 for a single production and this total amount may, alternatively, be spread over three years, at £200,000 per year, as an investment in one or more productions. In addition, as a further encouragement to corporate reinvestment in the industry, the concession on capital gains tax, which allows deduction of the full purchase price before tax relief, for shares held for three years in a film production company, is being extended.
These enhanced incentives will apply up to 9 July 1992, and, together with other incentives already in place, will provide significant and substantial assistance to the film industry in attracting investment.
Section 27 extends for a further three years the special rate of capital gains tax which applies in respect of certain shares, including those dealt with on the smaller companies market of the Stock Exchange. This concession was introduced in 1986 when the smaller companies market was first set up. The smaller companies market is still a relatively new market which has yet to realise its potential in terms of a capital raising facility for small growth-oriented Irish companies. The Government believe that the extension of the special capital gains tax rate for a further three years will prove to be a very useful boost to the smaller companies market.
Section 29 of the Bill provides that future contracts based on Government securities will not be chargeable assets for the purposes of capital gains tax. Gains on Government securities are already exempt from capital gains tax. As the law stands, this exemption would in all probability be held to extend to future contracts based on those securities provided that delivery of the underlying security is an unconditional requirement of the contract. In order to remove any ambiguity on this point, section 29 makes it explicit that this will be the case.
In addition to providing for the excise duty increases announced on Budget Day, Part II of the Bill also makes provision for the rationalisation and updating of some 50 excise licences. In general, the level of licences/fees payable is being increased in line with inflation. A small number of redundant licences are being terminated. I am also taking the opportunity to create an excise licence specifically for dealers in petrol, whether wholesale or retail, at an annual rate of £20. There already exists a hydrocarbon oil vendor's licence, to cover dealers in auto-diesel, which is being increased in the Bill to £20 also. I am providing that a single payment of £20 will cover both the petrol and the auto-diesel licences. The purpose of the new licence is to equip the customs and excise service more effectively in the fight against petrol smuggling.
There is also provision in section 47 for the introduction of a ten year driving licence at a fee of £20. The three-year licence will continue, at least for the present, and there will also be provision for a one-year licence in certain cases.
Deputies will be aware that there is no reference in the Bill to the scheme of refund of VAT and excise duty on vehicles purchased by disabled drivers. I am anxious to make a further attempt to ensure that obvious anomalies in the operation of the scheme be minimised and, if possible, eliminated, and I propose to discuss with Opposition spokesmen the possible terms of an amendment which I might introduce on Committee Stage of this Bill. I would welcome any suggestions the main Opposition spokespersons may wish to make. We will probably then sit around the table in an effort to work out an acceptable amendment. I do not think anyone is interested in seeing the abuses which are taking place continue. Last year my predecessor made an attempt which proved to be unsuccessful. Therefore let us hope we are more successful this year.
Part III of the Bill gives effect to the VAT changes announced in the budget as well as a number of further measures. The budget measures comprise the increase from 1.4 to 2 per cent in the farmers' flat-rate refund and the related livestock rate, the introduction of the annual accounting option to which I referred earlier and the reduction from 25 per cent to 10 per cent in VAT for works of art. In regard to this latter provision I have gone further than my budget day announcement by extending the lower rate to works of art regardless of their age. Literary manuscripts are also covered by the concession. It was pointed out to me, that because of the 50 year period laid down, the works of some very well known Irish artists were excluded. Consequently, I have made this change.
Section 49 is a technical amendment affecting legal services supplied in insurance-related cases involving businesses.Until a recent High Court judgment the position was that such services were regarded as being supplied to policyholders who, in most instances, were able to recover any VAT charge. The court adjudged that the services should be regarded as being supplied to the insurer who, being VAT-exempt, would not be able to recover the tax. As the effect of this would have been to increase the cost of insurance premia, and also to introduce an element of distortion of competition between Irish and certain foreign insurers, I am restoring the previous position.
Section 53 is a technical amendment which empowers the Minister for Finance to set appropriate conditions when concessionary VAT refunds are being made under section 20 of the VAT Act.
