I move: "That the Bill be now read a Second Time."
I am glad to introduce this, my third, Finance Bill to the House. In my first Bill I concentrated on reducing the tax burden on low and middle earners. In my second Bill I reformed and refocused the structure of investment tax reliefs and set a minimum tax which the well-off must pay. In this Bill I seek to ensure the benefit of strong economic growth is shared by all taxpayers and, in particular, low and middle income earners. I also seek to ensure that the ordinary taxpayer can better access the full range of normal tax allowances by improving the way the tax system works.
The principal aims of the Bill are, therefore, to reduce the income tax burden on the lower paid by removing almost 40% of income earners from the tax net; deliver on our promise to middle income earners to ensure that 80% of all taxpayers in effect pay tax at no more than the standard rate; promote jobs, enterprise and investment, particularly in small firms through measures specifically aimed at that sector; promote greater investment in research and development and to retain our attractiveness as a prime location for foreign domestic investment; continue to improve the efficiency and effectiveness of the tax system and close off the loopholes that are an unfortunate feature of all tax codes; and use the tax system to promote environmental and other socially desirable policy goals.
It is worthwhile at this point to set out a few basic facts about our tax code which will help dispel a number of myths that might otherwise go unchecked. First, the tax system has become incomparably fairer than the one we inherited in 1997. There will now be more than 845,000 low income earners exempt from income tax compared with 380,000 in 1997. The average tax burden on those on average incomes is less than half that in 1997. We have one of the lowest tax takes in the world from persons on low and middle incomes.
Second, rather than extending tax reliefs to all sorts of projects, as happened in the past, we now have a rational measured approach with appropriate caps on how far those reliefs can be exploited. There is a case for targeted, productive, job giving reliefs where they can be shown to deliver for the taxpayer. The business expansion scheme and regional relief schemes in the Bill pass this test and involve a degree of risk taking by investors perhaps lacking in other tax relief schemes.
Third, the system of indirect taxes under this Government seeks to safeguard the lower paid. It is not regressive as some studies maintain, for example, VAT does not apply to a range of basic foodstuffs — bread, butter, milk, meat, fruit and vegetables — children's shoes or clothing and oral medicines.
Fourth, we have gone a long way to achieve an efficient and effective tax system. More tax is being paid by self-assessed taxpayers. More taxes are being paid on time. Modern IT systems mean more on-line payments. Greater revenue powers achieve a better collection performance and complete change in the culture of paying one's taxes. Better IT facilitates the customer and a range of measures in this Bill will help make claiming tax reliefs easier. It is important to appreciate these facts and acknowledge this perspective when examining the contents of this Bill, as I will now do.
The Bill is being presented against a backdrop of continued strong economic performance and sound public finances. The economy is estimated to have grown by 5.4% last year and is forecast to grow by 5.3% this year. Our public finances are healthy and we have recorded a general Government surplus in nine of the past ten years and reduced our debt to GDP ratio to the second lowest in the euro area.
Good economic and fiscal performance does not happen on its own but is nurtured and supported by sensible economic policies which reward hard work and enterprise through low taxes on labour and business. Hand in hand with this, a strategically balanced, prudent and stability-orientated approach to the public finances facilitates historically high levels of investment in the productive capacity of the economy, while at the same time enhancing public services and protecting the most vulnerable in our society. In this regard our record speaks for itself.
Since 1997 the economy has been transformed, growing at an annual average rate of more than 7% in GDP terms. More than 600,000 more people working than in 1997. For the first time in our history more than 2 million people are employed in the State. With so many more jobs and people employed, more goods and services are being produced and the consequent increase in tax receipts has allowed for a significant increase in the level of public services.
Our approach of making work pay has proved hugely successful. We are not complacent about our success and must continue to work to create the conditions necessary to sustain economic progress in the future. We recognise that Ireland is a small and open economy especially exposed to changes in the global economic environment. As such, we must address those domestic factors that we can influence or control in order that we can ensure the economy is suitably prepared in the event that external difficulties arise. In these circumstances, a key policy challenge will be to enhance our competitive position to ensure continued improvements in our living standards.
