I move: "That the Bill be now read a Second Time."
This Finance Bill provides a statutory basis for the taxation measures which I announced in the budget on 29 January. It also contains the legislative basis for provisions which were foreshadowed in the budget, notably in order to prepare for the EC Internal Market, and for other tax policy measures which the Government now consider necessary. Overall, the Bill marks a further significant step in the Government's strategy of tax reform, as set out in the Programme for Economic and Social Progress and our revised Programme for Government. Before turning to the main provisions of the Bill, I would like to outline briefly the strategy underlying the budget and review the economic prospects for the year ahead.
The central objective in the budget was to support the fight against unemployment by a combination of soundly based public finances which are essential to sustainable economic growth and structural reforms aimed at ensuring that we get the best possible employment return from that growth. There can be no doubt that the overall policy on the public finances pursued over the past few years has been the correct one. The reduction of our dependence on borrowing, the control of public spending and the easing of the tax burden which this made possible have restored confidence and strength to the economy. We have, at the same time, achieved major progress in reforming income taxation and improving the equity of the system generally, while also restructuring indirect taxation in preparation for the advent of the Internal Market next year. It is no coincidence that we have to date been able to weather the current difficulties in the international economy with much less damage than we suffered during similar circumstances in the past.
The 1992 target for the Exchequer borrowing requirement — EBR of 2.4 per cent of GNP is very substantially below the unsustainable Exchequer deficits of earlier years; indeed, one has to go back more than 40 years to find deficits that represent a lower proportion of GNP. We are now in the position that, even if growth should dip somewhat, the debt ratio will continue to decline. This is also important in the EC context. The convergence criteria set out in the Maastricht Treaty put a firm obligation on member states to meet challenging budgetary guidelines. I am happy to say that we now satisfy these criteria and the Government are determined to maintain that position.
The overhang of debt must be reduced as rapidly as possible so that we can free more of our national resources for other needs. It is a sobering fact that almost one-tenth of GNP or more than a quarter of total tax revenue must be allocated annually to meet debt servicing costs before the Government can address those spending and taxation priorities which are in the interests of economic development, employment creation and social equity. We have reduced the burden of debt and debt service costs; the debt/GNP ratio has already fallen from 131 per cent at end of 1988 to 107 per cent last year. The ratio will fall again this year, and we are determined to ensure that it continues to do so in the years ahead.
You will recall, a Leas-Cheann Comhairle, that the Government moved decisively last year to correct a potentially serious slippage on the 1991 budget targets. I can assure the House that we are equally committed to maintaining that discipline this year and will not be found wanting should the need arise. Over the year to date, however, the indications are that the budget arithmetic is unfolding reasonably in line with expectations. There is some upward pressure on spending, and this is being carefully monitored, but tax revenue is holding firm, even when account is taken of a number of favourable timing factors which combined to boost the first quarter yield by a margin of some 9 per cent over the first three months of 1991. Keeping the public finances on the right track is central to providing the right climate for the creation of sustainable employment.
Despite the economic slowdown, Ireland's economic performance last year had many positive features. GDP growth at about 2 per cent was very creditable in the context of world growth of only about 1 per cent and outright recession in some of our trading partners. Compare our performance, for example, with the UK, where the volume of GDP fell by 2.5 per cent: our industrial exports rose by over 6.5 per cent, although our export markets expanded by only about 2 per cent.
The year 1991 saw a further general improvement in real incomes, but weaker confidence internationally and continuing high real interest rates saw much of this translated into higher savings rather than spending. Thus, there was only a modest rise in consumer spending and investment fell in real terms following the very strong growth of the previous two years.
But despite all the difficulties we faced, employment in larger industrial establishments in the first three quarters of 1991 was up by over 1,000 on average compared with the corresponding period in 1990. While employment in construction fell, employment in banking, insurance and building societies in the same period was well above its 1990 level. Taking a wider view of employment, and taking into account the indications from the various tax returns, the picture which emerges is of a significant increase in average non-agricultural employment last year compared with 1990.
Information on the way in which the economy is performing so far this year is still scarce but there are some hopeful signs. Exports turned in another strong performance in January, as did industrial output, and the seasonally adjusted trade surplus was one of the best on record. Consumer spending and building investment indicators for recent months show some tentative signs of a modest improvement. While we cannot allow ourselves to become complacent about inflation — which rose to 3.7 per cent in the year to February, it is some consolation to note that we remain below EC levels on this score, and that wholesale price increases have been somewhat more modest over this period, at 3 per cent.
Tax returns and employment levy receipts for the first quarter point to employment holding up reasonably well. PAYE receipts for the first quarter were almost 10 per cent ahead of the first quarter of 1991; training and employment levy receipts up to early April were some 11 per cent ahead of the same period last year. Both figures suggest that the continuing rise in unemployment reflects a growing labour force rather than falling employment.
Looking to the future, the international economic outlook for 1992 remains uncertain. Last December both the OECD and the EC Commission forecast a slow and modest international recovery, with growth picking up to 2 per cent or more from about 1 per cent last year. Developments so far this year in the major economies, the US, Germany, the UK and Japan, suggest that the international economic recovery may be slower and more modest than earlier envisaged.
However, while international economic predictions made at the turn of the year may now be a little optimistic, I think we can still look forward to an improvement in our export markets as the year goes on. The UK Treasury now forecast a 4 per cent rise in the volume of UK imports this year compared with a decline of 3 per cent in 1991. Our agricultural exports should also benefit from better market conditions in the Middle East.
At home nominal after tax incomes, after allowing for the important mainstream income tax reliefs in the budget, should rise by about 67 per cent. Assuming broadly unchanged savings behaviour, consumer spending should show a modest improvement with growth of around 2 per cent in real terms. The prospect of an international economic recovery combined with a useful increase in the volume of public capital spending suggest some growth too in investment.
On budget day I predicted that GDP growth was likely to be around 2.25 per cent this year and GNP growth about 2 per cent. I see little reason to change this assessment now. There seems to be a general consensus among private sector economic analysts that the forecasts underpinning the budget were soundly based and that GDP growth in 1992 will be in the region of 2.25 to 2.5 per cent.
Although total economic growth this year may be only a little better than last year, its composition should be more balanced as between domestic demand and exports. For that reason, it should also be more employment intensive. However, with unemployment in the UK likely to go on rising for the foreseeable future and only modest growth on the continent and in the US, job opportunities abroad will be scarce. Given the projected rise in our labour force, average unemployment here is likely to rise significantly again this year.
The social welfare spending figures in the budget were based on an average unemployment forecast of about 272,000. Unfortunately, the average seasonally adjusted live register figure for the first quarter is already about 272,000. It now seems likely that, taking account of the trend in net migration and the extra numbers of school and college leavers who may enter the labour force later this year, the average number on the live register this year may be in the region of 280,000. The extra social welfare cost to the Exchequer will be of the order of £25 million this year.
The message from this brief review of economic developments and prospects is clear. The Government's overall economic strategy is working. The country's commitment to responsible economic and budgetary policies — to moderation and improving competitiveness — is working. In this period of international slowdown, we are growing faster than our competitors generally, we are increasing our share of world markets and we are further consolidating our national finances. Sound fundamentals stood us well in hard times. Equally, they can be the springboard for more rapid growth as conditions improve.
