I move: "That the Bill be now read a Second Time."
The essential purpose of this Finance Bill is to provide a statutory basis for the taxation measures which I announced or foreshadowed in this year's budget. The measures represent a very significant tax reform package which will promote the development of the economy. They include the reduction in the standard rate of income tax to 30 per cent and the reduction in the top rate to 53 per cent, which are now beginning to reflect themselves in pay packets; the reduction in the standard rate of corporation tax to 40 per cent which will help job creation in the services sector; the extension of the 10 per cent rate for manufacturing industry to the year 2010 so as to create greater certainty for investment planning; the extension of the urban renewal incentive package to 1993; the reduction in the standard VAT rate which has already taken effect and is helping to reduce inflation; changes in stamp duties to further encourage the development of the financial services sector, and the abolition of the 60 per cent rate of capital gains tax which has been an inhibiting factor on investment.
There are also measures to curb tax abuse, notably in relation to the business expansion scheme and the definition of manufacturing for the 10 per cent rate, and to deal with other areas of tax avoidance.
Taxation is, of course, a key component of overall economic policy and the measures in this Bill are an integral part of the Government's economic and social policy. Before detailing the main provisions of the Bill I would like to review briefly the present economic position, outline the general direction of Government policy in this regard and touch upon the general approach to tax reform.
We can take heart from the major economic achievements of the past three years. As a result of pursuing the right policies we have created the conditions for a resumption of growth. Irish economic performance has improved enormously over this period. Annual growth in real gross national product has averaged 3.5 per cent over the three years. We have now resumed our position as one of the top performers in the world league.
The underlying objective of Government policy is, of course, to maximise growth and thereby jobs. This is the payoff we are seeking from our comprehensive policy approach. Non-agricultural employment in the private sector did, in fact, increase by some 30,000 in the two years to April last.
In considering the effect on jobs of the resumption of economic growth, it is vital to remember that the net improvement shown by last year's labour force survey — 10,000 more employed than two years before — understates the gross private sector job-creation response to the economic upturn. In addition to creating those 10,000 extra jobs, the private sector has produced new employment sufficient to offset both the necessary reductions in public sector employment and the continuing secular decline in agriculture over the period. More recent indicators suggest that employment is continuing to expand. For 1989 as a whole, there was an estimated net increase of the order of 13,000 jobs outside agriculture.
I am confident that, despite some moderation in growth internationally and in particular the weakening in the UK, we can again this year achieve a growth performance on a par with that of the past three years. In the light of the budget measures to strengthen the economy, GNP should expand by around 3.5 per cent once more. The budget also puts us on course for a significant reduction in inflation — to a little over 3 per cent in 1990 as a whole, with the annual rate slowing down to about 2.5 per cent by the end of the year. Provided we carry this through into our international competitiveness, we can anticipate further solid export growth even if not so spectacular as over the last couple of years because of the more muted external demand now in prospect.
The signs are that the volume of business investment is headed for expansion of the same order as in 1989 — 10 per cent. Personal consumption seems set for a further significant rise also, perhaps of the order of 4 per cent this year. All three — exports, investment and domestic demand — will have a strong positive effect on jobs. The overall result is that a net increase in non-agricultural employment of 16,000 can be achieved this year.
A key element in our economic success of the last three years has been the Programme for National Recovery. The success of the programme has set an international example of what can be achieved by a consensus approach. The Government have played their part in achieving, ahead of schedule, the financial objective of stabilising the national debt-GNP ratio and setting it firmly on a downward trend. Employees, by adhering to the moderate pay increases provided for in the programme, have greatly contributed to the reduction in cost and price inflation while at the same time, as a result of the substantial income tax reductions made possible by the improvement in the public finances, they have enjoyed an increase in real take-home pay over the last two years and into 1990. For example, single workers on average male industrial earnings have enjoyed an increase in real take-home pay of 8.5 per cent over the period of the programme. Employers, through increasing investment and job creation, are making their contribution. The whole community has gained.
It is essential to future employment prospects that we do not lose the ground gained under the present programme. We reached, in the present Programme for National Recovery, an eminently sensible agreement whereby, as I have said, living standards of employees were secured through a combination of pay increases geared to give us an edge on our competitors and reliefs in personal taxation which enhanced real take-home pay. This arrangement can be a model for the future. To be viable, of course, it presupposes that the terms under the various headings of a new agreement are consistent with the wider needs of the economy.
A vital ingredient in the improved economic performance and outlook has been the progress made in recent years in correcting the imbalance in the public finances. In 1986, Government borrowing stood at nearly 13 per cent of GNP. As a result of the firm action taken by the Government, this had been more than halved by the end of 1988, to 6 per cent of GNP. Last year there was a further significant fall in Government borrowing to 2.4 per cent of GNP. Borrowing is now at its lowest level in about 40 years and the debt-GNP ratio, which was stabilised in 1988, has begun to fall at a significant rate — down from 131 per cent at end-1988 to about 123 per cent at end-1989. It will fall further this year.
