I move: "That the Bill be now read a Second Time."
This year's Finance Bill implements an important range of measures designed to promote and assist the creation of sustainable employment. They do this through enhancing business competitiveness, promotion productive use of resources, and stimulating and rewarding genuine enterprise. In bringing forward these measures, I have taken account of the views of many interested parties, notably the Task Force on Small Business and the Task Force on jobs in Services. Accordingly, this year's package places particular emphasis on improving the climate for smaller and start-up enterprises. It also reflects the Government's conviction that the services sector can continue to make a major contribution to fulfilling our employment needs.
I would emphasise that the measures in this year's Bill should not be viewed in isolation, but rather as complementing and enhancing the initiatives for enterprise and employment enshrined in the 1993 Finance Act. More importantly, they must be seen in the context of the Government's broadly-based strategy for economic progress in the interests of job-creation: the key elements of this are the continued observance of budgetary discipline, the responsible pay arrangements in the new Programme for Competitiveness and Work, and the commitment to reforming the taxation system to make it more employment-friendly.
Among the significant items in the Bill in this connection are: the introduction of a special capital gains tax rate for individuals in respect of shares in most unquoted trading companies, so as to help in attracting investment funds to this area and to reward those who put their funds at risk in developing job-creating business; extension to the wider services sector of the roll-over relief under capital gains tax for equity investment by entrepreneurs in unquoted trading companies, introduced last year for reinvestment in business in certain sectors; a new business assets relief in capital acquisitions tax, so as to facilitate the transfer of family business and to improve incentives for those trying to build up businesses; an easing of the income qualification test for access to the seed capital scheme which assists new business start ups by employees and the unemployed; an increase in the company-value limit for the purpose of BES investment by the "original entrepreneur"; a raising of the VAT threshold for both goods and services, thus relieving the very small business from the obligations associated with VAT registration; the cash-basis of accounting for VAT is being made available to business in all sectors with an annual turnover of up to £250,000; a new and better focused scheme of incentives for urban renewal, with new incentives for industrial buildings, in the interests of more balanced development in inner city areas; improved annual capital allowances for hotel development and farm buildings, an increased allowance for business cars, and the granting of capital allowances to the purchase of computer software or the rights to use such software; the introduction of a new provision into the relief for investment in films aimed at assisting low budget Irish films; simplification of the payment arrangements, subject to EU approval, for VAT on long term leases of property; a range of relieving stamp duty measures, including a new appeals procedure and a special relief for young trained farmers; modernisation of the tax treatment of businesses' foreign exchange gains and losses; unilateral credit relief for foreign withholding taxes incurred by computer software companies; a range of measures to underpin the further development of the International Financial Services Centre; and amendment of the tax provisions relating to bearer bonds, so as to assist the development of Irish financial markets.
Section 1, 2 and 3 provide for the major improvements in the mainstream income tax code announced in the budget. The basic personal allowances are being increased by 8 per cent and the standard rate tax band is being extended by 7 per cent. To help those on lower incomes, the marginal relief rate, which is the effective tax rate for many lower paid people, is being reduced by 8 percentage points, from 48 per cent to 40 per cent and the child addition to the exemption thresholds is being improved by £100 per child for all children.
Section 4 provides for the PAYE allowance to be extended to the children of proprietary directors and of self-employed persons where they are working in their parents business.
Sections 6 and 7 provide for the phased restriction to the standard rate of tax of the relief for mortgage interest and health insurance premiums. The measures will only affect those taxpayers who claim relief at the 48 per cent rate. Section 6 provides that, in relation to mortgage interest relief, standard-rating is being phased in so that it will not apply fully until 1997-98. For first-time house buyers, for the first five years of their claim, the percentage of mortgage interest qualifying for relief will be 100 per cent and the de minimis exclusion will not apply.
Section 7 provides for the standard-rating of medical insurance premium relief. As the relief is available on a previous years basis, there will be no impact on taxpayers in 1994-95 and full standard-rating will apply to relief claimed in the tax year 1996-97. Relief in respect of unreimbursed medical expenses is not being standard-rated given the unpredictable nature of this expenditure. However, section 8 provides for the thresholds to be raised to £150 for an individual and £300 for a family in respect of expenditure incurred in the tax year 1994-95.
