I move: "That the Bill be now read a Second Time."
I am glad to be able to introduce my fifth Finance Bill to the House. In previous Bills I introduced measures that supported business, made the tax system fairer and significantly lightened the burden on low and middle income earners. In this Bill I will continue with this approach, while also seeking to promote care for our environment through a range of initiatives. The principal aims of this Bill are to support enterprise and innovation, to advance sustainable development and to ensure a fairer tax system.
Helping enterprise by reducing the administrative burden to make doing business easier should be part of any finance Bill deliberation. The Bill builds on measures to assist small business which I introduced in the 2007 budget and it includes a number of business friendly measures such as revised preliminary tax payment arrangements for corporation tax aimed at small and start-upcompanies; an increase in VAT registration thresholds for small business to €37,500 in the case of services and €75,000 in the case of goods; and the extension of film relief for another four years until the end of 2012, with an increase in the cap on eligible expenditure from €35 million to €50 million per project
I am enhancing the existing research and development tax credit scheme by extending the current base year of 2003 for a further four years to 2013, an increase over the current six years. The change will provide an additional incentive for increased expenditure on research and development in future years and will help to achieve the targets set out in the strategy for science, technology and innovation for 2006 to 2013. It will also offer more certainty to industry regarding the tax credit scheme and also assist in competing for new foreign direct investment.
Sometimes I am criticised for what is not in the Bill. In this regard I reiterate my recent comments on the use of tax incentives for the development of the Cork docklands and the Limerick regeneration project. The Cork project is at the beginning of a process of evaluation and we need to assess how best to devise proposals that would meet with EU State aid requirements. It is an exciting project but at this stage it is still a work in progress. An early announcement may not assist in clarifying some of the outstanding issues that have yet to be resolved between the various stakeholders. The special Cork docklands forum is expected to report by the middle of the year and I remain open to looking at ways in which the tax code can be used creatively to encourage investment and change behaviour. Significant progress has been made in a short period on the Limerick regeneration project, and the regeneration master plans are due to be finalised in June of this year. I am optimistic that I will be in a position to work with the Limerick regeneration agencies when these plans are finalised.
Practical measures to help protect our environment are necessary and I am introducing a number of new measures in this area. The new tax initiative for energy efficient equipment will allow companies to claim the full cost, in the year of purchase, of specified energy efficient equipment against their taxable income. The purpose is to assist in improving cost competitiveness while helping to reduce overall energy demand and carbon emissions. The incentive is a pump-priming exercise for a period of three years. Companies should embrace the economic benefits of investing in energy saving equipment. The incentive will come into effect by order when EU state aid approval is obtained.
The Finance Bill provides for the most fundamental reform of the vehicle registration system since its inception in 1993. It will provide people with the opportunity to make choices to help the environment and with financial incentives to do so. The VRT system is being revised to take greater account of CO2 emissions, with VRT exemption for series production electric cars, and up to €2,500 VRT relief for certain series production hybrid and flexible fuel cars. The Bill will make the business expansion scheme more accessible for recycling companies, and also provides for a reduction in the VAT rate applicable on certain supplies used for the agricultural production of bio-fuels from 21% to 13.5%.
Our income tax system has been made fairer, friendlier and more progressive. The protection of more vulnerable groups must remain a priority when reviewing the income tax code and various improvements for such groups are made. The Finance Bill provides for increasing the personal credits and bands to ensure that low income earners are kept out of the standard rate band and average earners are kept out of the higher rate band. It also provides for a further increase in the ceilings up to which first-time buyers can claim mortgage interest relief and for increases in rent relief.
Tax credits relating to those in special circumstances, such as lone parents, widowed persons and widowed parents, the elderly and those caring for persons with a disability have increased very significantly in recent budgets. This Finance Bill makes further improvements in the area. Age exemption limits have increased by 85% in the last seven years compared with inflation over the same period of about 27%. For 2008, it is estimated that the top 1% approximately of income earners, namely, those with income over €200,000, will account for about 25% of the income tax take in 2008 compared to less than 15% of the income tax take in 1997. The most recent data from the OECD for 2006 indicates that for a single worker on average earnings, Ireland continues to have the lowest tax wedge in the EU and one of the lowest in the entire OECD. These are the hallmarks of a fair tax system.