The Government is addressing the competitiveness challenge in a number of ways. We are investing in infrastructure and people and improving the skills of the population, which will help us to compete by repositioning the economy for the production of more knowledge based goods and services. We are also committed to enhancing the capacity of our economy and have illustrated this commitment in the recently announced national development plan. We are improving our infrastructure and moving towards a more knowledge based economy by investment in research and development, science and innovation. This will sustain our economic progress, improve our competitive position and create new and better jobs.
The planned total spend of €184 billion in the national development plan is an investment for us all in the future, which serves to increase competitiveness, enhance productivity, reduce congestion and improve services. The plan builds on the significant achievements of its three predecessors. In the 2000-06 period the previous national development plan delivered: more than 525 km of new national roads and 51,000 km of non-national road refurbishments; more than €10 billion in housing projects and almost 50,000 new homes built; more than 460 schemes under the water services investment programme have been completed to improve water quality and help the environment; more than €500 million has been invested under the rural water measure, with more than 450,000 people benefiting from the upgraded group water and small sewerage schemes; 57 new primary schools and refurbishment of almost 5,000 more; 19 new secondary schools with a further 13 already in construction; and 31,000 additional child care places.
These facts show that the previous NDP delivered for the people. We are fortunate to live in good times. The current plan seizes the potential presented by current prosperity, strong financial standing and favourable demographics to position the country for continuing progress if the environment becomes less benign in future. While continuing the good work of the previous development plans, the new NDP necessarily has a different focus in that it is designed to secure the gains made, sustain our prosperity into the future, balance growth across our country and do all this in a way which protects and enhances our environment.
A vibrant economy underpinned by the reward of enterprise and work, strong and stability orientated public finances and the ambition of the national development plan are strategic cornerstones of the Government's economic and social policy. The Finance Bill I present to the House today, focusing as it does on ensuring the benefit of strong economic growth, is shared by all taxpayers, and in particular low and middle income earners will further enhance the solid underpinning for future economic growth and the broader well-being of our society.
In each of the three Finance Bills I have introduced to the House I have been able to introduce measures which make the tax system fairer. The tax burden on the low and middle income earner has been significantly lightened. When this Bill has been enacted two out of every five income earners will have been removed from the tax net. The Bill delivers on our promise to middle income earners to ensure that 80% of all taxpayers in effect pay income tax at no more than the standard rate.
The Bill runs to 118 sections and three Schedules. I will outline some of the main provisions in the time available to me, listen carefully to the contributions of Deputies and try to respond to the points they make when I reply to the debate.
The various income tax measures and reliefs announced in the budget are dealt with in sections 2 to 4, inclusive. These widen the tax bands and increase various credits, including the basic personal credit and employee tax credit, and reduce the top rate by 1%. When this Bill has been enacted, almost two out of every five income earners will have been removed from the tax net. The Bill delivers on our promise to middle income earners to ensure that, in effect, 80% of all taxpayers pay tax at no more than the standard rate.
Section 5 provides for a 9% increase in rent relief. Section 6 confirms the budget increases in the ceilings on mortgage interest relief. For first-time buyers the ceiling is doubled from €4,000 to €8,000 in the case of a single person and from €8,000 to €16,000 in the case of a married couple or a widowed person.
Section 8 provides that the foreign service allowances of employees of certain agencies, working in the overseas offices of those agencies, are treated in an equivalent manner in terms of the allowances paid to staff in the Civil Service who are serving in foreign postings.
Section 9 provides the necessary legislative changes to allow the Revenue Commissioners, where possible, to credit and repay automatically reliefs such as age-related tax credits, health expenses, tuition fees and trade union subscriptions.
Section 10 extends indefinitely the special tax exemption for unemployment benefit paid to systematic short-time workers. This had previously been renewed from year to year.
Section 11 amends the provisions exempting from income tax income arising on the investment of certain compensation payments. This will exempt returns from offshore funds from tax in the same way as returns on domestic investments.