Section 9 reduces, on foot of the fall in commercial interest rates, the rates used for determining the benefit-in-kind charge on preferential loans made to employees by their employers. Section 10 revises the current list of accountable persons for withholding tax purposes.
Section 12 provides that, in view of the abolition of the 1 per cent income levy, taxpayers paying their preliminary tax for 1994-95 will not have to take the levy into account if they elect to pay their tax on the basis of 100 per cent of their 1993-94 tax liability. Section 12 also provides that individuals availing of the 100 per cent rule for computing preliminary tax may not take account of the relief on investment in film companies under section 35.
To redress an unintended effect of the rule for the seed capital scheme in denying access to some people at whom the scheme was aimed, section 14 provides that there will no longer be any reference to income in the year immediately preceding the establishment of the new business. Moreover, the condition regarding income from sources other than employment will be eased.
Section 14 also provides for an increase from £150,000 to £250,000 in the ceiling which the capital of a company must not exceed if the rules which prevent an individual who, broadly, owns 30 per cent of a company obtaining BES relief, are not to apply. The section also ensures that mushroom cultivation continues as a qualifying trade for the purposes of the BES and the seed capital scheme.
The Finance Bill, 1991 countered the circumvention of the BES company limit by the use of company splitting devices, subject to an exception for transitional cases. The transitional arrangements were intended to be purely temporary and section 15 provides for their termination as and from 30 June 1994.
Section 16 provides for more meaningful public access requirements in relation to the income tax relief on heritage property, bringing them into line with those for the corresponding CAT relief. The property must in future be open to the public for a total of 90 days annually, 60 of which must be in the period May to September. The section further makes it a requirement for claiming the relief in any year that the location/address of the house or garden and its opening times be notified to Bord Fáilte, so that the details may be published by the board or another tourism promoting body.
Section 17 provides that, subject to certain conditions, the benefit-in-kind charge on works of art or antiques loaned by an employer will not apply where such objects are on view to the public in an approved property.
Unemployment benefit has been made reckonable for tax purposes from 6 April 1994. It has been decided, however, that, in recognition of their special circumstances, workers who on 5 April 1994 were participating in a systematic short-time working arrangement, recognised by the Department of Social Welfare, will be exempted from the new tax arrangements. This exemption will apply in respect of unemployment benefit payments received in relation to systematic short-time working for the duration of an individual's current unemployment benefit claim or to the end of the present tax year — 5 April 1995 — whichever is the earlier. I will bring forward a Committee Stage amendment to this effect.
Section 18 amends the tax relief for investment in Irish film-making companies. It introduces a pilot scheme targeted at promoting investment in low budget films, which will operate for a one year period from 9 July 1994. This will allow a corporate investor to invest up to £350,000 in one or more films certified by the Minister for Arts, Culture and the Gaeltacht on the basis of objective criteria relating to small budget films not exceeding a cost of £1,050,000. As I announced in a press release on 14 January 1994, investment in film companies by way of loans is being eliminated from that date in order to rectify an anomaly whereby investment via a short term loan obtained much more favourable tax treatment than investment by way of shares.
Section 19 increases, with effect from 27 January 1994, the capital value threshold for determining the capital allowances and the deduction for running expenses in respect of cars used in the course of a trade, profession or employment. The threshold will increase from £10,000 to £13,000 in respect of capital allowances for new cars only, and in respect of allowable running expenses for all cars. The previous £10,000 limit for capital allowance purposes will continue to apply to existing and second hand cars.
Section 20 shortens the writing down period from ten to seven years for capital allowances purposes for expenditure on hotels and holiday camps, incurred on or after 27 January 1994. Section 21 improves the annual capital allowances regime for farm buildings and structures by reducing the write-off period from ten to seven years.
Section 22 provides that where computer software is acquired as an asset of a business, either by outright purchase or under licence, the company will be able to claim plant and machinery capital allowances in respect of expenditure incurred in the acquisition of this software.