This Bill is being presented against the backdrop of a slowdown in Irish economy and weaker public finances. The Irish economy is estimated to have grown in GDP terms by 4.8% in 2007 and is forecast to slow to 3% in 2008. While this represents a slowdown compared to recent years, it nevertheless is strong compared to our trading partners. At the time I indicated that there were a number of risks to this forecast and it is fair to say that these remain.
Against this background, my Department projected tax revenue growth of the order of 3.5 % for this year. We have now received one month's data and in broad terms revenue growth is in line with expectations. The profile for tax receipts in 2008 assumes that there will be some weakness in revenue growth in the first half of the year, reflecting the very strong economic activity during the first half of 2007. As we go through this year, earlier weaknesses in revenues are expected to be compensated for later on, thus achieving the overall budget target of 3.5% tax growth. Yesterday's figures showing taxes for January down 2.9% compared to January 2007 must be seen in the context of one month's data in 12 months. While it is too early to draw any firm conclusions, the weakness in January was due primarily to the continuing weakness in the property market, which has been factored in to the projections. In addition, it is also fair to say that most other taxes, particularly income tax, performed well in the circumstances. Thus, the January figures are in line with the budget forecasts.
Inflation on a CPI basis, which has been higher than we would wish, is expected to ease back over the coming months from an average of 4.9% in 2007 to around 3% for 2008. It is often said that administered prices are a major contributor to Ireland's inflation, but this is not so. These services only account for a small fraction of the consumer price index and their contribution to inflation is small. In the year to last December, the cost of regulated utilities and local charges increased by only 0.8%. There is also a common perception that inflation in Ireland is worse than in the rest of the EU. Again this is not so. It was only 0.1% higher than the euro area average last December and exactly the average of the 27 member states on a comparable basis. Over the past nine years inflation in Ireland has been on average about 1.25 % above the euro area. Most of this gap was accounted for by higher increases in services prices due to our rate of economic growth, which was three times faster than the euro area and due to our much lower unemployment rate, with consequent faster wage growth. I am not in any way complacent about inflation. While the reasons for Ireland's high rate of services inflation were understandable in a period of rapid economic growth, in the current environment of slower growth such increases would not be consistent with enhancing competitiveness.
New housing output, which has grown rapidly over the past decade, is expected to revert to more sustainable levels over the next few years. However, while this contraction in the residential construction sector will result in some losses in employment and will exert a short-term negative drag on the economy, other sectors of the economy are performing well. Infrastructural investment under the national development plan will increase over the coming years. Services exports are growing rapidly.
The performance of services exports in recent years is worth expanding upon. At the turn of the decade, services exports accounted for one fifth of total exports. However, exports of computer services, financial services and business services have all performed very well in recent years with the result that services exports now account for two fifths of total exports. Strong export growth in these sectors means that Ireland is now the fifth largest exporter of commercial services in the world, an astounding figure for an economy of our size. The shifting of resources into internationally traded, high value-added services reflects the next phase of development for the Irish economy. In an increasingly globalised economy, internationally traded services will become the main source of highly-skilled, high-paying employment and this is where Ireland's competitive advantage will lie.
The overall sound position of our economy did not come about by accident. Ireland's economic development has been aided by sensible economic policies and a pro-business attitude, as exemplified by our low taxes on both labour and business. The measures in this Finance Bill seek to continue to support business in a focused and pragmatic manner. In addition, Ireland is internationally regarded as one of the best places in the world to do business, cementing our reputation as an attractive location for foreign investment. As an accompaniment to our economic growth, we have also pursued a prudent approach to the public finances. We have been able to invest significantly in roads, education and many other types of infrastructure. At the same time, we have been funding improvements in public services as well as providing greater resources to help those who have not been able to share in the fruits of our economic success.
The results of our success are clear. Since 1997, the economy has grown at an average annual rate of over 7%, which is one of the best economic performances in the world. Employment growth has averaged 4% per annum since 1997 while the number of people at work has risen by more than 600,000. Immigration has replaced emigration and economic success has allowed us to increase public spending without putting a strain on the public finances. We have developed a substantial export sector, particularly in the areas of IT, chemicals and financial services.