While there were some timing distortions in the Exchequer figures for the first quarter, the returns indicate that the results so far are broadly in line with budget expectations. The Government will be monitoring trends closely over the remainder of the year so as to ensure that the budget targets will be achieved.
I would emphasise to Deputies that the Government are fully committed to reducing further both the level of borrowing and the debt-GNP ratio. Specifically, the aim now is to achieve broad balance on the current budget by 1993. By the same deadline, it is intended also to make a significant rate of progress in reducing the debt-GNP ratio towards 100 per cent, down from its end-1989 level of 123 per cent. These objectives require that tight control is maintained on current expenditure and that borrowing for investment purposes continues to be subject to rigorous scrutiny. There is no scope for reverting to a relaxed approach to the public finances. To do so would undermine confidence and destroy the very basis on which the improvement in the economy, and the increase in income for workers and welfare recipients, has been secured.
The Government have an ambitious agenda in the field of tax reform. Already in the past three years major progress has been made in reducing personal income tax rates, in starting the reform of the corporation tax system to make it more conducive to job creation and, last but by no means least, in greatly improving the system used to assess and collect taxes. As I have indicated, this year's Finance Bill builds on the progress already made and breaks new ground with major further development of the self-assessment system by placing self-employed taxpayers on a current year basis; the significant new reductions in personal income tax for all taxpayers; further reform of the corporation tax system; initial steps to reduce our indirect taxes so as to help lower inflation and to bring our rates closer to European levels and the new steps as part of the Government's determined efforts to curb tax avoidance and ensure greater equity in the system.
In relation to income tax, the changes in the Bill mark a substantial step towards fulfilment of the Programme for Government commitments. The Government are well on target to meet their objectives of achieving a standard rate of 25 per cent by 1993 and of moving towards a single higher rate. The Government are determined to achieve the income tax targets we have set ourselves in tandem with the overall objectives for continuing improvement in the public finances. We recognise the negative impact on enterprise and initiative of high tax rates and we have shown that we are able to tackle it. This is a major element in our approach to tax reform. The Government are anxious to see this process continue and to ensure that lower income tax rates do, in fact, bring about not only a more favourable climate for employment but more actual jobs on the ground.
If others have a different approach to tax reform they should say clearly what changes they would make and how, specifically, these would be financed. Calling for new reliefs without any counterpart funding plans does not represent a coherent approach to tax reform.
I will turn now to the individual sections of the Bill and draw the attention of the House to the more significant items. Full details of the individual sections of the Bill are contained in the Explanatory Memorandum which has been circulated to Deputies with the Bill.
The opening sections of the Bill deal with the substantial package of income tax reliefs which I announced in the budget. These reliefs continue the process which I began in 1989 of reducing income tax rates while making special provision for the low paid and maintaining at 63 per cent the proportion for the taxpayers on the standard rate. The reliefs will cost over £200 million in the current tax year; taken together with the 1988 and 1989 budget changes, they mean that income tax reliefs costing over £800 million on a cumulative basis will have been provided over the period of the Programme for National Recovery.
In addition to the reductions in the rates of tax to which I have already referred, the specific income tax changes are as follows. The general exemption limits are being increased from £6,000 to £6,500 in the case of a married couple and from £3,000 to £3,250 in the case of a single person. The age exemption limits are being increased from £3,400 to £3,750 for single persons aged 65 years or over and from £4,000 to £4,350 for single persons aged 75 years or over. The age exemption limits are being doubled, to £7,500 and £8,700 respectively, for married couples. The special child addition to the exemption limits, which I introduced last year at £200 per child, is being increased to £300 per child. Finally, the marginal relief rate, which applies where income does not greatly exceed the exemption limits, is being reduced from 60 per cent to 53 per cent.
It is estimated that these changes will exempt some 31,000 taxpayers with 58,000 children from tax altogether, while a further 65,000 taxpayers with 123,000 children should benefit from marginal relief. The Revenue Commissioners have, as I indicated at budget time, conducted a publicity campaign to make low paid taxpayers aware of these concessions; they also sent an information leaflet, incorporating a short application form, to low paid taxpayers with their tax-free allowance certificates. This leaflet also drew their attention to the family income supplement scheme operated by the Department of Social Welfare and described how to get details of that scheme. I understand that there has been a good response so far to this publicity.