However, there is no denying that a daunting employment task lies before us — to earn the extra jobs we need; soundly based jobs; jobs which flow from producing more goods and services which can sell in the marketplace at home or abroad.
The Government in the budget took a number of steps to combat rising unemployment. The reductions in direct taxes will improve incentives, the rewards for enterprise and effort on a broad front. We have agreed with the EC on the provision of substantial funds for a new employment subsidy scheme and for in-company training. I warmly welcome the fact that these schemes are receiving the full support of the Federated Institute of Employers and other employer organisations and the Irish Congress of Trade Unions. I strongly urge all employers to participate as fully as possible in these schemes.
The area partnerships, envisaged in the Programme for Economic and Social Progress to combat long term unemployment through training, education and enterprise development are now in place in 12 pilot areas. The public agencies concerned have made the necessary arrangements; the estimated cost to the Exchequer is £60 million in 1992.
A committee of Ministers, assisted by a working party of officials and private sector individuals, are examining the recommendations of the Industrial Policy Review Group and the Task Force on Employment.
In the final analysis, there is only so much that any Government can do. They can make a key contribution by ensuring that their broad policy stance is conducive to employment growth. We have done so. They should ensure that, in its detail, Government policy minimises any disincentive effects on private effort and enterprise. We are doing so, not least through the substantial tax reforms in this and recent budgets. They should provide leadership on growth-oriented policies. Again, we have done so, but in the final analysis our progress will be determined by how well the private sector uses the opportunity so created. In the past, they have shown that, given the right conditions, they can create a significant number of new jobs. For example, between April 1987 and April 1991, net non-agricultural employment in the private sector rose by over 70,000.
The key to greater employment creation in the private sector is stronger investment and expansion. In today's conditions, maintaining competitiveness is not enough. It must be improved. The recent easing in cost increases in the UK shows we have no cause for complacency. The days of easy competitiveness gains in the UK market are over.
In these conditions, the pay provisions of the Programme for Economic and Social Progress and its spirit must be strictly adhered to. Pay increases under the local bargaining clause can be contemplated only on the basis provided for in the Programme for Economic and Social Progress, in particular the need to take full account of competitiveness aspects. Neither is there room for the attitude that margins can be increased as economic activity strengthens if we are to generate the extra jobs we need. Higher profits, like higher earnings, are desirable, but both must be earned through increased output if sustainable jobs growth is to ensue.
All aspects of public expenditure, including expenditure on public service pay which accounts for more than half of non-capital supply services expenditure, will have to be critically examined to ensure that the significant resources devoted to our public services are used as efficiently and effectively as possible.
In this connection, the time has come to take a critical look at the influences affecting the costs of public service pay and to examine ways in which the system of pay determination can be made more transparent so that, the budgetary situation facing the Government can be given more weight when rates of pay are being determined. The necessity for flexibility and organisational change, long accepted in the traded sector of the economy, will also have to be addressed.
Discussions on these important issues have already commenced with some public service unions. I hope the outcome to these discussions will be to achieve agreement on a new system which better reflects the realities of the competitive pressures which we face in the 1990s.
In relation to ongoing measures to improve efficiency and effectiveness in the public service, negotiations on the manner in which the local bargaining clause 3 of the current pay agreement will apply in the public service have also commenced. Clause 3 provides for negotiations between employers and trade unions designed to improve efficiency and effectiveness, with any increase limited to a maximum of 3 per cent of basic pay costs. However, the emphasis in the negotiations in the public service has to be on measures to improve efficiency and effectiveness to offset any movements in pay. This approach is essential to ensure that the significant level of resources already required to finance our public services is used to maximum efficiency.
While I would not wish to pre-empt the outcome of such discussions, I hope that it will ultimately lead to improvements in the quality of our public services which can be provided, in the future, on a more cost-effective basis.
I will now deal with the individual taxes as set out in the Bill. Income tax is in many ways the most important of all the taxes. It yields most revenue to the Exchequer, it exerts a significant influence on the labour market and it is paid direct by more people than any other tax. This importance is reflected in the amount of attention the tax has received from commentators and advisory bodies over the years. The Commission on Taxation devoted a very substantial portion of their work to it; so did the National Economic and Social Council, in both "A Strategy for Development" and "A Strategy for the Nineties". The OECD, the EC and the IMF have all commented on it. Most recently, the Industrial Policy Review Group pronounced on it in very strong terms.
These groups have shown a remarkable consistency in their advice to Governments over the years as to what should be done with our income tax system. It needs thorough reform, they have said, and the reform should broaden the base of income liable to the tax and reduce the tax rates applying to liable income. The purpose of this approach is to establish as comprehensive as possible a definition of income for tax purposes, for equity, simplicity and consistency reasons; to reduce as far as possible economic distortions caused by differential treatment of different forms of income; and to ensure that the lowest possible tax rates apply to income, consistent with equity and the need to generate the revenue necessary to meet expenditure.
A great deal of progress has already been made along this path of base broadening and rate reduction. Since 1987, despite the difficulties in the public finances, major strides have been made in the income tax area. These strides were made in the context of the Programme for National Recovery and the Programme for Economic and Social Progress, as well as under the Programme for Government. More recently, the process of tax reform received renewed impetus with the conclusion of the Review of the Programme for Government, which promised a radical overhaul of the entire tax code, involving a systematic curtailment of tax exemptions, shelters, allowances and concessionary tax rates on a phased basis in order to help fund tax rate reduction.
The 1992 budget will be seen as a milestone on this journey of tax reform. As well as increasing the general and age exemption limits for the low paid and reducing to 48 per cent the marginal relief rate which applies where income does not greatly exceed those limits, the budget further extended the standard band by £775 for a single person and £1,550 for a married couple; further reduced the standard rate to 27 per cent; and further reduced the top rate to 48 per cent so that we now have just a two-rate system, with rates of 27 per cent and 48 per cent.
This major package of income tax reliefs, along with the usual renewal of the PRSI allowance, is provided for in the first few sections of the Bill. It will cost an estimated £168 million in 1991 and £280 million in a full year, and will reduce the marginal tax rate facing over 700,000 taxpayers. It will improve incentives for enterprise and effort and leave taxpayers with more of the fruits of their own labours. It is consistent with the objectives for income tax set out not only in the Programme for Government and the review of that programme, but also in the Programme for Economic and Social Progress agreed with the social partners. It should help to reduce for employers the cost of employing staff. In this context I appeal to employers, who have long complained about the impact of taxation on the decision to employ staff, to look again and look hard at the improvements this income tax package has made. Last but not least, these income tax measures mark a further and decisive step in a retreat long wished for by Irish taxpayers: a retreat by the Exchequer out of their pay packets. It is a retreat with which I am very happy to be associated.
The rest of Chapter I of the Bill deals mainly with what might be called the bad news; that the major package of income tax reliefs which I have just outlined has to be paid for, and that some of the funding is being found in the income tax system by restriction of special reliefs. I make no apology for this: indeed, there is a fundamental point to be made here about tax policy, and with the permission of the House I would like to devote a little time to it.