As I stated, while the outlook for growth over the short to medium term has deteriorated somewhat, we expect the economy to pick up again once housing output stabilises at more sustainable levels. However, this relatively benign outlook is of course subject to risks, both external and domestic. There are several downside risks on the external side, including oil prices, the euro-dollar bilateral exchange rate and the changing conditions in the US economy. Sterling's recent falls against the euro could cause difficulties for exporters to the UK. In addition, it is too early to gauge the full extent to which recent conditions in financial markets internationally have affected global economic trends.
With these challenges in mind, it is important that we focus on addressing the domestic factors to improve competitiveness over which we have some control. In this regard productivity is all important. It is by being more productive that we can earn more and enjoy greater leisure. In other words, our living standards will be raised.
Ireland cannot, and indeed should not, attempt to compete on the basis of costs with low cost countries such as India or China. Our competitive advantage must lie in other areas. This will require us to increase our capital investment and to develop an increasingly skilled and educated workforce. Our competitive advantage will also be a direct result of how effectively inputs such as capital, energy, materials and employees are utilised. For example, today's Bill contains pro-business measures that encourage the use of energy efficient equipment which will support our energy policy more generally.
The key areas that we must address are human capital, infrastructure, regulatory and public service reform, maintenance of stable public finances and a pro-enterprise tax system.
In terms of human capital, the Government is investing considerable resources in raising the skills-set of the population. While all levels are being targeted, investment in third and fourth level education is of particular importance to the Government. Infrastructural investment under the national development plan will help to raise the public capital stock. Exchequer capital investment in 2007 was approximately €7.8 billion, €l billion higher than in 2006. The benefits of this extensive investment can be seen all around us. In relation to private capital, the Government is committed to maintaining an environment conducive to private sector investment through, for instance, improvements contained in this Bill to promote research and development through the tax code and through €8.2 billion in direct spending allocated under the strategy for science technology and innovation. A relatively light regulatory burden, a low taxation environment which rewards work and enterprise, together with flexible product and factor markets will be essential.
Today's Bill is geared towards supporting enterprise by keeping our tax burden low and the first report of the high level group on business regulation due in July of this year will set the framework for reducing regulatory burden.
All these measures make up the active framework that helps to support productivity growth in Ireland and will help us to meet the challenge of a rapidly changing global economy. This is how we can enjoy high wages while still being competitive.
The Bill runs to 133 sections and eight schedules and is structured by taxheads. Today I will outline some of the main provisions in the time available to me but I will not give an exhaustive list of the minor or more technical issues. I will listen carefully to the contributions of Deputies and I will try to respond to the points they make when I come to 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 measures widen the tax bands and increase various credits, including the basic personal credit, employee tax credit and home carer credit. Significant increases in the value of other personal credits and the age exemption limits, which are targeted at certain more vulnerable groups, underline the Government's commitment to look after the needs and welfare of those most deserving in our society.
When this Bill has been enacted, the increases in the value of the credits and bands ensure that approximately four out of five income earners continue to pay tax at no more than the standard rate and almost two out of every five income earners will remain outside the tax net entirely.
In order to address the cost pressures of those renting their home, section 6 provides for an 11% increase in rent relief.
Section 7 confirms the budget increases in the ceilings on mortgage interest relief for first-time buyers. The ceiling is increased from €8,000 to €10,000 in the case of a single person and from €16,000 to €20,000 in the case of a married couple or a widowed person. This means that mortgage holders may receive extra relief of up to approximately €33 per month, if single, or approximately €66 per month, if married or widowed. This increase fulfils the Government commitment in this area as promised in An Agreed Programme for Government. The rent-a-room scheme can be a useful measure for cash-strapped first-time buyers. Accordingly, section 11 increases the income tax exemption limit which applies to rent received under the rent-a-room scheme from €7,620 to €10,000. This increase takes account of the fact that the limit has not been increased since the scheme was introduced in 2001.
The social partners have made a number of requests in relation to employee financial participation. In response to these requests, section 13 increases the aggregate maximum amount of monthly contributions that an employee can make under a certified contractual savings-related share option scheme from €320 to €500. The existing limit dates from the time the scheme was introduced in 1999.