Section 25 deals with two issues arising from the removal, by section 38 of the Finance Act, 1992 of the formal liability of non-residents to income tax in respect of Irish dividends. First, it closes a loophole inadvertently created whereby such dividends paid for the ultimate benefit of an Irish resident fall outside the scope of certain anti-avoidance provisions of the Finance Act, 1974. Second, it deals with a problem that has arisen with a number of our Double Taxation Treaty partners. They have taken the view that dividends, being legally exempt from Irish tax, cannot be said to be subject to double taxation if fully taxed in the treaty partner country. However, the stance they have taken ignores the fact that Irish corporation tax is paid on the profits of an Irish company paying dividends to non-residents. In other words, the non-resident shareholder has effectively borne Irish tax.
Both of these problems are being solved by amending the 1992 legislation. While dividends paid to non-resident shareholders will be liable to Irish tax, any tax due will be fully eliminated by way of a tax credit and further relief so as to purchase a net nil liability to Irish tax.
Section 26 tackles certain abuses of the tax exemption for patent royalty income by refocusing the relief, in line with the original industrial policy thrust of the scheme, on inventions researched and developed in Ireland. The exemption is being maintained where the royalty is paid in respect of manufacturing activity, whether carried on in the State or abroad, and for non-manufacturing patent royalty income arising out of Irish Research and Development to the extent that it arises from third party payments. Dividends paid out of such exempt royalties will continue to be exempt from tax subject to existing requirements. The provisions in the Bill, therefore, fully protect the status quo for our major research and manufacturing companies.
Section 27 closes off certain loopholes in the legislation dealing with capital allowances and loss relief in the case of general partnership schemes, by confining them to the partnership income in such situations. A number of schemes have been launched in the past two years which sought to use these reliefs in an unintended and unacceptable way. These loopholes are being closed in the case of moneys invested in a partnership on or after the publication date of the Bill.
Section 28 introduces restrictions in the tax rules for capital allowances for lessors of plant and machinery in order to deal with an unintended use of these provisions through a new type of lease arrangement with serious implications for the corporate tax revenue yield. Under these balloon lease arrangements, the bulk of the lease payments are not received by the lessor until the end of the primary leasing period which can be up to ten or 15 years after the commencement of the lease. The effect of this is that the lessor can use virtually all the capital allowances on the leased assets for offset against his other taxable income over the early years of the lease.
With certain exceptions, therefore, the Bill ringfences the capital allowances in the case of such leases to the lessor's receipts from that particular lease in the case of leasing agreements entered into on or after 22 December 1993. The new rules will not apply to leasing companies in the IFSC or Shannon or to leases of buildings and the rules are relaxed to allow for seasonal factors in the case of leases of agricultural machinery. Special arrangements are provided in the case of leased machinery or plant the expenditure on which is incurred on or before 31 December 1995 and which is provided for the purposes of certain new projects which have been approved for grant aid and which qualify for 50 per cent accelerated capital allowances under the Finance Act, 1990.
There are two Chapters in the Bill dealing with urban renewal. Chapter III deals with the transitional arrangements associated with the current urban renewal scheme which has a termination date of 31 July 1994. First, expenditure incurred between 1 August and 31 December 1994 on certain projects will continue to qualify for the incentives under the scheme. Second, there will be an additional two year period until 31 July 1996 for the completion of leases to qualify for the double rent allowance.
The legislation also provides for an increase in the maximum floor area size of refurbished accommodation in the Custom House Docks and the Temple Bar areas in the context of the owner-occupier relief and the relief in respect of rented residential accommodation. In addition, the owner-occupier's allowance in respect of refurbishment expenditure in the Custom House Docks area is being increased from 50 per cent to 100 per cent.
Chapter IV sets out the provisions announced in the budget for the new urban renewal scheme which will commence on 1 August 1994 and will operate for a period of three years. The areas qualifying for the scheme, including certain designated streets under a pilot scheme designed to promote living over business premises, will be designated by way of ministerial order.
The scheme will include accelerated allowances up to 50 per cent for certain industrial buildings in the designated areas and a maximum capital allowance of 50 per cent for certain commercial buildings therein. Subject to specific conditions, these allowances will also be available in relation to the refurbishment of such buildings in designated streets.