The exemption limit changes will benefit a wide variety of taxpayers, small farmers and shopkeepers as well as PAYE taxpayers. They mark the second year in a row that the Government have taken special measures to help the low paid. The changes are substantial. The general exemption limit for a married couple has been increased from £5,500 to £6,500 in two years, an increase of nearly 20 per cent; for a couple with three children, the increase is nearly 35 per cent; with five children, over 45 per cent. These various changes complement the rate changes in what is a significant package of income tax reliefs. As I have said, the Government are committed to continuing with this process.
Chapter 1 of the Bill deals also with other income tax changes. Section 3 renews the PRSI allowance for 1990-91, while section 4 reduces the level of life assurance relief from 80 per cent to 50 per cent of what previously applied. This restriction was necessary in order to meet a small part of the cost of the budget income tax reliefs. Without the restriction, life assurance relief would have cost some £35 million in the current tax year. The restriction will yield some £13 million in the current tax year. Even taking account of this, the cost of the overall budget package of income tax reliefs will, as I have said, exceed £200 million in the 1990-91 tax year.
While I am dealing with restriction of reliefs, I want to refer to the question of mortgage relief. Deputies will be aware that this relief has been restricted twice in recent years. It was restricted to 90 per cent of interest within the £2,000 single — £4,000 married ceilings in 1987. The second restriction of the relief, to 80 per cent, was made last year. I decided to make no further change this year.
The restrictions of 1988 and 1989 must be seen in the context of the major package of income tax reliefs which have been introduced in recent years. Since 1987, the general exemption limits have been increased from £2,650 to £3,250 for a single person and from £5,300 to £6,500 for a married couple, and a child addition of £300 per child has been introduced. The standard rate band has been extended by £1,800 for a single person and £3,600 for a married couple, and now stands at £6,500 single and £13,000 married. Most dramatically of all, the standard rate of tax has fallen from 35 per cent to 30 per cent and the top rate of tax has been reduced from 58 per cent to 53 per cent.
These reliefs have benefited every taxpayer in the country. It is against this background that the restriction of mortgage interest relief must be viewed. It must also be seen in the context of the Government's commitment in the Programme for Government to further reduce the standard rate of tax, to 25 per cent by 1993, and to move towards a single higher rate.
The suggestion has been made that mortgage interest relief should be restored to 100 per cent because of the rise in interest rates over the past year. This suggestion ignores the fact that, as I have already pointed out, the revenue gained from the restriction has been used to pay a small part of the cost of the major income tax improvements made in recent years and no suggestion has been made as to how the Government should recoup the cost — estimated at £55 million a year — of such a restoration. The second point I would make is that, despite the restriction to 80 per cent, mortgage interest relief will cost the Exchequer an estimated £220 million in terms of tax foregone in the current tax year, as compared with some £170 million in 1989-90. The vast bulk of this increase is due to increased interest rates. By any standards, this is a very substantial level of on-going Government support for mortgage-holders.
There is no question of the Government being unconcerned about those paying mortgages. The underlying problem is of course the increase in interest rates which, unfortunately, has occurred due mainly to international factors. In our domestic policies the Government have done everything possible to promote lower interest rates and we will maintain our efforts in this regard.
Section 6 implements the budget proposal relating to farmers' stock relief. This is aimed at farmers whose stock has to be disposed of under disease eradication measures. In such cases, there will be an extra period of one year allowed to farmers for restocking before a claw-back of stock relief takes effect.
There are two provisions in the Bill, in sections 7 and 29, which impinge on the Business Expansion Scheme.
As Deputies will be aware, the BES was introduced in order to generate risk capital for companies in selected sectors of the economy. The scheme is a very attractive one from the investor's point of view, because he or she can obtain tax relief on the full amount of his or her investment up to the agreed limits; this is intended to encourage him or her to take the risk involved in putting up venture capital.
The scheme has, I regret to say, been the subject of continuing abuse. Last year, as Deputies will recall, I introduced a number of measures intended to counter these abuses: the principal one was a ban on guarantees and options to purchase BES shares, at the end of the obligatory five-year holding period, at other than market value. The purpose of that measure was to try to eliminate the guarantees which had become a feature of BES schemes while allowing the investor an exit mechanism from his investment at the market value of his shares.
Despite this restriction, guarantee arrangements aimed at eliminating risk and circumventing the legislation remained a feature of BES projects in the tax year just ended. This is obviously inconsistent with a scheme for generating risk capital. In my budget statement I indicated my determination to ensure that the BES remains a risk capital scheme.
Accordingly, section 29 of the Bill ensures that BES relief will not apply where arrangements exist which guarantee the investor's shareholding regardless of whether or not the company is successful. Relief will be denied where an arrangement exists to eliminate the risk that shareholders might be unable to recover an agreed amount in respect of their investment within an agreed period. In other words, guaranteed investments will no longer qualify for BES relief. I consider this provision an essential one to counter the sort of abuse which we have seen taking place in recent months. I am also conscious in this context of the necessity to protect the equity of the tax system. The BES was not introduced to provide a guaranteed tax shelter for well-off investors at the expense of the Exchequer — that is, at the expense of other taxpayers. It was introduced to encourage those with funds to make them available as risk capital for investment in productive Irish industry and thus to help maximise the value to the economy in terms of employment and output.