A change in the VAT treatment of optical services is provided for in sections 54, 55 and 56 (b). The supply of spectacles and contact lenses by opticians has been treated as exempt from VAT on the basis that it was an integral part of the optician's professional service which is free of VAT. The European Court held in 1987 that this practice was erroneous: their view, which is of course binding, was that while the professional service of eyesight testing is properly exempt under EC law, the supply of the spectacles or lenses must be taxable. In accordance with this judgment I am imposing the 10 per cent rate of tax on these goods but, in order to allow opticians time to make the necessary arrangements for this transition, the provision will not take effect until 1 November next. I do not expect corresponding increases in the cost of spectacles since, as a corollary of taxation, opticians will become entitled to reclaim input VAT on their purchases of equipment and other goods and services.
As announced in the budget, the bank levy is being renewed at last year's level of £36 million and section 57 gives effect to this.
Since the middle of 1987 the Revenue Commissioners have operated a pilot scheme for the voluntary assessment of capital acquisitions tax. This scheme involved close co-operation between the Revenue Commissioners and the legal profession. In view of the success of the pilot scheme and the potential gains in terms of additional yield and greater administrative efficiency, I announced in the budget that the Government had decided to introduce self assessment of the tax on a mandatory basis. Legislation to give effect to this and to a number of other matters in relation to capital acquisitions tax is contained in Part V of the Bill.
Section 65 is the principal section. It provides that mandatory self assessment will take effect from 1 September 1989. Because of the "grace" periods allowed for the submission of returns this means that self assessment will be fully operational on 1 January 1990. Under the present legislation the Revenue Commissioners assess tax directly on the basis of information provided in returns completed by taxpayers or their agents. Under the new procedure the taxpayer or his agent, usually a solicitor, would complete the return, assess the tax due and forward this to the Revenue together with the payment.
If a self-assessment system is to work it is critical that taxpayers disclose fully the assets which are subject to tax and compute their liabilities correctly. The Bill, accordingly, provides for increased penalties and powers of enforcement. Section 68 increases the statutory penalties for non-filing or late filing of returns from £500 to £2,000 and the penalty for fraud from £1,000 to £5,000.
In order to ensure that the new system will not be abused it is also considered necessary to introduce a surcharge for significant under valuation of property. This is provided for in section 70 and will operate so as to increase the tax payable in such circumstances by a surcharge ranging from 10 per cent to 30 per cent depending on the extent of the under valuation. This type of surcharge represents a new development. It is modelled on US Federal estate duty. Normal appeal procedures will of course apply both in relation to the original tax and to the surcharges.
There is a number of other changes which the Government have decided to introduce this year. The main one of these concerns what is known as the "favourite" nephew relief. A nephew or niece who takes a gift or an inheritance of business assets from his uncle or aunt is treated as a child of that uncle or aunt and so has a tax-free threshold of £150,000 instead of £20,000 in relation to those assets. In order to benefit from the relief the nephew or niece must have worked "substantially on a full-time basis" in carrying on the business of the uncle or aunt in the five years prior to the date of the gift or inheritance. This concession is being retained and the opportunity is being taken to set out more clearly what constitutes "working substantially on a full-time basis". The concession is being extended also by section 74 to gifts or inheritances involving trusts.
Parallel with the introduction of increased penalties and powers of enforcement section 75 contains a particular measure designed to facilitate those who wish to make provision for a future charge to tax. Since 1985, it has been possible to take out special insurance policies to provide for payment of inheritance tax. The proceeds of these policies are exempt from inheritance tax in so far as they are used to pay that tax. The relief applies at present only to policies in a sole name. Representations have been made by the Irish Insurance Federation that the relief be extended to policies in the joint names of husband and wife and payable on the death of the survivor. Because of the spouses exemption, tax does not normally arise until the death of the surviving spouse. Section 75 extends the relief for qualifying insurance policies in the manner suggested by the Irish Insurance Federation.