It was never expected and never intended by the advocates of tax reform that widening the tax base and reducing tax rates would produce a lower tax bill for everyone. On the contrary; it was always inherent in this strategy that there would be trade-offs between improvements in the mainstream income tax regime and curtailment of reliefs which benefit limited groups or sectors. This was common ground among the proponents of tax reform, and was explicitly stated by, for example, the Commission on Taxation. As the Commission said in their first report:
... tax reform is a collection of measures, each of which affects some individuals adversely and others favourably. Those who will not benefit are those who are over favourably treated under the existing system.
I emphasise this point, a Cheann Comhairle, because since the budget there have been some groups who, while praising the overall thrust of the budget, have gone on to urge that we should, nevertheless, retain the special relief which was of benefit to their particular sector. It is of course understandable for individuals and groups to look at tax reform in this way, just as it is understandable that many individuals and groups are in favour of rigorous expenditure control for everyone else. But while this attitude may be understandable, the Minister for Finance of the day must be on his guard against it, if he is to act in the overall interests of the Exchequer, that is, the general body of taxpayers. I repeat: reform is reform, not a universal lowering of tax rates.
In saying this, however, I must emphasise that the Government are not restricting reliefs simply to ensure that particular groups are made to suffer. We recognise that individual reliefs can well have merit and in restricting or eliminating them we do not imply that all were worthless. But restriction of reliefs is an essential part of tax reform both to generate funds for reducing tax rates and to ensure that as far as possible income, no matter in what form it may be received, is subject to tax. This process also helps to simplify the tax system for both taxpayers and Revenue alike and narrows the scope for tax avoidance, so making the system fairer; it will also reduce economic distortions, and should help to divert into more productive channels the very considerable brains at present deployed in the tax avoidance industry. Despite the understandable preference on some people's part that we should have started with other people's reliefs, I believe there is widespread support for the broad thrust of our policy in this regard. I have described this approach in some detail, a Cheann Comhairle, because it informs and underpins the curtailment of reliefs contained in the remaining sections of Chapter I. It is against that background that these measures must be viewed.
I will now go on to deal with the measures individually. Section 4 abolishes the remaining income tax relief on life assurance premiums. As Members will recall, the relief has been progressively reduced each year since 1989: its abolition this year will yield some £5 million in 1992. I announced in my budget statement that the rate of tax charged on refunds of pension contributions was being increased from 10 per cent to 25 per cent with effect from budget day. The increase was intended to recoup, in some measure, the tax relief already given when the contributions were made. Section 6 of the Bill confirms the increase but provides, however, that it will not apply where an application for a refund was made before budget day.
Sections 10 and 11 are concerned with the withholding tax scheme introduced in 1987 for the deduction of tax by accountable persons — i.e. Government Departments, local authorities and the main non-commercial State bodies — when making payments for professional services. As announced in the budget, the Bill extends the current list to include the commercial State bodies and a number of other non-commercial State bodies. The new list of accountable persons is set out in the Second Schedule to the Bill.
Section 12 abolishes the concessionary tax treatment available in respect of share options granted under approved share option schemes. Under such schemes, while share options had to be at market price at date of issue of the options, there was no charge to income tax on the recipient: he was liable to capital gains tax only, a charge which arose on his eventual sale of the shares and was mitigated by the indexation provisions in the tax and the small gains exemption. In the case of manufacturing and Shannon companies, there was a further aspect, in that rate of capital gains tax was determined, not by the date of acquisition of the shares, but by the date of grant of the options, a significant extra concession. The generosity of the tax treatment of options under approved share option schemes may be measured by the fact that, since their introduction in 1986, over 200 approved schemes were set up, and options were granted over shares worth well over £200 million at date of grant.
Section 12 ends this concessionary regime, in respect of options granted on or after budget day, 29 January 1992. The recipient of such options henceforth will be liable to income tax on the difference between the option price and the market value of the shares on the date on which he acquires them: the income tax charge will arise on that date. This treatment is in line with the recommendation of the Commission on Taxation. Of course a recipient will be subject to capital gains tax in the normal way on the difference between the market values of the shares when he acquires them and sells them.
Section 14 deals with the income tax relief available on interest on loans to acquire shares in a quoted company. The section abolishes the relief in respect of such loans applied on or after budget day, or, if later, the date on which the company becomes quoted and phases out the relief in respect of loans applied before such date. The phasing out will begin on specified dates: 6 April 1992, where the loan was applied on or before 5 April 1989; 6 April 1993, where the loan was applied in the 1989-90 tax year and 6 April 1994, where the loan was applied on or after 6 April 1990. This will ensure that taxpayers whose loans were taken out more recently have a respite before phasing out begins: those with older loans will already have benefited from a significant period with full interest relief. If later than the relevant one of these specified dates, the phasing out will begin on 6 April of the second-next tax year after the company becomes quoted. The phasing out will mean that relief will be given only on 70 per cent of the relevant interest in the first tax year of phasing out, and on 40 per cent in the second. No relief will be available in the third and subsequent years. Section 14 also introduces a general anti-avoidance provision into the relief on interest on loans for purchase of shares in respect of loans applied on or after 24 April 1992. This will ensure that relief is confined to interest on loans applied for bona fide commercial purposes and not as part of an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax.
The purpose of section 14 is clear. Quoted companies have access to the Stock Market for capital and should not need the assistance provided by this relief in raising it. In addition, quoted shares in general are valuable, tradeable assets. It is difficult to justify to ordinary taxpayers why they should provide a subsidy for their acquisition. This is especially so when, as the House is aware, interest relief for most people is confined to mortgage interest and is significantly restricted even for that purpose.
I promised in my Budget Statement that enabling provisions to establish the tax charge on short term social welfare benefits would be contained in the Finance Bill. Accordingly section 15 of the Bill provides for the treatment of disability benefit, including occupational injuries benefit and unemployment benefit, and associated pay-related benefit, as income for tax purposes. The section provides that they will be treated as emoluments for the purpose of PAYE. The section also provides for the making of a commencement order or orders to bring taxation into effect.
As I indicated in my Budget Statement it was not possible, for operational reasons, to implement taxation of disability benefit from 6 April 1992. The operational requirements for taxing this benefit are still being examined. I would, however, like to indicate the lines on which consideration is proceeding.
Taxation of disability benefit presents substantial practical problems because of the potential interaction between employers, the Department of Social Welfare and the Revenue Commissioners and large numbers of benefit claimants. My aim is to keep this interaction to a minimum so as to avoid imposing excessive administrative burdens on those involved.
The essence of the solution being considered at present by my Department, the Department of Social Welfare and the Revenue Commissioners would involve potential claimants' tax-free allowance amounts being notified by Revenue to the Department of Social Welfare. The weekly rate of tax-free allowance would be used by that Department when making disability benefit payments, with any excess of the payment over the tax-free allowance being subjected by that Department to tax in the normal way at the taxpayer's marginal tax rate. Where the tax-free allowance exceeded the benefit payment, the intention would be that the excess would be available to the employer for use against any occupational sick pay payments to the employee. The net effect would be that claimants would have their benefit taken into account in determining their income for tax purposes, and as appropriate, tax would be charged accordingly.