In addition, section 23 type reliefs will be obtainable and a ten year double rent allowance will be available for qualifying properties in the designated areas but not in designated streets. For owner occupiers there will be a 50 per cent personal tax allowance claimable over ten years in respect of new construction costs with 100 per cent available for refurbishment expenditure.
The new urban renewal scheme, with its focus on residential and industrial development, will stimulate growth and employment in our designated cities and towns.
Deputies will be aware that, in order to comply with a direction from the European Commission, the Government had to take steps to remove mushroom cultivation from the scope of the 10 per cent manufacturing rate of corporation tax. Section 43 makes the necessary changes.
Section 45 provides that a company entitled to a section 84 loan by virtue of it being included on an IDA list of allowable loans can only get one such loan of the full allowable amount. The Bill also imposes a seven year limit on the duration of a section 84 loan taken out on or after the publication date of the Bill and provides that all loans taken out before that date should be terminated before 11 April 2001, that is seven years after the publication date of the Bill.
Section 46 extends to 31 December 1996, relief from corporation tax for gifts to the Enterprise Trust.
Section 47 provides for an exemption from corporation tax for certain payments by the Minister for Agriculture, Food and Forestry to National Co-operative Farm Relief Services Ltd. and to grants made by that body to its member co-operatives for the purpose of engaging contractors to provide farm relief services.
Section 49 deals with a double taxation problem arising from foreign withholding taxes affecting certain software companies. It provides for the introduction of unilateral credit relief for foreign withholding taxes on payments in respect of software transactions.
Section 51 addresses a number of the most pressing problems in the area of foreign exchange gains and losses facing Irish business engaged in international trade. I have decided to take a minimalist approach targeted on the main current problems and based on accounting practice. This ensures that commercial strategies for reduction or elimination of currency risk are effective after the taxation liability on the transactions have been determined.
Briefly, the provisions in the Bill relate to four basic problem areas as follows. First, foreign exchange gains and losses on long term borrowings incurred by companies, which are currently ignored for tax purposes, will now be deductible or chargeable, as appropriate, in the computation of taxable income.
Second, the foreign exchange gain, or loss, on a hedge instrument associated with a capital borrowing, which, as Deputies may know, are arrangements adopted by companies to protect themselves against exposure to exchange rate fluctuations, will be included in the computation of taxable income and excluded from the computation of capital gains. In conjunction with the proposal on capital borrowings, this will mean that hedging arrangements will be fully effective for commercial purposes after tax as well as before tax.
Thirdly, it is now proposed to allow companies with a non-Irish pound functional currency to compute their capital allowances in that functional currency. Finally, in the case of companies operating in non-Irish pound functional currencies, it is proposed to value any trading loss in such a currency at the exchange rate of the year the loss is offset against income.
I am happy to say that these changes have been welcomed by the business community as evidenced by the positive reports on the matter since the publication of the Bill.
I would like to inform the House that it is my intention to bring forward a Committee Stage amendment to provide for an exemption from tax for income of noncommercial State bodies. The exemption will not apply to deposit interest or to fee income, excepting statutory fees and incidental income of this kind. In settling the annual Exchequer allocation for such bodies, account is fully taken of own-resources arising to them so that the interests of the Exchequer will be safeguarded even in the absence of a tax charge.
The Government acknowledges the contribution that services have made and will continue to make towards our overall economic performance, particularly in the creation of much needed employment. In recognition of this, action has been taken in developing an overall strategy for the services sector. Moreover, various policy initiatives being legislated for in this Bill have been consciously directed at the services sector. In addition, the Government has undertaken, in the Programme for Competitiveness and Work, to examine options developed by the Task Force on Jobs in Services and other bodies in the area of the incentives, including tax treatment, afforded to the services sector.
In relation to incentives, Members will be aware that the Taoiseach recently set up a small interdepartmental working group to examine the range of international service activity which can qualify for State assistance including the reduced rate of corporation tax. In the time available to the group, it has not proved possible for them to carry out a detailed study of the matter to enable them put specific recommendations in this regard to Government for consideration in the context of the current Bill.
It would be the Government's intention, however, to consider at an early date any recommendations proposed by this group in relation to the application of State assistance, including the 10 per cent corporation tax rate, to a wider range of internationally traded services.