Section 13 closes off an abuse of the rent-a-room exemption scheme in order that the exemption will not apply where an adult child pays the rent to a parent for staying in the parental home. Section 14 increases the child-minding tax exemption limit of €10,000 per year set in last year's budget to €15,000 per year to encourage a greater uptake. Section 15 introduces an additional threshold of relief of €20,000 per year for qualifying long-term leases of farmland exceeding ten years' duration.
Section 16 amends the tax treatment of various pension products and approved retirement funds in a number of respects. The main changes are that: first, Revenue will in future be able to approve, subject to conditions, generic pension products such as those under which single-member retirement benefits are marketed without the need for individual Revenue approval for each case and, second, an amendment to the legislation is being made to clarify that the operation of the pension fund limits is not affected as a consequence of pension adjustment orders made by the courts in circumstances of judicial separation or divorce.
Section 18 confirms changes to the business expansion and seed capital schemes. Both schemes are being extended for a further seven years until 31 December 2013. The company limit is being increased from €1 million to €2 million, subject to a maximum of €1.5 million to be raised in a 12-month period. The investor limit is being increased from €31,750 to €150,000 in the case of the business expansion scheme and to €100,000 in the case of the seed capital scheme. Recycling companies are being added to the list of qualifying trades. These changes to the schemes, with some additional alterations to the operation of the schemes provided for in this section, are subject to a commencement order being made on foot of approval by the European Commission.
The Government is firmly of the view that this relief is important to the creation of jobs in Ireland and for the development of the small business sector and that the European Union will recognise this also. In this general context, the film investment relief is due for renewal next year and before we renew it we will have it fully reviewed, as before, to ensure that it is delivering the desired effect.
Section 19 proposes a number of changes to income tax appeal provisions to provide that where a determination of the appeal commissioners is to be reheard by a Circuit Court judge or a case is to be stated for the opinion of the High Court, the inspector will not be obliged to amend the assessment under appeal until the appeal process has been fully completed. In such a case, a refund of tax paid or the collection of tax levied will not proceed until final judgment.
Sections 21 to 23 amend the tax code concerning farmers as follows. Certain farmers who were in receipt of Feoga and single farm payments in the calendar year 2005 can qualify under the income averaging scheme. The 25% stock relief for farmers and the special incentive stock relief of 100% for certain young trained farmers is extended for a further two years, subject to clearance with the European Commission under State aid rules. The educational qualifications for the special 100% relief are being aligned with rules governing stamp duty relief for young trained farmers. The scheme of capital allowances for milk quota is being amended to ensure this relief is available for quota purchased under the new milk quota trading system. I will bring forward further tax relief measures for farmers on Committee Stage.
Section 24 sets out proposed new tax arrangements for stallion stud fees, which will come into effect on 1 August 2008 with the present regime ending from 31 July 2008. These will replace the present tax arrangements which had been objected to by the European Commission. The bloodstock industry and the wider racing industry are important economic drivers in rural Ireland. Despite its small size, Ireland is now the third largest producer of thoroughbreds in the world and accounts for 42% of total EU output. The existing exemption was key to the development of the sector and in recent years up to 70% of the world's top stallions have been located in Ireland.
A recent survey estimated that the total number directly employed in the stallion breeding sector is 2,400. An additional 2,300 are employed in the brood mare sector with estimates of up to 16,500 employed in directly associated activities in the economy. In addition, the availability of good stallions, together with the high reputation of Irish breeders, has led to more foreign owners boarding their mares here. In the past 30 years or so, the number of foals born here has tripled and thoroughbred foal output now stands at more than 12,000 per year.
The key measure in this new arrangement is the provision of a deduction for the purchase cost of the stallion, which will allow the cost to be written off over a useful economic life of four years. This four-year writing down allowance, which the Bill provides for, is in step with the existing accounting practices in the industry which have evolved over time to deal with the reality in this business, that in the majority of cases investing in thoroughbred stallions is inherently risky and is often a loss-making venture.