Taxation under this system, and indeed taxation of longer-term disability benefit and disability benefit paid to claimants without an employer, cannot be introduced until 1993. However, it may be possible to introduce some limited form of taxation of disability benefit for those in employment later this year, by having employers reduce the tax-free allowance of benefit claimants in employment by the amount of the disability benefit being paid to them by the Department of Social Welfare. The net effect of this would be to curtail availability of tax refunds to employees who are claiming disability benefit, thus meeting a core objective of introducing taxation of disability benefit. However, much work remains to be done both in this area and in regard to the longer-term arrangements for taxation, and I am not yet in a position to announce an implementation date. The operational requirements for taxing unemployment benefit also continue to be examined. It is still the Government's intention that taxation should begin in 1993.
I would like to emphasise to the House that there will be no change in the present tax status of any of these benefits until the commencement date for taxation; I hope to be able to announce a date for this in the reasonably near future as far as disability benefit is concerned. I would also emphasise that all that will be done will be to treat these benefits as income for tax purposes; the extent, if any, to which taxation will arise in a given case will depend on the amount of other income the recipient has in the same tax year.
Chapter II of the Bill moves away from the purely income tax measures contained in Chapter I and deals with income tax, corporation tax and capital gains tax. The first section of the chapter, section 16, provides for the recognition of foreign adoptions for the purposes of these taxes on the same basis as they are recognised for the purposes of general law under the Adoption Act, 1991. Similar provisions elsewhere in the Bill have similar effect as regards stamp duty, capital acquisitions tax and residential property tax.
Section 17 provides for the reduction for 1992-93 and subsequent years of the limit on the annual value of shares an employee may receive from his employer under approved profit-sharing schemes. The limit is being reduced from £5,000 to £2,000. In addition, to cater for the situation where an employee received less than £2,000 worth of shares in the 1991-92 tax year, he will be able to receive an additional allocation in 1992-93 so as to make up the deficit. The additional allocation will be deemed to have been made on 5 April 1992, that is, in the 1991-92 tax year.
In reducing the annual value per employee of profit-sharing scheme shares from £5,000 to £2,000, rather than eliminating the relief entirely as proposed in the budget, I have been conscious of the arguments put forward by the Irish Congress of Trade Unions, the Federation of Irish Employers, the Confederation of Irish Industry and the Irish Profit-Sharing Association among others, that profit-sharing schemes can bring benefits in terms of improving industrial relations and enhancing employee motivation. The £2,000 figure will still provide a generous incentive for the introduction and maintenance of such schemes.
Section 18 closes a loophole in tax law which enables payments by employers to employees under restrictive covenants to escape with less than a full charge to tax. Restrictive covenants are covenants between an employer and an employee under which the employee, arising out of his employment, gives an undertaking to his employer which restricts his conduct or activities, and in return receives a payment from his employer. In keeping with the commitment in the Review of the Programme for Government for a radical overhaul of the tax code involving systematic curtailment of exemptions, tax shelters etc., and in order to prevent increasing exploitation of this loophole, section 18 provides that all payments made on or after 24 April 1992, that is, the date of publication of the Bill, will be chargeable to tax as part of the employee's remuneration and will be subject to the operation of PAYE.
Section 19 deals with the exemption from tax of patent income, and dividends paid out of patent income, in the hands of individuals, As the House will be aware, since 1973, income derived from patent royalties has been exempt from tax provided the principal work in devising the patented invention was carried out in the State. Since 1975, a company in receipt of tax-exempt income from patent royalties may issue tax-free dividends in respect of the relevant income. Again in line with the Review of the Programme for Government commitment for radical overhaul of the tax code, and to prevent increasing exploitation by individuals of the patent exemption in substitution for exemptions and reliefs affected by the budget measures, the Government have decided to phase out the exemption in so far as it applies to individuals. Accordingly, one-third of income from patent royalties and dividends paid out of such royalties will be taxable in the period from 24 April 1992 to 5 April 1993, and two-thirds in the 1993-94 tax year, subject to the condition as regards dividends that where the annual amount in any of these years exceeds 125 per cent of the average amount received over the last four years, the excess will be taxable in full. The full amount of income and dividends will be taxable in 1994-95. I would emphasise that taxation will apply to individuals; the exemption is being retained for companies. I would also emphasise that section 35 of the Bill, which I will be describing shortly, provides for the reduction to nil of the formal legal liability for Irish tax of non-resident shareholders, so that non-resident shareholders, whether individual or corporate, will not be affected by the phasing-out of the patent income exemption.
The Bill contains two provisions relating to company cars. Section 8 will increase the cash equivalent used for taxing the benefit-in-kind enjoyed by a person who has available for private use a car supplied by his or her employer. The additional yield from the increase in the BIK on company cars will be partially offset by the cost to the Exchequer of the increases from £7,000 to £10,000, provided for in section 21, in the threshold for capital allowances and for allowable running expenses in respect of cars used for business purposes.
The old BIK rates, that is, 20 per cent of the original market value where all the costs were met by the employer but falling to 12½ per cent where the car only is provided, were very lenient when compared with the cost of private ownership. When this sliding scale was introduced in 1982, it was intended that these rates would be doubled to 40 per cent and 25 per cent for 1983-84 and subsequent years but this increase never took place. The increase in the BIK rate to 30 per cent, announced in the budget, is seen as being fair and reasonable having regard to the annual cost for individuals of providing a car at their own expense and the benefit derived from private use of an employer-provided car.
Equally the Government consider that the curtailment of tapering relief announced in the budget is justified. Tapering relief is available to employees with high business mileage and reduces the BIK charge by varying amounts linked to the business miles driven. This tapering relief will in future only come into reckoning when business mileage exceeds 15,000 miles; at present the figure is 10,000 miles. Furthermore, I announced in the budget that tapering relief will not permit the BIK charge to be reduced below a minimum 25 per cent of the basic amount irrespective of the level of business mileage.
While satisfied that the BIK increases announced in the budget are fully justified compared with the cost of private motoring, I have decided to make certain changes which will reduce the impact of the increases on employees, such as company representatives and commercial travellers, who drive very high business mileage. The Bill provides for the phasing-in over five years of the minimum 25 per cent charge allowable under tapering relief. This concession will mean that the minimum charge will be 5 per cent in 1992-93, 10 per cent in 1993-94, increasing by equal amounts to 25 per cent in 1996-97. The new tapering relief tables are set out in the First Schedule to the Bill.
Section 20 will introduce a further easement in the stock relief clawback regime for farmers in certain circumstances. It will give them a further year, in addition to the existing two years, in which to restock after depopulation of herds because of disease eradication measures.
Section 28 is a technical measure which closes a loophole in relation to the double rent allowance incentive in the urban renewal designated areas. The intention had always been that the allowance would only apply in the case of leases granted on either new or refurbished commercial or industrial buildings in the designated areas. The existing legislation, however, permitted double rent allowance to be given to new lessees of an existing industrial building in those areas, irrespective of whether any refurbishment expenditure was incurred on the building. This section provides, therefore, that qualifying capital expenditure on refurbishment of an existing industrial building will have to be incurred before the double rent allowance can apply.
I indicated on the publication of the Bill that I intended to bring forward Committee Stage amendments to provide for final and definitive extensions to the current time-scales applying respectively to the Custom House Docks area and to the designated areas generally. In the case of the Custom House Docks area, the final extension will be for four years, up until 25 January 1997, and for the other designated areas, the final extension will be for one year, up until 31 May 1994. Fuller details on these measures will be given on Committee Stage.