In addition, section 14 amends the rules relating to employee share ownership trusts, ESOTs. Employees can gain access to triple the annual tax relief limit in the year in which an ESOT pays back a loan provided the loan has been held for a period of ten years and at least 50% of the shares have been encumbered for five years. This measure was introduced in recognition of the fact that a large number of shares could be encumbered to guarantee such loans and thus the shares would not be available for distribution to employees and they would be unable to avail of the annual tax free limit of €12,700 per annum. The amendment will permit the Revenue Commissioners to allow a loan period of less than ten years, on a case-by-case basis, where an ESOT has sufficient income, from dividends for example, to pay off such loans earlier than expected.
Section 15 is an amendment that ensures that farmers availing of tax averaging arrangements will not suffer a clawback of tax when they enter a milk production partnership. As with all Finance Bills, there are a number of measures to address tax avoidance. Section 16 is one such provision relating to convertible securities. The provision will ensure that the full value of the securities received by an employee or director will be subject to income tax.
Section 18 extends the same basis of assessment to certain UK source income which applies to income from other EU and EEA states. Section 20 is concerned with the spreading over six years of tax arising from the receipt of moneys under the scheme of aid for the restructuring of the sugar beet industry.
Section 22 introduces provisions that restrict the use of reliefs by high income individuals which took effect from 2007. It clarifies the correct sequence of the calculations to be made in applying the measure when certain other provisions in the Tax Acts are involved. The section will ensure that restriction will work as intended in such cases.
The European Commission gave State aid approval to the business expansion and seed capital schemes changes in the 2007 budget. As a result, section 23 brings into primary law the amendments made to the schemes by regulations on a temporary basis last year following approval of the schemes by the European Commission. The section will also make it easier for some recycling companies to participate in the schemes.
Section 24 is a preventative measure which broadens the meaning of a contribution to an employee benefit trust to ensure that, as intended by existing legislation, the employer will get a deduction for the contribution at the time the employees receive the benefits and no earlier. In order to assist capital expenditure on buildings and structures used in caravan parks and camping sites section 25 introduces a tourism initiative to allow caravan parks and camping sites registered with Fáilte Ireland to avail of capital allowances at the rate of 4% over 25 years.
Section 27 deals with an income tax matter relating to payments for decommissioning fishing vessels. Where a balancing charge arises as a result of claiming excess capital allowances, the charge will be spread over five years instead of the normal one year.
As a counterpart to the proposed changes to vehicle registration tax, VRT, that relate it more closely to CO2 emissions, section 28 sets out the changes to the capital allowances and leasing expenses regime for business cars announced in the budget by linking the availability of capital allowances and leasing expenses to the carbon emission levels of cars. The new provisions will come into effect in respect of cars purchased or leased on or after 1 July 2008.
On foot of a recently completed independent review of the film relief, section 29 extends film relief for another four years until the end of 2012 with an increase in the cap on eligible expenditure from €35 million to €50 million per project.
To support the international financial services industry in Ireland, sections 33 to 36, inclusive, with sections 110 and 111, introduce a package of measures designed to provide a competitive boost to the securitisation, funds and insurance sectors by removing impediments to the development of these businesses here.
Section 37 amends the provisions granting tax relief for certain expenditure on know-how that is bought by a person for use in a trade carried on by the person. This relief is not available where the know-how is bought as part of a trade that is being acquired or where the buyer and the seller are connected.
Section 38 is a response to the OECD recommendation to prohibit a deduction for tax purposes of illegal payments made to a foreign official.
The tax treatment of foreign dividends will be put on the same footing as the taxation of income out of which Irish-sourced dividends are paid by section 39. Up to now, foreign sourced dividends have been subject to tax at the 25% rate. The changes mean, in broad terms, that the 12.5% rate will apply to foreign dividends received by Irish resident companies, which are paid out of trading income, and the 25% rate to foreign dividends paid out of non-trading income, where the foreign dividends arise from companies in EU member states or from countries with which Ireland has a double taxation treaty.
Section 40 amends the close company surcharge rules by also providing for parity of treatment for Irish holding companies that are close companies in respect of dividends received from their foreign and domestic subsidiaries.
A new profit resource rent tax is introduced in section 41 which may apply to profits arising from a new petroleum lease which follows an exploration licence awarded by the Minister for Communications, Energy and Natural Resources after 1 January 2007. Additional taxes of between 5% and 15% will apply depending on the profitability of petroleum fields. These taxes will be in addition to the 25% corporation tax rate which currently applies to profits from such activities.