Section 7 is to prevent a situation where investors could get interest relief on loans taken out to buy BES shares, as well as the BES relief itself on the capital invested in the scheme. Such interest relief could be available where the investor is an employee or director of the BES company. However, there is in my view no reason why an investor, having got tax relief on the capital amount he invested through the BES, should also be able to get relief on the interest paid on a loan taken out to enable him to acquire the shares. In other words, tax relief should not be available on both the capital and the interest. Accordingly, section 7 provides that where tax relief is claimed on capital invested through the BES, relief will not also be available on money borrowed to fund the investment.
This is the second year that the Government have had to introduce anti-abuse measures in relation to the BES. I think it is proper that I should record my deep disappointment, and the Government's, at the way that this generous tax relief, far from being used for the productive purposes for which it was introduced, has been abused. At a time when improved industrial performance and increased employment are so vitally necessary, it is a great pity that the considerable talents involved in the BES industry could not have been put to more productive use.
I would add that I will continue to take careful note of the behaviour of the BES industry and will take account of that behaviour in future decisions on the BES.
Section 8 deals with the tax treatment of ex gratia payments made to individuals on retirement or termination of employment. The section provides that where tax relief on such payments is being calculated, account will be taken, not only of any tax-free pension scheme lump sums which the individual has received or will receive, but also of any options he has — which have not been revoked — under which he may receive such lump sums in the future. The purpose of the section is to ensure that individuals do not get excessive levels of tax-free payments on retirement or termination of employment. I should stress that the tax-free status of ordinary pension scheme lump sums is not affected.
Section 9 exempts local committees, vocational education committees, county committees of agriculture and health boards from income tax other than deposit interest retention tax. These bodies are already exempt from corporation tax and capital gains tax. The fact that local authorities were liable to income tax used not to give rise to any actual liability. However, the restriction of interest relief in 1973-74 gave rise to the possibility of a tax charge and some authorities have in fact been assessed to income tax which is unlikely to be paid without assistance from the Exchequer. The present section therefore exempts local authorities, and the other bodies I have mentioned, from income tax with effect from the 1973-74 tax year, the year when the possibility of a tax liability first arose. I am sure that Deputies from all sides of the House will join in welcoming this section, which settles the long-running question of the income tax liability of local authorities.
Chapter II, comprising sections 10 to 23 of the Bill, gives effect to the change in the basis of assessment for self-employed taxpayers.
As a result of these provisions self-employed taxpayers will, with effect from the present tax year, have their liability for tax based on the profits of the current rather than the preceding year. This major change is necessary to facilitate further development of the self-assessment system. The self-assessment procedures introduced on a voluntary basis in 1988 have been a tremendous success but further development of the system is essential at this stage if the momentum of progress is to be maintained. A prerequisite for this development is that all sources of income — trading income, investment income and so on — should be assessed for tax on the same basis: at present some income is assessed on a preceding year basis and other income is assessed on a current year basis. This gives rise to considerable confusion and, in effect, necessitates the submission of two years' returns before the liability for a particular year can be finalised. The switch to a current year basis of assessment for all income is, therefore, the next logical step in the progress towards a full obligatory self-assessment system where taxpayers would be required, in due course, to compute and pay their tax themselves.
The switch will bring greater certainty and efficiency into the system and in particular will result in a lower compliance burden for taxpayers and their advisers, greater efficiency in, and therefore better service from, tax officers and the intensified pursuit of tax evasion through better use of resources.
Details of the legislative arrangements for the new assessment regime are set out in the explanatory memorandum to the Bill. The main features are as follows: For the 1990-91 and subsequent tax years all income will be charged to tax on the basis of the income in the year of assessment. In the case of trading profits of the self-employed, which are computed by reference to annual accounts, the charge to tax will, as I indicated previously, be based on the profits of the accounting period ending in the current tax year, as opposed to the accounting period ending in the preceding tax year as at present.
There will be changes in the tax payment arrangements. Preliminary tax will be due on 1 November in the tax year and, to avoid an interest charge for underpayments, the taxpayer must pay not less than 90 per cent of the current year ultimate liability or not less than 100 per cent of the preceding year's actual tax liability. The option of paying the previous year's liability will assist taxpayers who may not be in a position to estimate their liability on a current basis by 1 November of the tax year.