Section 31 gives effect to the limited four month extension to the section 23 relief for rented residential accommodation which I announced in the budget. Apart from the designated areas, section 23 relief ended on 31 March last, but for construction projects which had foundations fully laid before Budget Day, an additional four months, up until 31 July, 1992 is being allowed for expenditure to qualify for the section 23 relief. This measure is intended to allow an orderly run-off to section 23 projects.
I announced in the budget that the exemption from corporation tax on certain trading profits of agricultural and fishery co-ops was being terminated from 1 April of this year, and section 45 gives effect to this. The section also contains a number of measures which will ease the transition from exempt to fully taxable status, and which are being introduced to meet concerns expressed in particular by service and liquid milk co-ops. In summary, the provisions will allow relevant trading profits which are attributable to the pre-April 1992 period in a co-op's accounting year to be exempt, will phase-in the transition from exemption to the standard 40 per cent tax rate by taxing only one-third of affected profits in 1992, and two-thirds in 1993, and will provide that unused trading losses incurred prior to 1 April 1992 may be used for offset against profits arising after that date. In section 44, trading profits arising to a co-op from supply of milk to another co-op for processing, where the processing co-op is wholly or mainly engaged in dairy processing, will be deemed eligible for the 10 per cent rate of corporation tax. In addition, section 44 contains a provision which maintains the relative tax position which Bord Bainne had prior to the termination of the co-ops exemption. Profits which Bord Bainne made on distribution of processed products purchased from supplier co-ops were exempt because Bord Bainne is itself a co-op; such profits will now be taxed at 10 per cent, as would be the case if the products were sold by the processing co-op's.
Section 13 withdraws the partial income tax exemption for the dividends received by individual shareholders in companies which benefit from the 10 per cent rate of corporation tax. This relief was being increasingly used in an unintended way by close companies to pay the director-shareholders of these companies partially taxed dividends instead of fully taxable remuneration.
Section 23 ringfences the losses and capital allowances arising from trades carried on by limited partnerships. This means that these losses and allowances can in future be offset only against the profits from the partnership trade and not, as up to now, against the other income of the limited partners. A similar restriction is being introduced under section 24 for the capital allowances on holiday cottages. The reason behind these two changes is that schemes were being devised to use these allowances and losses for tax shelter purposes for offsetting against the other taxable income of the investors in these schemes. With the closing off of other tax loopholes, there would be adverse effects for the Exchequer if such schemes were to become widely used.
Section 25 provides for the new wear and tear capital allowances regime for plant and machinery which was announced in the budget. The new wear and tear tax depreciation rates are 15 per cent per annum on a straight line basis for the first six years for all plant and machinery, with the remaining 10 per cent being written off in year seven. These rates will apply to both new and second-hand plant and machinery acquired on or after 1 April. This new capital allowances regime represents a major simplification and improvement on the old system which had three rates and which applied on a reducing balance basis. It also strikes a reasonable balance between the objectives of encouraging investment and promoting job creation.
Section 32 implements the budget measure abolishing the tax exemption for dividends distributed out of profits which were exempted from corporation tax under export sales relief or Shannon relief. The full tax charge on these dividends is being gradually phased-in over the period from 29 January 1992 to 6 April 1994.
Section 35 deals with the Irish tax liability on dividends distributed by Irish resident companies to their foreign shareholders. A de facto exemption has existed for many years in regard to this liability, and the formal legal liability is now being reduced to nil to conform with this. The change is being made in order to assist Irish companies to obtain equity finance from abroad and to remove uncertainty on the part of foreign manufacturing and financial companies which set up operations here.
Sections 37 and 38 implement the changes which were announced on 20 December last restricting domestic sourced section 84 loans. The main change involved is that no new section 84 loans are allowed on and from that date except in the case of loans to projects specified on two lists of approved manufacturing projects which were provided for in previous Finance Acts. These changes are in line with the recommendation in the Culliton report on this matter.
Section 39 removes a tax anomaly in the case of banks and general insurance companies which operate in the State on a branch basis. As announced in the budget, these branches will no longer be entitled to avail of the tax exemption available to non-residents in respect of their profits from Government securities. Their entitlement to loss relief arising as a result of this exemption is also being restricted.
Section 40 provides for a phasing-in over three years of a tax charge on the gains accruing to building societies on the disposal of Government securities. This change will mean that the societies will in future be charged to tax in the same way as banks on such disposals.
Section 41 implements the two changes announced in the budget relating to the taxation of life assurance companies. The first change is concerned with the expenses incurred by a life assurance company in acquiring new business. These expenses will in future have to be spread over a seven year period instead of being fully offset in year one. This change is being phased in as announced in the budget, but in order to allow the companies more time to make the necessary administrative adjustments, the commencement date is now being put back to 1 April 1992. The second change is the introduction of a new annual charge on the life companies' unrealised gains on their holdings in unit trusts or other tax exempt investment vehicles. Since this is a charge on unrealised capital gains, the gains and losses involved are being spread over seven years, and indexation relief will apply to the losses as well as the gains.
Sections 42 and 180 implement the new arrangements relating to the bank levy which were announced in the budget. Section 180 continues the bank levy for the years 1992 to 1994 at its 1991 level of £36 million. Section 42 provides that where a bank increases its corporation tax liability for the relevant tax year by a sufficiently high amount so that it exceeds a specified threshold, all or part of its annual bank levy payment will be off-setable against its excess corporation tax over that threshold. The specified threshold will be the higher of the bank's advance corporation tax payment for that year or a level of corporation tax arrived at by indexing the bank's average corporation tax liability for 1989-90 and 1990-91 by the change in its profits since 1990-91. These new tax arrangements will be reviewed in three years time in the light of developments over the period.
Section 43 provides that a company's trading losses and other deductions arising from an activity chargeable at the 10 per cent corporation tax rate will no longer be allowed for offset against the profits of that company chargeable at 40 per cent.
Section 52 introduces a new incentive for companies to send in their tax returns on time. The section debars a company, which fails to meet the prescribed tax return deadline, from claiming certain reliefs in a particular way in respect of the accounting period in question.
Section 53 gives tax relief on corporate donations to the Enterprise Trust Limited, a measure announced in the budget. The trust has been set up by the representative employer bodies as their response to assist the area based initiatives for combating unemployment outlined in Chapter VII of the Programme for Economic and Social Progress.
Section 54 extends until 1999 the existing corporation tax exemption for certain of the profits of Nítrigin Éireann Teoranta. The reason for this extension is to enable the company to use these tax exempt profits to service and to reduce its accumulated debts which are State guaranteed.
The relief from corporation tax for investment in films, commonly known as section 35, is due to expire on 9 July 1992. As an exceptional measure, this relief is being extended up until 31 March 1995, and this is provided for in section 55 of the Bill.