Overall, the measures contained in this section of the Bill will mean that the same broad principles will apply to the stallion breeding industry as for other businesses. These tax arrangements are subject to clearance by the European Commission.
Section 25 amends the tax relief for donations to approved bodies to remove a number of references to the requirement that various educational bodies must be established in the State. A number of named bodies are also removed either because they are defunct or are already established charities to which the donations scheme applies.
Section 26 introduces a scheme aimed at encouraging the development of tourism infrastructure in the mid-Shannon area. Such a scheme has been under consideration for some time. In the lead-up to budget 2006, a submission proposing such a scheme was received from Shannon Development. This was the subject of anex ante evaluation by Goodbody Economic Consultants last year. The review was followed by the completion of Fáilte Ireland’s tourism product development strategy 2007-13. In addition, in the lead-up to this year’s budget a follow-up proposal was received from the Department of Arts, Sport and Tourism. Accordingly, I have decided to proceed with such a scheme on a pilot basis. In doing so, I point out that in their report Goodbody recommended that if any such scheme was to be implemented: the scope of the scheme should be strictly limited; the scheme should only allow for accommodation where it is integral to the resort; it should not apply to cabin cruisers; it should only operate for a limited term; and there should be an independent certification body. All these recommendations have been met in the design of this scheme.
A certification body will be established to vet proposed developments so as to provide quality assurance for the scheme. Such certification is aimed at establishing eligibility under the scheme before proceeding with any project. The qualifying period for expenditure under the scheme will be three years from the date of its commencement, which will be done by way of ministerial order. It will not cover stand-alone hotel or holiday cottage developments and the accommodation content of any qualifying development cannot be more than 50%.
The designated areas involved are in a corridor of about 12 kilometres on either side of the river, stretching roughly from the bottom of Lough Derg to Lough Ree. The tax relief will consist of accelerated capital allowances over seven years for qualifying construction and refurbishment expenditure incurred in the qualifying three-year period. This is aimed at assisting the development of a critical mass of the type of tourism projects needed in the area, such as marinas, leisure centres, equestrian centres, adventure sport facilities, sailing schools, interpretative centres, health farms and spas, heritage houses and gardens.
It is envisaged that following the passing of the Finance Bill 2007 at the end March, the scheme will be immediately notified to the European Commission at which stage work will commence on the drawing up of guidelines and establishment of the certification board with a view to signing the commencement order in June, assuming there are no problems with the European Commission. The scheme will be operational for three years after this date — that is, to approximately June 2010.
Section 27 closes a loophole concerning unallocated partnership profits by clarifying the position that the tax-adjusted profits of a partnership must, for tax purposes, be fully apportioned between the individual partners each year. This will close off a potentially large tax loss in some major partnership firms.
Section 28 makes various amendments to relevant contract tax which applies to payments made by principal contractors to subcontractors under relevant contracts in the construction, meat processing and forestry industries, including a number of amendments to meet commitments, contained in the partnership programme Towards 2016, to strengthen the RCT system.
Sections 29 and 30 amend the current tax laws on SSIAs and the pensions incentive tax credits scheme so as to empower Revenue to seek various information returns from SSIA managers and to require SSIA moneys invested in pension funds under the pensions incentive tax credits scheme to be held for at least one year to avoid a claw-back of credits given under the scheme.
Section 31 provides for DIRT-free interest to be paid automatically by financial institutions to taxpayers of 65 years of age or over, whose total income does not exceed the relevant income tax exemption limit. This will also apply to permanently incapacitated people in receipt of such interest in defined circumstances. It will ensure that relief is given without the need to apply to Revenue for a refund each year.
In section 32 I seek to afford relief to persons who may suffer double taxation arising from capital gains in countries with which we have a double taxation treaty but where the treaty itself predates the introduction of capital gains tax in Ireland. The section also removes an element of double taxation on the profits of a foreign branch or agency of an Irish company, where such a branch or agency is located in a country with which we do not have a double taxation treaty.