As a result of the switch to a current year this year accounting periods ending in 1989-90 will not now form the basis for an assessment. A transitional measure is included so as to reduce any hardship that might arise, as a result of a significant fluctuation in income between 1989-90 and 1990-91. The Bill provides that where the profits for 1990-91 exceed the profits for 1989-09 by 50 per cent or more, the assessment for 1990-91 will be reduced to the average profits of the two periods. Farmers will of course continue to have their general averaging option available.
Transitional provisions are also included to deal with the treatment of capital allowances in the changeover year 1990-91 in the case of unincorporated businesses.
Notwithstanding that 1989-90 will not form a basis for an assessment, a return of income for the period will still be required. This is necessary to settle outstanding matters relating to 1989-90 tax liability and to ensure that no one is taking unfair advantage of the changeover to transfer income into the period which would not form a basis of assessment.
The tax return filing date is being changed from 31 December in the year of assessment to 31 January in the year following the year of assessment.
Provision is made to retain the existing arrangements as regards crediting of tax deducted in the preceding year and the operation of the interim refund procedures under the scheme of withholding tax on professional fees. There are certain other mainly technical consequential provisions.
While these measures will bring the tax treatment of the self-employed closer to that of PAYE taxpayers, important differences still remain.
I would like to underline again the importance I attach to this change in our continuing efforts to have a simpler and more effective tax system. Much has been done in this regard in recent years and we can now go further. The proposals represent a reasonable and balanced package of measures and I commend them to the House.
Before leaving this topic it is only right that I should acknowledge the valuable role played by the tax practitioners in the success of self-assessment to date and I look forward to their continuing co-operation in relation to the new measures provided for in the Bill.
Sections 25 to 28 are concerned with the urban renewal tax incentives for the designated areas. As announced in the budget the time-limit for this incentive package is being extended by two years from 31 May 1991 until 31 May 1993. The development of the designated areas will be given a further impetus by this measure, especially in the case of projects which are as yet only at the planning stage.
Sections 27 and 28 are intended to counter several unintended uses or abuses of the generous tax incentives contained in the designated areas package. The double-rent allowance available to tenants in these areas allows them to reduce their income for tax purposes over a ten-year period by taking a deduction each year of an amount equal to twice the rent actually paid. In the case of sole traders or partnerships, where income tax at a rate of 53 per cent can apply, the tax saving can actually exceed the amount of rent paid. This is unduly generous, and section 27 accordingly limits the tax foregone by the Exchequer to an amount not exceeding the rent actually paid by the taxpayer. That section also provides that the double-rent allowance will not be given in a contrived "cross-letting" situation. It was never intended that any one party could obtain both the full capital allowances as the lessor of a qualifying building, and the double-rent allowance as the lessee of a similar building, in an arrangement undertaken purely to exploit the tax provisions.
Section 28 excludes finance leases of commercial premises from qualifying for the double-rent allowance. Such leases include capital payments which enable the lessee to purchase the building. The double-rent allowance was intended for normal rental payments by the lessee and not for capital payments.
The overall effect of sections 27 and 28 will be to eliminate excessive levels of tax benefit which were never intended under the incentive package for the designated areas. By reducing the potential for excessive tax gains to lessees, the provisions will enable market forces to operate more freely in regard to rental levels.
I have already referred to section 29 in dealing with the business expansion scheme. Section 29 also deals with abuses of the exemption for Shannon dividend income. A number of schemes were launched last year which involved the extension of this Shannon exemption to investments which had a bank guarantee for both the sums invested and the investment return. Through the use of a combined loan-share arrangement, the guaranteed fixed rate of return amounted to over 800 per cent per annum on the very small amount of actual share capital invested. I announced on 21 July last that if necessary I would introduce legislation in regard to these schemes. Section 29 accordingly provides that where arrangements exist to eliminate the investor's normal risk, the Shannon tax exemption for shareholders will not apply.
I would like to take this opportunity to state that I will not hesitate to take similar action in future where necessary and with similar immediate effect from the date of the announcement, if I become aware of other abuses of a specific exemption.
I will now turn to the main changes in the Bill relating to corporation tax.
As announced in the budget, the standard rate of corporation tax on company profits is being reduced from 43 per cent to 40 per cent from 1 April 1991. This is part of the continuing process of reform which includes also the phasing-out of accelerated capital allowances, which I will refer to shortly. Sections 31 and 32 of the Bill give effect to the reduction in the rate and to the related adjustment in the tax credit attached to company distributions out of profits taxed at this standard rate. This change will be of particular benefit to the services sector which is such an important source of new jobs.