To the extent that areas warranting extension of the 10 per cent rate are identified by the group and approved by the Government, the aim will be to make provision for these in the 1995 Finance Bill with retrospective effect to the date of any announcement on the matter.
I would also like to inform the House that I am considering extending the definition of qualifying shipping activities in section 39 of the 1980 Finance Act to include deep-sea tugs. Subject to the resolution of some technical definitional problems, it would be my intention to bring forward a Committee Stage amendment to give effect to this change. If this does not prove possible in the time available, I will make the necessary changes in next year's Bill.
The IFSC has been a great success and I am anxious to ensure that it develops to its full potential. I am proposing certain changes, which are mostly of a technical nature, to assist this. In particular, I propose to put in place the tax legislation which is necessary to complement the legislation on investment limited partnerships which the Minister for Enterprise and Employment has announced he will be introducing to help develop the collective funds sector here. The relevant Finance Bill provision adds certain limited partnerships to the categories of undertaking within the definition of collective investment undertaking in section 18 of the 1989 Finance Act. This provision will only come into effect when the proposed Investment Limited Partnerships Bill is enacted.
I also propose to allow credit for foreign withholding tax paid in countries with which we do not have a double taxation treaty at present. This practice is the norm among OECD countries and its implementation here will help the development of business from the IFSC and the Shannon zone.
Income attributable to non-resident policyholders of IFSC foreign life assurance companies is not liable to tax in the State. Policies written now will, in most cases, mature in years beyond 2005, the year in which the 10 per cent tax concession for shareholders' profits in such companies will cease. The provision in this year's Bill extends indefinitely the exemption from tax here of non-resident policyholders' income. This is critical to the development of this important and relatively labour-intensive part of financial services activity in the centre.
Capital allowances on leased plant and machinery in the IFSC and Shannon zone are ring-fenced twice, once to prevent the allowances being set against non-IFSC and Shannon income and secondly to prevent them being used against income of IFSC and Shannon companies other than from the trade of leasing. It is considered that this latter ring-fence is too restrictive in an IFSC and Shannon context and it is proposed to relax it in the context of claims for capital allowances at the standard rate only.
There are other provisions of a more technical nature which will also help the development of both the IFSC and the Shannon zone. I do not propose to go into further detail on these at this stage: Committee Stage would be more appropriate for this.
Part II confirms the changes announced in the budget with regard to the increases in excise duty on cigarettes and other tobacco products, alcoholic drinks, road fuels and heavy fuel oil and the reduction in the rates of vehicle registration tax on cars and motor-cycles. Also confirmed is the relief from excise duty on oil emerging from a waste oil recycling process and on the use of marked gas oil in vehicle-mounted cranes and well-drilling equipment. In response to trade representations, this latter concession is being extended to include mobile concrete pumps and conveyor belts.
The Bill provides for the legislative framework to introduce a tax stamp regime for cigarettes which I first announced in the 1993 budget. The provisions, which are mainly technical, deal with the control and collection of the excise duty on cigarettes, deferred payment arrangements and related offences and penalties. I consider the proposed regime to offer greater security against the erosion of this significant revenue source from illegal importations within an internal market devoid of border controls.
A number of amendments are proposed in the vehicle licensing area with the primary aim of safeguarding road tax revenue. The amendments are designed to remove any doubts as to the legal status of the national vehicle file regarding vehicle ownership and related matters and to confirm the validity of information contained in certificates taken from the file for evidential purposes.
At the trade's request, it is proposed to change the high season period of the limited annual licence from 1 March-31 August to 1 April-30 September so as to better reflect seasonal trading patterns. Accordingly, amusement machines so licensed may be made available for play at any time during the six month high season and at week-ends and public holidays during the remaining six months of the year.
The Bill includes an enabling provision which will relieve bets placed at a horse race-meeting, in respect of events taking place elsewhere, of the existing betting duty when the proposed horse racing authority, as envisaged in the Horse-racing Industry Bill, 1994, is established. It is proposed under the latter Bill to apply a levy to such bets at the same rate as the existing betting duty, and this provision avoids the double taxation of such bets. Such revenue, which would normally accrue to the Exchequer, will in future be diverted at source into the racing industry for its direct benefit, in the same way as the on-course betting levy helps fund the industry currently.