Chapter VI of the Bill sets out the definitive tax regime which is to apply to oil and gas activities in Ireland's offshore areas, other than the Marathon acreage, and which is designed to improve Ireland's competitive position in attracting oil and gas exploration. In broad summary, it incorporates provisions included in the 1985 Petroleum Taxation Bill, which was never enacted, updated to reflect subsequent policy decisions. A particular feature is the provision for a special incentive rate of corporation tax of 25 per cent, which will apply to income arising under petroleum production leases granted by the Minister for Energy before certain specified dates. These dates reflect the respective relative degrees of difficulty of gaining access to, and developing, commercial discoveries in the offshore areas, as indicated by the duration of exploration licences granted in respect of such waters — longer licences being granted for exploration of more difficult waters.
The chapter provides in section 70 for the various definitions and, in section 71 for the ring-fencing of certain petroleum activities. The 25 per cent rate of corporation tax, already referred to is set out in section 72, Sections 73 and 74 apply ring-fence provisions for relief for losses and capital allowances, and for group relief purposes, with the exception of allowing losses incurred in an onshore mining trade to be set off against offshore petroleum profits. The treatment of chargeable gains and allowable losses in relation to petroleum related assets is covered in section 75, while section 76 restricts interest expense and charges on income as deductions from petroleum profits. Section 77 ring-fences the set-off of advance corporation tax (ACT) on distributions made between associated companies, in order to prevent the unintended offsets against petroleum profits.
Sections 78 to 80 deal with the treatment of the various allowances for expenditure incurred on production and development and on exploration, both abortive and successful. Section 81 provides for an allowance on abandonment expenditure and reflects the growing consciousness for the need to protect the marine environment. Section 82 provides for the valuation at market value of petroleum which, for example, is being sold by a production company to an associated refining company. Finally, section 83 relaxes the capital gains tax charge which would otherwise arise in cases where disposals and acquisitions under approved changes in licence interests occur before the production stage of petroleum activities.
Sections 59 to 69 in Chapter V of the Bill are concerned with the implementation of an EC Directive on mergers, divisions, transfers of assets and share exchanges between companies in different member states. These provisions deal primarily with cross-border transfers of assets. The reason for this is that cross-border share exchanges are already permitted under Irish tax law and the necessary EC or Irish company law does not yet exist to allow cross-border mergers and divisions to take place. However, a general provision is being introduced giving the Revenue Commissioners power to grant the appropriate reliefs under the directive in the period between the enactment of the EC company law provisions on mergers and divisions and the subsequent enactment of these reliefs in a future Finance Bill. The main relief granted under Part V is the deferral of capital gains tax where a company resident in one EC member state transfers some or all of their trading assets to a company resident in another member state. Since such assets can include development land, a similar tax deferral is also being introduced in the case of a transfer of development land between Irish companies in an amalgamation or reconstruction situation.
In my budget speech, I promised to bring forward measures in the Finance Bill to deal with the tax issues which arise as a result of capital liberalisation. These measures are contained in sections 22 and 209 of the Bill. Once capital liberalisation is completed, Irish residents will be allowed to open and maintain deposit and current accounts with financial institutions in other EC member states. This freedom will apply to both individuals and companies.
Radical changes in the taxation of deposit interest are therefore necessary to avoid possible detrimental effects on domestic financial markets and on interest rates from capital outflows. The changes are also designed to preserve revenues from interest income to the fullest extent possible, but by maintaining taxation at a realistic level and by introducing a number of reporting requirements to safeguard against the use of foreign accounts for tax evasion purposes. The package of measures in the Bill will allow Irish financial institutions to offer savings accounts to Irish residents which should be broadly competitive with accounts abroad.
The main points of the changes provided for in the Bill are as follows:
Companies and pension funds will be allowed maintain accounts which are free of DIRT. To ensure that this concession is confined to bona fide tax paying companies, there is a requirement that a company on opening a DIRT free account will have to give their corporation tax number to the financial institution concerned. This tax number will have to be certified as correct by the company's auditor. The financial institutions will be required to send a report to the Revenue Commissioners giving details of their DIRT free accounts including the name, address and tax number of each company holding an account, together with a statement of interest paid on each account. These accounts will be available to companies from the date exchange controls are lifted.
For individuals, the financial institutions will be allowed to offer special savings accounts and the interest on these accounts will be subject to tax at 10 per cent. No further tax will be payable on this interest. There are a number of conditions attaching to these accounts. As the accounts are savings accounts, there can be no withdrawals in the first three months of operation of the accounts and all withdrawals must be at one month's notice. The maximum balance allowed in the accounts is £50,000 and the financial institutions will not be allowed to offer fixed interest rates on these accounts for more than two years at a time. Only one account per person over 18 will be allowed. Married couples will be allowed to opt for either two single accounts or two joint accounts. Like the DIRT-free accounts for companies and pension funds, these special savings accounts will be available from the date exchange controls are lifted.
Of course, individuals will continue to maintain other accounts which will remain liable to DIRT at the standard rate of tax. From the tax year 1993-94, the DIRT charged on interest income on these accounts will represent the taxpayer's final liability to income tax on that interest.
From 1 June any Irish resident opening a foreign account will be obliged to notify the Revenue Commissioners of the existence of the account within three months of the opening of the account. Failure to do so will result in a surcharge of 10 per cent of the taxpayer's liability to tax for the year in which the account was opened, irrespective of the tax loss on the account.
Any institutions or financial agents which act as intermediaries in the opening of foreign accounts for Irish residents will be required to make a report to the Revenue Commissioners giving the name, address and tax reference number of each resident on whose behalf they have opened an account.
Similar reporting requirements will apply to those acting as agents for Irish residents investing in foreign collective investment undertakings.
Sections 56 and 57 provide for the reforms of capital gains tax announced in the budget. The single rate of capital gains tax at 40 per cent is confirmed, as is the halving of the annual small gains exemption. This exemption now stands at £1,000 for a single person and £2,000 for a married couple. Section 58 is an anti-avoidance section. At present capital gains tax relief is allowed when a trader transfers business assets into a company. This section will confine this relief to cases where the transfer is carried out for bona fide commercial purposes. Sections 203 and 204 extend the tax base for discretionary trust tax. At present, the tax is not charged to trusts where any of the principal beneficiaries are under 25 years of age. This provision will lower that age limit to 21 years.
The Bill provides in Part IV for the stamp duty changes announced in the budget. Section 183 introduces the new £2 charge on ATM cards. To ensure that this charge is applied in an equitable fashion, two exceptions to its application are provided for. The first is an exemption for cards which are never used for ATM purposes, the second is an exemption for cards held on deposit accounts where the average daily balance is less than £10 over the charging period. The Bill also confirms the Stamp Duty (Variation) Order which came into effect on 1 November last. This order exempts many instruments used in the financial service industry from stamp duty.
Part II of the Bill deals with Customs and Excise. Apart from confirming the various budget rate changes, provision is made for implementing the other initiatives which were announced, with a few modifications. The Bill also provides for the transposition into national law of the EC Council directive adopted last February for control and movement of excisable goods in the Internal Market.
Sections 84 to 97 provide a framework for the levying of excise duty on beer on the finished product instead of at the "worts" (pre-fermentation) stage as at present. The new system will come into operation on a date to be specified. The draft EC directive on the new internal market structures for the taxation of beer and alcoholic drinks generally envisages, of course, a 1 January 1993 start. The actual rate of duty to be applied will be determined in the light of budgetary circumstances and Single Market constraints then prevailing.