In my Budget Statement on 25 January this year I announced that the Government had decided to introduce measures to counter the avoidance of tax. Part VI of the Bill contains the Government's proposals in this regard. Section 76 contains a general anti-avoidance provision. This represents a new development in Irish tax law but is by no means a new development in the international context.The need for a general provision here was highlighted by a decision of the Supreme Court last July in what has become known as the "McGrath case". It was clear following that decision that the means to counter tax-avoidance schemes had to be fundamentally reviewed if the Exchequer were not to incur a major loss of tax revenue.
Numerous provisions aimed at curtailing tax avoidance have been introduced in earlier years. These provisions have been of a specific nature — that is, aimed at particular abuses — rather than a general nature. While specific provisions have a continuing role to play, and the Bill indeed contains a number of new specific provisions, experience shows that they can be circumvented by elaborate tax-avoidance schemes. In addition, with a specific provision the loophole is closed only after it has already been exploited. It is clear, therefore, that as well as specific provisions there is a role for a general provision to help safeguard the revenues of the State.
The general provision in section 76 is a carefully balanced one which has been drawn up by the Government in close consultation with the Attorney General and taking account of the Supreme Court judgment in the case to which I have referred. The purpose of the general section is to counteract certain transactions which have little or no commercial reality but are entered into primarily for tax avoidance purposes. The intention is to enable the Revenue Commissioners, subject to specified procedures and safeguards, to disallow the benefits of such transactions.
The provision applies basically to transactions carried out on or after Budget Day, when I indicated the Government's intention to legislate in this area. Transactions carried out before that day are affected only if they would result in the avoidance of tax arising on or after Budget Day. In the absence of this latter provision tax deductions and reliefs engineered artificially before Budget Day could adversely affect the Exchequer, and thus the general body of taxpayers, for many years to come. In simple terms I am saying if somebody following the McGrath type case avoidance scheme had set up his or her losses in advance of Budget Day and the profits had not come through but might come through in future years that would stop from Budget Day. I must stress that this provision is aimed at transactions which set out purely and simply to avoid tax. There is no question of trying to create uncertainties for genuine business transactions or normal use of recognised tax reliefs. The section contains explicit safeguards in this respect.
Under existing arrangements the Revenue Commissioners are prepared in certain circumstances involving incentive reliefs to give an opinion in advance on the possible tax consequences of a proposed activity. In addition the Revenue Commissioners will give, within the limits of their resources, opinions on the tax position of actions which have already taken place. These procedures will not be affected by the new provision. I know that the Revenue Commissioners will continue to be anxious to help to the maximum extent possible in dealing with approaches from business or other interests about genuine transactions. What they understandably must be wary about is a request for an advance opinion on a hypothetical or artificial proposition which is aimed at constructing a tax avoidance scheme.
I would also like to draw attention to the procedures which must be followed before a benefit can be disallowed under section 76. The Revenue Commissioners must first from an opinion that a transaction is a tax avoidance transaction. Having formed such an opinion, they must then notify the tax payer concerned who has 30 days in which to contest it by appealing to the Appeal Commissioners. There is provision too for the rehearing of an appeal by the Circuit Court and the stating of a case for the High Court on a point of law.
There is, therefore, no question of giving an unfettered general power to the Revenue Commissioners. At the end of the day, an appeal to the courts is available and, in the case of dispute, it will be the judgment of the courts and not the opinion of tax officials which will finally determine the outcome.
In addition to the general provision, specific anti-avoidance provisions are being introduced to counter a number of known avoidance schemes. Section 77 counters tax avoidance devices designed to create allowable losses for set-off against chargeable gains. Section 78 counters arrangements designed to enable shareholders to extract profits from a company without becoming liable to income tax on the receipt of those profits. Section 79 combats the avoidance of capital acquisitions tax by the use of arrangements involving private company shares.
In this opening address I have dwelt on some general economic issues and the approach to tax reform as well as outlining the more significant elements of the Bill. I look forward to the opportunity on Committee Stage to discuss in more detail the individual sections of the Bill.
I commend the Bill to the House.