Part III deals with VAT and confirms two important measures for business announced in the budget, namely the increase in the VAT registration thresholds and the change in the availability of the cash receipts basis of accounting, as well as the extension of VAT to the services of loss adjusters.
The Bill streamlines the VAT regime applicable to travelling shows and funfairs through providing that all funfairs will be liable at the reduced rate of 12½ per cent with the exception of gaming and amusement machines which will be standard rated.
The arrangements regarding the payment of VAT on long term property leases are being simplified to eliminate the onerous cash-flow burden on businesses entitled to full VAT deductibility and help developers of shopping and business centres. A facility is being introduced enabling relevant businesses, if they wish, to avoid the current need to pay over a sizeable lump-sum. As this measure requires EU approval, which is now being sought, the Bill provides for an implementation date to be effected by commencement order. In parallel with this concession, the opportunity is being taken to confirm that bad debt relief does not apply in cases where a landlord does not receive payment from a tenant for the VAT due on long term leases. The Bill also provides for a number of technical changes in order to clarify existing law and confirm present practice and also to bring Irish law into line with EU VAT law.
As I mentioned in my Financial Statement on 27 January last, I have reviewed the operation of the VAT monthly control statement introduced in 1992 as an anti-fraud measure, including consideration of the alleged distortion of competition arising between those traders currently subject to the control statement and those who are not. I do not propose to make any changes in the current arrangements which have been fully operational only for a relatively short period. I am conscious of the undoubted success of the initiative in eliminating certain fraudulent practices. However, I also remain mindful of the concerns expressed by traders in the matter. Accordingly, I am asking the Revenue Commissioners to examine ways of further improving the general operational approach, in consultation with trade interests, which will balance the respective legitimate official and business concerns.
Part V reduces the RPT house value threshold to £75,000 and the income threshold to £25,000. The single 1993 RPT rate of 1 1/2 per cent is replaced by three tiered rates, 1 per cent for houses valued between £75,000 and £100,000, 1.5 per cent on the value between £100,000 and £150,000 and 2 per cent on the value in excess of £150,000. A value banding system is included for houses valued at up to £100,000. The Bill introduces concessions for those over 65 and widowed and incapacitated persons along with a provision to deal with hardship cases and an easy payment scheme. The limit for marginal relief is extended from £30,000 to £35,000 generally and to £40,000 for those over 65.
The Government's strategy of creating conditions which are conducive to enterprise, investment and employment creation was reflected in several provisions of last year's Finance Act. Further substantial progress is made on this front in this Bill, which contains a number of major relieving measures in the area of capital taxation. These aim to improve the risk-reward ratio for entrepreneurs, encouraging them to expand and diversify their businesses. The Bill provides for a reduction in the rate of capital gains tax from 40 per cent to 27 per cent for longer term equity investments by individuals in small to medium sized companies; a widening of the scope of rollover relief under capital gains tax for equity investment by entrepreneurs to include investment in most trading enterprises, and a new relief under capital acquisitions tax for business assets acquired by gift or inheritance.
The new 27 per cent rate of capital gains tax will apply to unquoted equity investments in small-medium sized companies by individuals which are held for at least five years. I would like to emphasise that the 27 per cent rate has a very wide ambit. Trading activities, with the exception of dealing or investing in land, buildings and certain financial assets will be eligible, as will all individual investors, whether they are full-time working directors or non-active minority shareholders. I should add that the reduced rate will apply to quoted shares which were unquoted at the time they were acquired by the individual investor. When account is taken of the indexation relief, whereby only gains in excess of inflation are taxed, this new rate will generally translate into an effective rate of tax well below 27 per cent. This represents very favourable treatment for such investments, which can only be justified in terms of the risks associated with such business ventures.
The Bill provides for a considerable widening of the scope of capital gains tax rollover relief introduced last year. The relief provides for a deferment of capital gains tax where the proceeds of a disposal of shares in an unquoted company are reinvested in new share capital in another unquoted trading company. In future it will comprehend most trading activities, not just those falling within the scope of the business expansion scheme. The extended rollover relief will continue to be targeted at entrepreneurs who work in a full-time capacity for a business in which they have a material interest, and wish to move out of their present business in order to start up a new venture.