Sections 98 to 114 set out the revised legal arrangements that must apply to the control and movement of excisable goods between member states from 1 January next. They will replace the existing border controls on the intra-EC movement of tobacco products, mineral oils and alcoholic beverages. In the case of commercial transactions, excise duty will continue to be payable to the member state in which the goods are consumed and at the rates charged by that State. Personal purchases of alcohol and tobacco products in other member states will not be liable to any further tax when brought into the State in which the goods are to be consumed. As in the case of the VAT area, this legislation, including the various requirements and procedures to be followed by the different operators involved, is being introduced at the first opportunity so as to give maximum time to trade interests to familiarise themselves with the new regime. The Revenue Commissioners have already had discussions with interested parties and these contacts will continue in the run-up to the implementation date.
Turning to more domestic matters, sections 115 to 124 detail the arrangements for charging an annual excise duty of £100 on amusement machines. The duty will apply to, for instance, video-based games, skills machines and certain kinds of poker machines which do not return cash winnings or redeemable credits. It will not apply to the likes of kiddie rides, juke boxes nor to pool tables. In response to the representations made about the need to take account of the seasonal nature of this business in certain locations I have provided for a concessionary high season rate of £60 which will apply for the six-month period up to 15 September in each year.
The remaining sections in this part of the Bill confirm the following changes announced in the budget: the abolition of the duties on televisions and video players from budget night and on table waters from 1 November 1992; the restructuring of the duty on motor vehicles involving the reduction of duty on most cars, the elimination of the duty on a wide range of commercial vehicles and the increase in the duty on vans derived from cars and jeeps; the reduction in the duties on petrol, effective from 1 May 1992, and on non-automotive liquid petroleum gas, from 1 July next; and the increases in annual road tax, cigarettes and other tobacco products and cider and perry.
The present licence fee arrangement for public houses, whereby each premises irrespective of size or location, pays the same annual charge of £100, is, in itself, inequitable and any increase in the flat rate would accentuate that aspect. That is why, in my Budget Statement, I announced that I intended to replace the current charge for publicans and hotel liquor licences with one based on the rateable valuation of the individual premises concerned. I saw this initiative as introducing a desirable element of progressivity into the charging arrangements. However, following representations and contacts with the trade I am prepared to modify the proposal, while still retaining the progressive element. I now propose to relate the duty chargeable for spirits retailers on licences for pubs and hotels to their turnover. Section 135 provides for the basic provisions for the duty. However, because of the short period in which the modified approach had to be developed, it may be necessary to bring forward certain refinements on the Committee Stage.
The licence charge, which will apply equally to public houses and to the bar turnover of hotels, is set at £200 where turnover is less than £150,000 annually; on the best information available to me, up to three-quarters of premises could be liable at this minimum rate. A sliding scale of increased charges will then apply subject to a maximum of £3,000 for those premises with turnover of more than £1,000,000 a year. Where publicans carry on other separate businesses in their premises, in conjunction with the pub business, the turnover of the non-pub business will be excluded from the basis of the charge.
While I am legislating for a turnoverbased system rather than the rateable value approach, which was my original intention, I have no hesitation in saying that if I should find that the turnover basis for the charge proves unsatisfactory, for whatever reason, I will revert to the rateable valuation proposals.
In drawing up the detailed provisions for the new system, I sought to ensure that, as far as possible, all holders of liquor licences would be treated fairly and equitably, having regard to the different nature, conditions and scope of the various types of licences involved. Hence, the rates of duty on other categories of liquor licences are also being increased substantially.
Provision is also being made for the duties on other excise licences, e.g. on bookmakers, gaming, exemption orders, etc. to be increased.
The Bill also provides for a number of technical tidying-up measures.
In the budget I announced that the Finance Bill would contain provisions to enable the Minister to extend tax clearance to licences such as those for pubs, dance halls, employment agencies, bookmakers and so on. It was decided to concentrate initially on liquor licences issued by the Revenue Commissioners. Pubs, off licences, supermarkets, hotels and restaurants licensed for the sale of spirits, wines, beers, etc. will have to have a tax clearance certificate from the Revenue Commissioners when they seek to renew their licences later this year.
Section 136 amends the Finance Act, 1910, to require applicants for liquor licences to produce a tax clearance certificate. Section 221 defines what tax clearance means and to whom it shall apply. Under the Bill individuals, companies or partnerships seeking or renewing a licence will have to meet all their obligations in respect of income tax, VAT, corporation tax, PAYE-PRSI and capital gains tax as a condition of getting their licences. The Bill also provides for an appeal against refusal of a tax clearance certificate. In the event of an appeal against the refusal of a tax clearance certificate, the Bill provides that if a licence is already in existence that licence will continue in force and in the case of a new application a temporary licence will issue pending the final determination of the appeal.
Before leaving this Part of the Bill, I would point out that the Bill as published does not include the legislative provisions relating to the replacement registration charge to apply to motor vehicles when the existing excise duty is abolished as a result of EC Single Market requirements. These measures will, however, be brought forward on Committee Stage.
Briefly, the registration tax will be the responsibility of the Revenue Commissioners so as to protect the large Exchequer revenue involved — VAT as well as excise. That office will have total responsibility for the registration of vehicles, as well as for the assessment, collection and control of the new tax. It will be collected, in the main, through dealers under Revenue control, and will be administered and controlled through the network of Revenue offices around the country. This will ensure a local service to dealers and members of the public, as well as helping to absorb a sizeable number of surplus customs and excise staff in the various locations.
The role of the Garda in relation to the enforcement of road tax will be supplemented by an enhanced resource of Revenue officials as part of Revenue's enforcement of the new registration tax. Of course, road tax itself, both initial and renewals, will continue to be administered by the local authorities.
Part III of the Bill gives effect to changes in VAT law. On this occasion, in addition to confirming the main changes announced in my budget day speech, I am providing for the transposition into national law of the EC Council directive which sets out the new rules for the levying, collection and control of VAT with effect from 1 January 1993, when border controls disappear. So as to ensure that revenue collection is safeguarded in this new situation, the Bill will also include provisions to enhance Revenue's control and enforcement powers. Essentially, the proposed measures mirror those currently applying to intra-Community trade under customs law but which will no longer be applicable to such trade after the turn of the year. I am also using the opportunity offered by this fundamental revision of VAT law to provide for a number of general tidying-up measures.
The Bill confirms the rate changes announced on budget day. A range of goods and services at the 12.5 per cent rate are being increased to 16 per cent, in line with decisions taken at EC level, and the farmers' flat-rate addition, along with the associated livestock rate, are increased from 2.3 to 2.7 per cent.
In the interests of both equity and base-broadening, I announced my intention in the budget to apply VAT to bottled waters, frozen desserts and corn or maize-based snack foods, all of which are currently zero rated; similar action was signalled in regard to commercial sporting and leisure facilities and agricultural services supplied by farmers, both of which are currently exempt from the tax. Provisions to implement these measures are included in the Bill, but with some modifications to my original plans.