Section 34 provides for a number of amendments to the scheme of dividend withholding tax to deal with the introduction of electronic dividend vouchers, the application of the general four-year time limit that applies to other tax repayments to refunds of dividend withholding tax, and an extension of the existing exemption from dividend withholding tax available to non-resident subsidiaries. Section 36 is an anti-avoidance provision which makes a number of changes to provide special rules for the taxation of personal portfolio investment undertakings in regard to payments made to unit holders. This will prevent the exploitation by some wealthy individuals of the lower exit tax rate on certain investment funds.
Sections 38 and 39 amend taxation procedures in regard to life insurance policies in order that the investment proceeds of all life insurance policies will become chargeable to income tax after an eight-year period. Section 40 strengthens certain anti-avoidance provisions in regard to the transfer of assets abroad.
Section 41 extends the application for a further three years to 2009 of the base year 2003 expenditure on research and development against which incremental expenditure will be measured for the purpose of the research and development tax credit. In addition, expenditure by companies on subcontracting research and development work to unconnected parties will qualify under the tax credit scheme up to a limit of 10% of qualifying research and development expenditure in any one year.
Section 42 confirms the budget day announcement that the preliminary corporation tax liability threshold for treatment as a small company is being increased from €50,000 to €150,000. New or start-up companies with a corporation tax liability of €150,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period. In addition, provisions are being introduced under which large companies in a group will be allowed offset their preliminary tax payments between group members for the purpose of working out the adequacy of such payments for interest purposes. This will assist in minimising interest charges on the group.
Section 43 deals with group relief for companies, the provisions for which are being amended mainly to comply with a ruling of the European Court of Justice in the Marks & Spencer case on the use of foreign tax losses. Section 45 introduces a measure that provides an option to companies not to have interest payments made to associated companies in countries with which we do not have a double taxation agreement deemed as a distribution of their profits. This removes an element of double taxation in the tax code and will help the IFSC.
Section 46 extends the qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects from 31 December 2006 to 31 December 2011, subject to clearance by the European Commission from a state aid perspective. Sections 47 to 51 amend the tax code in regard to capital gains tax in a number of ways. They increase the retirement exemption threshold from €500,000 to €750,000, amend the site to child relief to limit the size of the site to 1 acre, exclusive of the house, and make a technical change to the exemption for sports bodies to ensure the full value of the existing asset must be applied for approved purposes. There is a technical amendment in the offshore income gains provisions to update a reference to resident individuals and, where a capital gains tax clearance is not produced on the closing of a sale, an amendment will ensure that any consideration withheld must be paid to the Revenue Commissioners within 30 days.
Parts 2 and 3 deal with indirect taxes, namely, excise and VAT. These include sections 52 to 67, inclusive, which set out a range of changes in regard to excise duties, including confirming the budget day reduction to zero of excise duty on kerosene and LPG used for heating, the increase in excise on tobacco and the introduction of a VRT relief of 50% for electric cars. Existing provisions relating to substitute fuels are being amended so that such fuels, including biofuels, will in future be taxed at the rate applicable to the fuel for which they can be substituted. The definition of "mechanically propelled vehicle" is amended to exclude vehicles that do not meet EU-type approval standards for entry into service on the State's roads. Arising from the Criminal Justice Act 2006, excise duties are being adjusted or imposed in regard to firearms.
In response to rulings by the European Court of Justice relating to other member states, the Bill provides that company cars driven by Irish residents on behalf of firms based outside Ireland will be exempt from VRT subject to certain conditions. Provision is also being made for the late opening of betting shops on days on which an evening race meeting is taking place in Ireland, regardless of the time of year. Currently, late opening is allowable when daylight hours facilitate evening race meetings — from April through to August. This change is in response to the advent of floodlit night-time horse racing in Ireland from the latter half of the year.
Sections 68 to 89, inclusive, contain a number of important revisions to the VAT code, as follows. They confirm the budget increases to the VAT registration thresholds for small businesses from €27,500 to €35,000 in the case of services and from €55,000 to €70,000 in the case of goods with effect from 1 March, the increase in the farmers' flat-rate VAT addition from 4.8% to 5.2% with effect from 1 January, and the reduction of the VAT rate on child car seats from 21% to 13.5% with effect from 1 May.