The Bill also provides for a new capital acquisitions tax relief for business assets. This involves a reduction for CAT purposes in the market value of the trade-related assets of a business which are acquired by gift or inheritance. The first £250,000 acquired by a beneficiary will be reduced in value by 50 per cent, while amounts in excess of £250,000 will receive 25 per cent relief. This relief has a wide scope, covering all business activities other than those dealing or investing in land, buildings and certain financial assets. It will serve as an important complement to the reliefs already available which assist the transfer of businesses from one generation to another — for example, the generous CAT exemption threshold for transfers from parent to child and the retirement relief under capital gains tax.
In order to ensure that the new relief is effective in alleviating the impact of CAT on the transfer of family businesses and in promoting enterprise and business development, I have decided to relax a number of the terms and conditions proposed in the budget. I have decided to dispense with the requirement that the beneficiary must work on a full-time basis for the business for a specified period after the gift or inheritance. I have also decided to modify the requirement that the beneficiary must hold a minimum 25 per cent interest in the business so as to enable a beneficiary with a minimum 10 per cent interest to qualify where his/her family has a controlling interest or where he/she has worked on a full-time basis for the business for at least five years prior to the transfer. The minimum period of ownership of the business assets prior to their transfer by the disponer is being reduced from five years to two years in the case of inheritances. Relief is to be provided for quoted shares which were unquoted at the time they were acquired by the disponer.
The Bill contains a number of measures which will benefit agriculture and encourage the transfer of farms to younger, more enterprising farmers. The measures include a substantial improvement in agricultural relief under capital acquisitions tax, relief in respect of probate tax and a new stamp duty relief for young trained farmers. These measures, when taken together with the EC early retirement scheme and the scheme of installation aid for young farmers, should help to improve the structure of this important sector of our economy.
The House will be aware of the significant improvements in agricultural relief under capital acquisitions tax announced in the budget, benefiting both gifts and inheritances. The Bill also provides for a reduction, by two-thirds, in the stamp duty chargeable on the transfer of agricultural land and buildings to farmers under 35 years of age who have completed an approved training course — for example, a Teagasc certificate. In the majority of cases the relief will entail a stamp duty rate of 1 per cent, down from 3 per cent, for transfers between relatives and 2 per cent, down from 6 per cent, for transfers between non-relatives. The new relief will apply to both gifts and sales and will be operative from 12 May 1994 until 31 December 1996. This fulfils the commitment given in the Programme for Competitiveness and Work.
The Bill provides for the budget proposal to grant probate tax relief at the rate of 30 per cent in respect of agricultural land and buildings. Farmers will also benefit from the provisions in the Bill giving effect to the budget proposal to fully exempt spouses from the probate tax.
The Bill provides for several measures aimed generally at rendering the administration of stamp duties more user-friendly for taxpayers and their agents. I would like to briefly outline these measures.
The Bill provides that where both stamp duty and VAT are payable on a property sale or lease, the stamp duty is to be based on the VAT-exclusive amount payable rather than on the VAT-inclusive amount. The Bill also provides for a retrospective validation of title deeds that have been incorrectly stamped on a VAT-exclusive basis. The changes in this area will be beneficial for commercial leases.
The stamp duty appeals procedures are to be brought into line with those applying for other taxes. All appeals may in future be heard by the appeal commissioners, whereas currently appeals on issues other than valuation must be initiated in the High Court. Revised procedures are considered appropriate since stamp duty is now on a similar footing to other taxes as regards enforcement and collection.
The Bill provides for a substantial reduction in the surcharges which apply when property transferring by voluntary disposition is undervalued for stamp duty purposes. No surcharges will apply for undervaluations up to 15 per cent, instead of 10 per cent as heretofore, and the rates of surcharge are being reduced by a half.
The Bill also contains provisions which will enable the Revenue Commissioners to revise and update the information requirements — that is, the "particulars delivered" form — in relation to property transfer deeds presented for stamping. The intention is to make the "particulars delivered" form more user-friendly and have a more precise description of the property. It is also proposed to require the tax reference numbers of the transferor and transferee to be provided, where appropriate, but full consultation will take place between Revenue and the Incorporated Law Society on the operational arrangements before this proceeds.