In order to increase the incentive for companies to purchase certain energy efficient equipment, section 42 allows companies to claim the full cost, in the year of purchase, of new energy efficient equipment against their taxable income. The equipment must be included on a specified list to be drawn up by the Department of Communications, Energy and Natural Resources in consultation with the Department of Finance. The incentive is subject to clearance by the European Commission from a State aid perspective.
Section 43 confirms, among other things, the budget day announcement that the preliminary corporation tax liability threshold for treatment as a small company is being increased from €150,000 to €200,000. New or start-up companies with a corporation tax liability of €200,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period.
Section 44 amends the provisions associated with taxation issues relating to the acquisition by a company of its own shares, that is, "share buy-backs". This amendment provides that costs incurred by a company in buying back its own shares are not allowed as a deduction for tax purposes.
In order to provide an additional incentive for increased expenditure on research and development in future years and more certainty to industry in relation to the tax credit scheme, section 46 enhances the existing research and development tax credit scheme with an extension of the use of the base year 2003 for a further four years to 2013. The period over which any rolled-forward base year will apply on a ‘look back' basis is also being extended to ten years. For example, the base year for 2014 will be 2004 and so on.
Section 48 makes a number of changes to the capital gains tax retirement relief provisions. It introduces a preferential regime where an individual receives a decommissioning payment in respect of a fishing vessel. Under the existing retirement provisions, an individual must be aged at least 55 and have been in business for ten years. These requirements are being amended and individuals aged 45 or more who have been in business for at least six years will be able to avail of the retirement relief in respect of the decommissioning payments that will be paid under a new scheme.
A further change provides a relief to farming partnerships on the dissolution of such partnerships prior to 31 December 2013. The relief provides that a gain will not be treated as accruing in respect of a relevant partnership asset and that the asset will be treated as having been acquired at the same time and for the same consideration as when it was originally acquired by the partner subsequently disposing of the asset.
Section 49 increases the capital gains tax exemption threshold that applies on a gain arising on the disposal of a site by a parent to a child to build a house. The new threshold is €500,000. It also clarifies that the threshold applies where both parents make a simultaneous disposal of a site to their child.
As required under the EU energy tax directive sections 51 to 62, inclusive, provide for an excise duty on electricity. The tax will be charged to the operator who supplies the electricity to the consumer. The tax will apply to supplies of electricity made on or after 1 October 2008. The rates of tax are being set at the minimum rates specified in the directive while electricity used by households will be exempt from the new charge as will electricity produced from renewables and combined heat and power generation. The overall cost and impact on electricity prices for business will be marginal.
Sections 63 to 75, inclusive, set out a range of changes in regard to excise duties, including confirming the budget day increases in excise on tobacco and duty payable in respect of an off-licence for the sale of alcohol. The necessary legislative changes are being made to revise the VRT system to take greater account of carbon dioxide emissions, exempt series production electrical cars from VRT, extend the existing relief for series production hybrid and flexible fuel cars until 30 June 2008 and replace it with a VRT relief of up to €2,500 for such cars from 1 July 2008.
Arising from European Commission decisions, section 66 includes the legislative changes to withdraw the excise reliefs in respect of fuel used for public passenger transport vehicles; in private pleasure-flying and private pleasure navigation and for recycled waste oil. The reliefs will be withdrawn with effect from 1 November 2008. In the case of public passenger transport vehicles alternative mechanisms to direct Exchequer resources towards such services, subject to State aid rules, continue to be explored by the Department of Transport in conjunction with the Department of Finance.
Sections 76 to 100, inclusive, deal with VAT. Following a review and extensive consultations, sections 79, 80, 82, 85 and 91 contain new rules regarding the application of VAT on property transactions. The purpose of the new system is to rationalise and simplify the VAT treatment of property, which has become extremely complicated. There is also a strong anti-avoidance dimension to the new rules to deal with increasingly aggressive avoidance schemes in relation to VAT on property. The supply of new residential property, building land and undeveloped land will remain unchanged. The new system comes into effect on 1 July 2008.