Section 33 is concerned with the definition of manufacturing for the purposes of the 10 per cent rate of corporation tax. I announced in my Budget Statement that I was concerned about the fact that the 10 per cent rate for manufacturing now applies to a wider range of activities than was originally intended. This reflects court decisions in particular cases as to what constituted manufacturing. The concept of manufacturing has, as a result, been extended well beyond the normal everyday meaning of the term to include activities which are not really manufacturing activities at all. These activities have gained an unintended benefit by being taxed at only 10 per cent instead of at the standard corporation tax rate of 43 per cent. New provisions are therefore being introduced under section 33 so as to restrict the definition of manufacturing to what was originally intended. This is done by excluding certain processes from the scope of the relief. The change is necessary in order to protect the corporation tax yield because the standard 43 per cent rate is the rate at which the bulk of corporation tax is paid.
The categories to be excluded are set out in the section and in the explanatory memorandum and the new rules will come into effect for accounting periods beginning on or after 1 April 1990.
It has been claimed that meat processing is now being given the 10 per cent rate for the first time. I would like to correct this impression. Meat processing has always been eligible for the 10 per cent rate. The reason section 33 specifically provides for meat processing is a technical drafting one, which is designed merely to ensure that meat processing does not lose its exsisting entitlement to the 10 per cent rate as a result of the application of the new rules.
As announced last week, the Government have decided that the termination date for the 10 per cent rate of corporation tax for manufacturing and related activities is to be extended from 31 December 2000 to 31 December 2010. This special low tax rate has proved to be a very effective incentive for attracting mobile international investment and for assisting the expansion of domestic manufacturing companies. Because of the long lead time associated with major manufacturing projects it is necessary to provide assurance and certainty now to foreign investors that the 10 per cent rate will continue after the year 2000. The necessary legislative provisions are being prepared and I hope to include these in the Bill on Committee Stage.
These measures will clarify the 10 per cent regime for manufacturing both as to its scope and the period for which it will apply.
Section 34 allows the Irish branches of foreign parent companies to deduct their patent royalty payments against their income for tax purposes. This will give such branches equality of tax treatment with Irish subsidiary companies of foreign parents where such payments are already allowed. It will also assist the industrial development agencies in their promotional activities abroad.
In my 1989 Budget Statement, I invited the business community to launch an initiative which would help to alleviate poverty and increase employment. I also asked that the initiative should be organised and operated by the business community itself. That community's response has been to set up a trust for community initiatives which will receive donations from companies and apply those to assist suitable projects in line with the aims of the trust. In order to encourage companies to contribute, section 35 provides for a relief for corporate donations which are given to the trust in the period between 20 April 1990 and 31 March 1991. This gives a reasonable deadline and should serve to stimulate a quick response by the business community. The trust deed itself, which has been drawn up in consultation with officials of my Department, of the Revenue Commissioners, and of the Chief State Solicitor's Office, contains appropriate measures in relation to the appointment of new or additional trustees, and to any changes in the trust deed. There is also a requirement on the trust to publish an annual report and to make detailed returns to my Department on the donations it receives, and on the disbursements it makes to assisted projects and initiatives.
Section 36 confirms the budget proposal to reduce the volume of section 84 loans with effect from budget day. No new domestic-sourced section 84 loans are now permitted except where the total loan volume of the lender does not exceed 75 per cent of his loan volume as of 12 April 1989. A special transitional arrangement will apply in the case of certain loans for new manufacturing projects which were under negotiation with the industrial promotion agencies. Provided particular qualifying conditions are fulfilled, section 84 loans for these projects which cannot otherwise be catered for under a lender's 75 per cent ceiling will be allowed. This transitional arrangement will apply to qualifying loans of this type given in the period 31 January 1990 to 31 December 1991. The total amount involved, which is not to exceed £170 million, will count towards the 75 per cent ceiling rule after the end of 1991 by which time section 84 loans to Shannon companies will have been phased out in accordance with the 1989 Finance Act.
The self-assessment system was extended to companies from last October. Sections 37 to 45, inclusive, introduce technical changes designed to assist both companies and the Revenue Commissioners in operating the self-assessment system. They will ensure as far as possible that the liability for an accounting period can be finalised in one return form and in a single payment of tax. In this way these sections will streamline the operation of self-assessment for companies.
Sections 46 and 47 contain provisions relating to the conversion of building societies into companies. These cater for the taxation consequences of such conversions which were provided for in the Building Societies Act, 1989. Similarly, sections 48 to 50 provide for the taxation consequences of the amalgamation of trustee savings banks and for their reorganisation into companies which were provided for in the Trustee Savings Banks Act, 1989.
Chapter VII of Part I, comprising sections 51 to 58, implements the budget proposal dealing with the distribution of income to their Irish investors from foreign unit trusts and similar investment funds. This measure is designed to promote a more level playing field between Irish and foreign investment media. Up to now investors in certain foreign funds had unrestricted scope for converting a taxable income into tax-free capital gains. With effect on and from 6 April foreign investment funds will have to distribute at least 85 per cent of their annual income each year to their Irish investors. If this distribution condition is not met, the investors will become liable to income tax instead of capital gains tax on the disposal of units or shares in these funds.