Finally, the rules for the valuation of unquoted shares in private family-controlled companies for stamp duty purposes are simplified.
The Bill amends the tax treatment of bearer — that is unregistered — bonds with the aim of encouraging greater participation by Irish financial institutions in the issuing of these bonds while at the same time countering as far as possible the use of these instruments for tax evasion by residents. It is normal practice for Eurobonds to be issued in bearer form. With the growth in the Irish pound capital market significant opportunities are emerging in relation to the issuing of Irish pound Eurobonds and the underwriting and managing of Irish pound issues on behalf of international institutions. The provisions in the Bill will enable Irish financial institutions to fully exploit these opportunities.
As I indicated in my Budget Statement and mentioned again in my Press statement on the publication of this Bill, a review of the detailed arrangements governing the question of residence for tax purposes is under way. The objective of this review is twofold. On the one side there is the matter of trying to bring greater clarity, transparency, order and certainty to an area where the current legal position reflects the interaction over a long period of legislative provisions, administrative practice and case law, much of it dating back to the nineteenth century. I am satisfied there is a compelling case for reassessing the provisions governing residency for the purposes of taxation against the background of modern realities. On the other side there is the issue of seeking to ensure that in this aspect of our taxation regime, as in others, we strike the best possible balance between what will help in fully realising our economy's potential and ensuring that equity in taxation applies not just in theory but also in practice. In this context we need a tax regime that is helpful and hospitable to inward investment in the overall, but we must at the same time ensure that loopholes are closed which may enable Irish residents to escape the tax obligations arising from generating income and wealth in Ireland. Getting this balance absolutely right is my main concern.
This review is an even more complex task than envisaged, thus has taken longer to complete than foreseen at the outset. However, I can assure the House, that I am pressing ahead with it and that I will bring forward my proposals at the earliest opportunity.
Before concluding, I want to make some points on the subject of tax reform. I hope that in this House there will be a greater willingness than among some participants in the debate to face up to what reform is really about and what it means for the taxpayer.
We all need to recognise the very considerable progress in improving the overall taxation system, particularly from an employment perspective, over the past few years, notwithstanding the constraints imposed by budgetary circumstances. Statements made often give the impression that no improvement has been made in the income tax system over the past few years. Any objective analysis will show this suggestion to be totally without foundation. This year's budget sought to address the most important issues in mainstream income tax. The relief given was by any standard substantial, the overall cost of these measures amounting to some £330 million in a full year. The budget also included a major restructuring of the PRSI system which should improve significantly the competitive position of firms with large numbers of low paid employees.
There have been major achievements in the area of corporate taxation. The tax base has been greatly widened, enabling the standard rate to be cut by ten percentage points. This reform has greatly shifted the balance of incentives in favour of job creation. In indirect taxation the standard rate of VAT has been reduced from 25 per cent to 21 per cent. There has been considerable simplification and consolidation of the rating structure, with a 12.5 per cent rate now applied to a wide range of employment-incentive sectors.
Our overrriding guiding principle in taxation policy will be to do what we judge best for employment. In my Budget Statement this year I set out what I and the Government regard as the guiding principles for a "pro-jobs" taxation strategy. It is from this perspective that the Government will address the board question of tax reform and evaluate any proposed changes to the taxation system. One of my major concerns is to tilt the balance in favour of productive investment. The new initiatives directly assist in this. But logic dictates that we look critically at aspects of taxation that tend to divert effort and resources into other areas which, whatever their particular merits, do not contribute to the creation of long term substainable jobs. The advantages conferred on housing investment have long been criticised from this standpoint and I am satisfied that the steps taken to redress this imbalance are fully justified in terms of our overriding objective to step up the pace of employment growth.
There is a clear responsibility on those who call for major tax reliefs not just to acknowledge their cost but also to state precisely from where they would have the funding come. Regrettably, very few of those who seek tax reductions are prepared to specify with a meaningful degree of precision from where the Government should raise alternative revenues.