In response to representations from the soft drinks industry, I am synchronising the dates for the imposition of VAT on bottled waters and for the full abolition of excise duty on soft drinks generally. The effective date for both measures will now be 1 November. The taxation of frozen desserts and corn and maize-based snack foods will go ahead on 1 July as originally intended, as will the taxation of commercial sports and leisure facilities. In regard to this latter activity, however, I am now proposing application of the 12.5 per cent rate instead of standard-rating to put it on a par with entertainment services generally. I must emphasise again that non-commercial bodies providing sports and leisure facilities will not be affected by this change.
In regard to agricultural services supplied by farmers, the Government have decided that, because of the vital role that artificial insemination services play in the development of the national herd, taxation should not apply in this area. Moreover, to streamline the application of VAT in the general agricultural sector, it is proposed to reduce the rate on technical assistance services and farm relief services, variously at 16 and 21 per cent, to the 12.5 per cent rate.
Moving on to the other measures in the Bill, Deputies will see that very many sections of the existing VAT Acts are being amended. This is to cater for the post-1992 situation in which border controls disappear and where movements of tradeable goods between member states will not be monitored for tax purposes at point of entry to the State. The basic principle underlying the new transitional system is that, as at present, VAT on intra-Community sales will be payable in the member state where the goods are consumed. This taxation at destination system will apply at least until the end of 1996 when a changeover is envisaged to a regime based on payment of tax in the country of purchase — this is the so-called origin scheme. The detailed operational rules underpinning the transitional destination-based regime have been set down in an EC Council Directive. The earliest possible opportunity is being taken to legislate for these changes, so as to enable businesses to acquaint themselves with the revised procedures and requirements as far as possible in advance of the system becoming operational.
As far as traders involved in cross-border trade are concerned, the essential feature of the new regime will be the disappearance of formalities at borders, such as the lodging of official documentation and the physical checking of goods; in future, compliance will be based essentially on ex-post accounting supported by traders' records. While the general rule for intra-Community trade will be that VAT will be due in the country of consumption, private individuals will be able to buy for personal purposes most goods tax-paid in the member state of their choice. However, special rules will ensure that it is the country of consumption who collect the tax on sales of new vehicles and mail-order sales. Full details of how these arrangements will work are provided for in the Bill. As is usual when such momentous changes will be prone to occur in taxation systems, the Revenue Commissioners will be disseminating detailed information through leaflets and seminars so that taxpayers are fully informed as to their changed responsibilities in good time for the changeover.
Central to the Single Market concept is the dismantling at frontiers of customs controls for tax purposes. This will inevitably lead to a diminution in Revenue's capability to ensure the security of VAT, unless alternative means of policing the movement of intra-Community goods are placed at their disposal. It is incumbent on the Minister for Finance, on the Government and on the Houses of the Oireachtas to provide the ways and means for the Revenue authorities to safeguard the collection of taxes so that the public finances may be maintained in sound order. To meet my responsibilities in this regard I am proposing that, in addition to a general extension of Revenue powers to which I will refer separately, enhanced powers will be granted to VAT officials for the purposes of combatting the new forms of fraud that will be prone to occur as a result of the abolition of frontier controls. As I said, what is basically involved is the transfer of customs powers currently exercised at the frontier to authorised VAT staff in limited specified circumstances. The powers in question are those of search and arrest, as well as the right to seize goods.
New reporting requirements will also be introduced. Furthermore, where persons with a history of VAT evasion or fraud are concerned, Revenue will be given the right to demand financial security as a guarantee against future compliant behaviour. I cannot stress sufficiently strongly that no legitimate trader has anything to fear from the implementation of these additional anti-fraud measures. Indeed, I would be failing in my duty to all law-abiding taxpayers if I did not move instantly to replace those controls which otherwise will be lost to Revenue as a result of internal market obligations with other effective means of ensuring tax compliance.
Removal of border control checks will also entail abolition of VAT at point of entry for intra-Community trade: as I said at budget time, this will give rise to an Exchequer cash flow loss of some £200 million. While good progress has been made in indentifying how this potential shortfall in the public finances can be made good, processing the sheer volume of other VAT items in the Bill has meant that final decisions on precise replacement measures for the VAT collected at point of entry have had to be held over. I can tell the House, however, that the ongoing examination is concentrating on ways of advancing VAT liabilities generally. My aim would be to have full details of the new provisions ready for inclusion in a further Bill later this year.
With the increasing need to audit the returns of taxpayers within self assessment, it has become clear that the existing Revenue powers to examine trading records and other documents with a bearing on tax liability are inadequate. The provisions in Part VII dealing with the inspection by authorised officers of various records, address this difficulty.
Sections 205 to 207 relate to the obligation by third parties to make certain returns of information to inspectors of taxes and the inspector's rights to audit this information. Section 210 deals with record-keeping for tax purposes and extends the meaning of records to include documents relating to sources of income and linking documents prepared in the course of making of business accounts.
Section 211 extends the powers of authorised officers to enter premises to inspect documents and records. It permits officers to search premises for records where these are not produced. It provides that an officer may enter a private residence only at the invitation of the occupant or on foot of a warrant issued by the District Court. Sections 212 and 214 contain provisions for the supervision of the PAYE system and the construction industry tax scheme broadly similar to those contained in section 211. The Bill also provides for the extension of the construction tax scheme to forestry and meat processing operations. Section 215 provides that Revenue officers, in carrying out their powers of inspection under sections 211, 212 and 214, may be accompanied by a member of the Garda Síochána who is given the power of arrest in the event of obstruction.
Section 218 empowers an inspector to require the submission of a statement of affairs, assets and liabilities, where no return of income is filed or he is dissatisfied with the return submitted.
Section 220 extends the Revenue Commissioners' powers to attach amounts owed by a third party to a taxpayer who has defaulted in paying tax.
Sections 223 and 224 provide for a further development of the self assessment system in that PAYE directors and their spouses will now be obliged to make returns of income without being served with notices to do so. Also these returns may be subject to an audit by an inspector of taxes and to the imposition of the 10 per cent surcharge for late filing.
Sections 225 and 226 provide that details of paper-for-paper transactions must in future be supplied in tax returns. Section 227 increases penalties under the Tax Acts.
Finally, regarding the extension of Revenue powers, I would stress that these powers are necessary to ensure that the Revenue Commissioners can tackle tax evasion effectively, and that they are, in any event, circumscribed in the legislation. Moreover, the board of the Revenue Commissioners have emphasised that the officers concerned will receive appropriate training and guidance in the use of these powers, particularly as regards entry to, and searches of, premises, and that the use of the powers will be closely monitored by the board. I would emphasise that the compliant taxpayer has no grounds for concern; on the contrary, it is in the interest of the general body of taxpayers that the authorities should be able to ensure that those who fail to pay taxes properly due can be detected and successfully prosecuted, and that avoidance practices can be addressed promptly.
The Bill as usual contains a number of miscellaneous provisions, some of which I have already mentioned. Section 228 contains the usual provision relating to the Capital Services Redemption Account. Section 229 provides that, in the eventuality of the Dáil being dissolved after the Second Stage of the Finance Bill is passed by the Dáil but before the Bill is enacted, any period when the Dáil is dissolved will be disregarded for the purposes of calculating the statutory deadlines governing enactment of the Bill. Section 230 provides for the payment direct from the Central Fund of any remittance falling due under the terms of the 1959 Agreement between the State and Marathon Petroleum.