Chapter VIII of the Bill provides for the budget reduction in accelerated capital allowances for plant, machinery and industrial buildings. These will be reduced from 50 per cent to 25 per cent from 1 April 1991, and to nil from 1 April 1992. As I have noted earlier, this is linked to the parallel reduction in the standard rate of corporation tax and is necessary to defray the cost of the tax rate reduction. It will also contribute to a broadening of the corporation tax base. The normal annual wear and tear allowances will still be available and the reductions will not affect the special building incentives in the areas designated for urban renewal, or qualifying service companies in the Custom House Docks area and in the Shannon customs-free airport.
A transitional arrangement is being applied in the case of new industrial projects approved for grant assistance by the industrial development agencies on or before 31 December 1990. For such projects accelerated capital allowances will continue to be available at a level of 50 per cent.
Sections 60, 61 and 62 contain the general measures for the phased reduction in accelerated allowances for plant and machinery, and sections 63 and 65 cater for similar restrictions in the case of industrial buildings. In similar vein, section 66 restricts accelerated allowances for certain farm buildings and other works. Finally, certain loopholes in the application of the capital allowances regime are covered in sections 59, 64 and 67.
Sections 71 and 72 provide, as announced in the budget, for the abolition of the 60 per cent rate of capital gains tax. The top rate of tax for disposals made on or after 6 April 1990 will be 50 per cent which is closer to the new top rate of income tax. This change is not expected to have a significant effect on revenue receipts.
The relief available under sections 26 and 27 of the Capital Gains Tax Act, 1975 on disposals of certain business assets by individuals aged 55 years or over — referred to as retirement relief — does not at present extend to disposals of shares in holding companies of trading groups. Sections 73 and 74 of the Bill provide for such an extension.
Section 75 in an anti-avoidance provision. Under the Capital Gains Tax Act a capital loss cannot be transferred between members of a group of companies. A practice has arisen whereby companies have used a particular provision in an unintended way to circumvent the above rule with a consequent loss of tax revenue to the Exchequer. The Bill closes this loophole.
Part II of the Bill deals with changes in the Customs and Excise area. Sections 78 to 84 give effect to the reductions in excise duty which were announced in the budget. Section 78 provides for the reduction in excise duty on environmentally friendly motor fuels, with tax on unleaded petrol being reduced by 5p per gallon and the tax on auto liquid petroleum gas being halved. The tax differential in favour of unleaded petrol is now 13.5p per gallon. Sections 79 to 84 provide for the budget reductions in duty on table water, televisions, videos and camcorders and for the abolition of duty on records, compact discs, matches and mechanical lighters.
Section 85 is a technical adjustment. It provides for a change in the technical composition of the tax on cigarettes made necessary by the 1 March reduction in the standard rate of VAT. This change is necessary in order to comply with an EC directive. This section will not change the overall level of taxation on cigarettes, nor will it affect the price of cigarettes.
Part III of the Bill, covering sections 86 to 96, gives effect to the VAT changes announced in the budget as well as a number of further largely technical measures. The major change is of course the reduction of two percentage points in the standard rate of VAT to 23 per cent which is making a significant contribution to lower inflation this year. The other budget changes include the increase from 2 to 2.3 per cent in the farmers' flat-rate refund and associated livestock rate, the increase from 5 to 10 per cent of VAT on electricity and the imposition of VAT at 10 per cent on telephone and related charges. The VAT imposition on telephones will now take effect from 1 January next instead of the originally proposed date of 1 July 1990, so as to facilitate Telecom Éireann in completing the installation of their new billing system. There will be no loss to the Exchequer since Telecom will pay over an amount in respect of the net VAT due. As I indicated on budget day, the VAT measures on electricity and telephones are being given effect without any increase in charges to consumers.
As a result of developments on the EC front we are required to terminate the VAT-exemption of horses and greyhounds, the non-taxation of which was only allowed temporarily by way of a derogation from Community law. I am proposing to bring these to tax at the low rate of 2.3 per cent which already applies to livestock and the effects on the industries concerned will be minimal.
The technical VAT measures in this Part of the Bill deal with taxation of services received from abroad that may currently avoid tax; clarification of the law in regard to the taxation of driving schools and a number of other items; and, finally, a minor extension of the existing definition of newspapers which can qualify for the 10 per cent rate of VAT.