Section 71 provides for the removal of the option for landlords to waive their right to exemption from VAT on short-term letting of residential property to remove an anomaly whereby the landlord can claim VAT on the assets of the property in year one but the equivalent VAT on rents from the property will only be received by the Exchequer over a prolonged period. This currently acts as an unintended Exchequer subsidy to private letting. The change will apply to properties acquired or developed after the passing of the Finance Bill 2007 and will not affect lettings in existence prior to that date.
Sections 76 and 81 provide for the deductibility of VAT on conference-related accommodation expenses from 1 July to help Irish hotels compete more favourably on the global stage for conference business. This change is in line with the recommendations of the tourism action plan implementation group and was announced in the budget. Other VAT changes relate to hire purchase transactions in cases where the customer defaults on repayments and where finance houses are involved in the transactions, the taxation of certain services received by public bodies, for example, consultancy services from abroad, and the application of the open market value to certain transactions between connected parties in determining the amount on which VAT is chargeable.
Sections 91 to 102 introduce changes to the stamp duty code to achieve the following: abolish the head of charge for mortgages; simplify the code; amend the relief available for young trained farmers; extend the relief for farm consolidation for a further two years to 30 June 2009 and allow relief where only one farmer is consolidating; introduce a new exemption from stamp duty for sports bodies which are already entitled to relief from income tax and capital gains tax — this exemption will relate to purchases of land for the purposes of promoting games or sports; limit the transfer of a site from a parent to a child to build a house to 1 acre, exclusive of the house; provide for an exemption from stamp duty on certain intra-family transfers of farmland; and extend the existing first-time buyer stamp duty exemption to persons who have undergone a judicial separation or divorce where certain conditions are fulfilled. I am currently considering further changes to the stamp duty code which may be introduced on Committee Stage. These relate to the application of the code to the development of land.
Sections 103 and 104 are technical amendments which arise as a result of a High Court case decided last year in regard to when a discretionary trust created will come into existence. Section 104 changes the date on which the tax becomes payable where a trust is created following death. This follows a High Court decision earlier this year. The tax will now apply from the date of appointment to the trust instead of the date of death, as before.
Section 105 alters the date from which interest becomes payable in the context of a clawback of agricultural or business relief where the assets are sold within the specified period. The interest will now apply from the date the clawback arises. Section 107 deals with capital acquisitions tax agricultural relief and amends existing provisions in order that an individual may offset borrowings on an off-farm principal private residence against the property's value, for the purpose of the 80% farmer test.
On tax administration, section 110 amends the tax code so the need for a person who holds a fixed charge on the book debts of a company to send to Revenue a copy of all the papers lodged with the Companies Registration Office is replaced with a simplified return. Section 111 provides for a reduction from six months or 183 days to 93 days in the period which must elapse after the receipt of a valid claim before Revenue is required to pay interest on overpayments. The shorter period applies for repayments made after the passing of the Bill.
Section 112 provides for a once-off increase this year in the ceiling for donations to the Irish Heritage Trust from €6 million to €10 million. This would allow for the donation of a collection of fine Irish paintings and furniture for display in Fota House.
Section 113 amends the existing requirements that Departments, the HSE and local authorities and similar statutory bodies that make any payment in the nature of rent or for the purposes of rent subsidy in regard to any premises to make a return containing details of the premises, its owner and payments made. The amendment will extend this provision so that these bodies will also be required to obtain the PPS number of the landlord concerned.
Section 114 amends the tax law to clarify and confirm the search powers of Revenue to assist in investigations with a view to prosecutions. Section 115 creates a new offence of impersonating a Revenue officer. There have been a number of instances in recent years of persons impersonating a Revenue officer.
I hope the House has benefited from this explanation of the measures in the Bill. There are still some matters under consideration that I may bring forward on Committee Stage, should they receive Cabinet approval. I will also give consideration to any constructive suggestions made during our debate today and tomorrow. I commend the Bill to the House and look forward to a constructive debate on it.