The main changes include ceasing to charge VAT on the capitalised value of leases in excess of ten years, removing old properties from the VAT net by confining the period during which VAT will apply to the supply of new properties to a maximum of five years and making some changes to the treatment of leases. In addition, a capital goods scheme is being introduced for property transactions. This will ensure that the amount of VAT deductible will be proportionate to the business use of a property over a 20-year period. The legislation also includes necessary transitional measures.
In order to ease the administrative burden on small businesses sections 86, 88 and 93 confirm budget day announcements increasing the VAT registration thresholds for small businesses to €37,500 in the case of services and €75,000 in the case of goods. These increases will take effect from 1 May 2008. A reverse charge measure is also introduced in respect of VAT on supplies made by a subcontractor to a principal contractor in the construction sector with effect from 1 September 2008. This is a simplification measure.
Section 98 provides for a reduction in the VAT rate for inputs used for the agricultural production of bio-fuels from 21% to 13.5% with effect from 1 March 2008. This section also provides for the rate reduction for non-oral contraceptive products from 21% to 13.5%.
The Revenue Commissioners intend to introduce a computer-based facility in the second quarter of 2009 which will allow a full self-service on-line process where the user can file, pay stamp duty and receive an instant stamp without Revenue requiring to see the deed in up to 90% of cases. Section 102 introduces enabling legislation to allow for the e-stamping of instruments for stamp duty purposes.
Section 106 is an anti-avoidance measure to ensure that transfers of shares to a connected company, which would benefit from a stamp duty exemption, will not be exempt from stamp duty where the company buying the shares claimed intermediary relief on the transaction. Section 108 increases the stamp duty exemption threshold that applies on the transfer of a site by a parent to a child to build a house. The new threshold is €500,000. Section 109 amends the provisions relating to the exemption from stamp duty in respect of the transfer of loan stock. The existing provision that the loan stock is redeemable within 30 years is abolished and the requirement that it is not linked to stock exchange or inflation indices is amended so that relief will not apply if it is linked in any way to an equity index.
Section 113 amends the stamp duty regime for owner-occupiers who benefit from preferential stamp duty rates and are liable to a clawback of relief if they let the house in the five years after purchase. This is being reduced to two years. In addition, in regard to first-time buyers, an anti-avoidance provision is being introduced to address certain abuses that have come to light.
To help support increased use of electronically-based financial transactions, section 114 reduces the charges on financial cards, as announced in the budget. In addition, financial institutions will be required to make a preliminary payment of 80% of the duty payable for that year by 15 December. However, the dates on which the institutions recover the stamp duty from their customers will not change.
Section 116 amends the First Schedule to the Stamp Duties Consolidation Act and provides for stamp duty on cheques to be increased from 15 cent to 30 cent and increases the rent threshold below which the annual rent on a house is not chargeable to duty to €30,000. Section 116 also gives effect to the substantial reform of stamp duty that I announced in the budget regarding residential property. Stamp duty is now charged on the following basis. The first €125,000 is charged at 0%, with the balance on houses up to €1 million charged at 7%. In regard to properties valued at over €1 million, the excess is liable to a further duty at 9%. However, to ensure that no one loses out on this reform, stamp duty will not be charged on houses costing no more than €127,000. This will result in a much fairer system for house buyers.
The tax system can and does support our national heritage. In this regard, section 122 will facilitate the donation of collections of heritage manuscripts and archival material to bodies such as the National Library, while section 123 is intended to enable the Irish Heritage Trust to complete its acquisition this year of an outstanding collection of paintings and furniture for display at Fota House. The trust has already acquired approximately one third of the collection in question.
It is important that our tax administration be modern and that the Revenue Commissioners have the power to enforce the law. In this regard, sections 124 to 128 introduce a number of measures in this area. These include allowing Revenue officers to question suspects in Garda custody for indictable revenue offences; enabling any Revenue officer to determine residency of an individual for tax purposes; obliging agents in the State in receipt of rental income, on behalf of another person, to also report rental income from foreign properties; and increasing the maximum fines on summary conviction for certain tax offences to €5,000.
I hope the House has benefited from that explanation of some of the measures in the Bill. There will be some matters under consideration that I may bring forward on Committee Stage should they receive Cabinet approval and I proceed with them. I will, of course, also consider any constructive suggestions put forward during our debate today and tomorrow.