It is gratifying that we have been able to make a number of indirect tax changes this year, especially the reduction in the standard VAT rate, which are consistent with the emerging framework for 1992. Much of course still remains to be agreed at EC level as to the rates of both excise and VAT and the other arrangements to apply post-1922. EC Finance Ministers took stock of the situation at a meeting which I chaired in Luxembourg on Monday last. I brought my colleagues up to date on the work which has been undertaken in this area under the Irish Presidency. The work is to be pushed ahead actively and the Commission was asked to bring forward the outstanding proposals as soon as possible. I also look forward to early completion of the study which the Commission is undertaking on the implications of tax approximation for Ireland.
Section 97 continues the bank levy for 1990, as announced in the budget. The total levy amount is £36 million, which is the same as for 1989. Section 98 implements the budget proposal for a 3 per cent levy on investment by Irish residents in unit trusts and similar investment funds. This will provide equality of treatment in this regard with investment in life-assurance linked funds, where the 3 per cent levy has applied since 1987.
I now come to a number of other measures which will help with the development of the financial services sector which is another important source of new jobs.
I announced in my budget speech that it was my intention to clarify and simplify the way stamp duties are to apply to various financial services and transactions. Sections 99 and 101 contain these measures together with the rationalisation of the rate bands applicable to property valued at less than £25,000. For bonds, covenants, mortgages and so on the exemption limit below which stamp duty is not payable is increased to £20,000 and there is a ceiling of £3,000 on the maximum charge. I hope that these changes will encourage the execution in Ireland of transactions which at present are being effected abroad.
Section 103 provides for exemptions from companies' capital duty for collective investment undertakings which come under the UCITs Directive. This measure is aimed at establishing UCITs in this country, especially in the IFSC, and is in line with a proposed amending Directive which has now been put forward by the EC Commission at our request. The fact that a 1 per cent duty could be charged on the foreign investment funds under management by these undertakings was proving to be an obstacle to their establishment here.
Section 100 provides for the charging of full stamp duty on non-grant type new houses. This measure is a response to the situation which had developed whereby the intending purchaser of a non-grant type new house could reduce his or her exposure to duty by having separate contracts for the purchase of a site and the construction of a house. In order to allow more time to cater for those persons who entered into contracts prior to my budget announcement to complete their transactions, this section will only become operative for conveyances executed after 1 September next. This section will not apply to an individual building a house on his own land nor will it apply to industrial or commercial property.
There is also a number of specific anti-avoidance measures and technical provisions in relation to stamp duty which we will have an opportunity to discuss on Committee Stage.
Section 110 will facilitate the self assessment of residential property tax by making provision for the rounding upwards of the market value exemption limit to the nearest £1,000 and for the use of the new house price index for the three months ended 31 December instead of the three months ended 31 March, in determining the market value exemption limit as at 5 April each year. The use of the March index at present is causing delay in administering the tax. Section 111 provides for the rounding up of the income exemption limit to the nearest £100.
More significantly, section 112 provides for the restoration of child relief under the residential property tax code in accordance with my budget announcement. The provision allows for a reduction of 10 per cent in the amount of tax payable for each child up to a maximum of ten.
Part VI of the Bill deals with capital acquisitions tax. In addition to the measures for indexation of thresholds and the exemption for gifts between spouses announced on budget day, it contains two further provisions. Section 116 tightens up the legislation in respect of certain exemptions from discretionary trust tax. Section 117 provides for an extension of the scope of section 60 insurance policies. The proceeds of these policies are exempt from tax where they are used to pay inheritance tax. The new provision will cater for joint policies effected by husband and wife where the estate is not left absolutely to the surviving spouse, for example, where the estate is devolved to a child on the death of that spouse. This extension will make these policies more popular.
The Bill contains some non-tax items. These include a number in relation to debt management as is customary with the annual Finance Bill. An important aspect of national debt management relates to conversion of existing Government loans, whereby the Minister for Finance may offer to replace a stock due for redemption by giving holders of the redeeming stock the opportunity to convert into another stock. This process is at present governed by legislation that is nearly 40 years old. During this period our capital market, and especially the bond market, has developed greatly. In line with this development, the stock conversion legislation needs to be updated to reflect modern market conditions and practices. This is the purpose of section 120.
Section 124 will provide the basis for the introduction of a new short-term Government security, Exchequer Notes, which will effectively widen the existing market for Exchequer Bills and provide greater flexibility for investors. For example, the notes will be made available more or less on a continuous basis, in contrast to Bills which are sold by weekly tender. The section provides that where Government securities are issued at a discount, the discount will be liable to tax; and exempts the discount in the hands of non-residents.
The Bill is a major and lengthy one. Some of its provisions represent significant policy initiatives while others, as I have indicated, are of a more technical nature. The real importance of the Bill lies in its furtherance of the Government's overall economic and financial objectives which are aimed at achieving more econiomic growth and jobs and, as part of this, a greater equity and efficiency in out tax system.
I commend the Bill to the House.
