As the Deputies who tabled Questions Nos. 1 and 2 are not present, we will proceed to Question No. 3 and revert to the earlier questions when the Deputies arrive. Is that agreed? Agreed.
Bank Debt Restructuring
3Deputy Joe Higgins asked the Minister for Finance if he will report on the expected economic and fiscal impact of the Eurozone bank bailout agreement reached in Brussels on 29 June 2012 and in particular the implications for the State’s total national debt; and if he will further report on the Budget deficit, the Memorandum of Agreement with the Troika, the general austerity policy of the government and many other relevant issues. [32861/12]
Last week's announcement following the euro area summit in Brussels represents a major shift in European policy in terms of breaking the link between recapitalising the banks and the sovereign, a policy change for which I have repeatedly pressed at European Union meetings. This message has been echoed by the Taoiseach, Tánaiste and other Ministers in meetings with their EU colleagues. The specific mention of Ireland in the statement issued following the summit is a welcome development and the result of intensive discussions over the past year. It shows there is widespread recognition for the measures this country has implemented and the significant sacrifices Irish people have taken to bring our public finances under control.
This is an agreement in principle which provides an opportunity for the issue of bank debt to be addressed at an EU level. As the details have yet to be worked out, it is too early to state at this time the precise implications of the announcement. There will be further discussions at the euro group meeting on 9 July. Preliminary discussions on how to separate banking from sovereign debt are under way but I do not want to prejudice them by commenting on the likely contents of any agreement at this time. Given their complexity, the discussions are likely to take some time. Our shared objective, agreed with our European colleagues, is to break the link between banks and sovereigns, and we are open to discussing any method of doing this.
On the memorandum of understanding, the current position is that a budgetary consolidation package of some €3.5 billion in 2013 is set out as that required to reduce the general Government deficit to 7.5% of GDP next year.
Ideally, I would like to see a resolution of the banking debt issue by the end of October but it is unlikely the agreement reached last week will affect our plans for budget 2013, which will be announced in early December. This announcement is undoubtedly a positive development for Ireland. However, we cannot lose sight of the fact that, notwithstanding the considerable negative effect State support for the banking system has had on the public finances, including the debt level, there remains a large gap between day-to-day spending and revenues. This gap needs to be closed to enhance further the long-term sustainability of our public finances.
The agreement on the banks was described by the Taoiseach, in respect of its effect on Ireland, as a seismic development and greeted with general elation in the capitalist press. Is it not the case that we do not have any specifics as to what the agreement will mean in the Irish context? The Minister indicated a meeting to be held later this month will go into greater detail. Is there any concept of what difference the agreement will make? For example, how does the Minister envisage the gross debt of the State breaking down? Will the massive amounts that had to be put into the banks be subtracted from it? Does the Minister know how it will work its way out? What impact will this have on the general policy of austerity pursued by the Government? What impact will it have when the Minister draws up the budget for 2013 next December?
There are a number of specifics in the statement. The first decision is the principle now has been set out clearly at the highest political level in Europe that the vicious circle between banking debt and sovereign debt will be separated. The second decision is that in this context, Ireland's sustainability and success in the programme will be reviewed and third, it contains a reaffirmation that countries in similar circumstances will be treated equally. This is a statement of principle and the detail that underpins the principle will be worked out in the course of negotiations. Another element that is fairly firm but which is subject to negotiation is the timeline. It starts now and one condition is that a banking supervisor within the ambit of the European Central Bank must first be in place, after which the details will be worked out. The timeline is to the end of 2012.
It seems to me that a single vague sentence referring to this country and generally praising the horrific austerity our people have been suffering to bail out bankers and bondholders is not massively strong ground on which to build. In respect of the national debt, the Minister did not indicate how this will have an impact in respect of a separation of banking debt and sovereign debt. Will the funding of the European Stability Mechanism, ESM, and the contingent liability to the State of up to €11 billion be affected by this agreement and if so, how will it be affected? How will the funding this State is obliged to put into the fund be affected by the proposal that has been agreed on in Brussels?
The best way to understand this is that Europe works in different ways at different times. Sometimes it examines the details of a problem and comes up with solutions and the sign-off is at the highest political level. At other times, when little progress is being made on the detail, the Heads of State and Government at the highest political level make a statement of principle in which they set out the principles of a policy and they then delegate the working out of that statement of principle. This is what has happened on this occasion and they have delegated the working out of the principle. However, there should not be any great surprise in this regard. Some Members present attended the meeting of the Joint Committee on Finance, Public Expenditure and Reform at which I gave the pre-meeting briefing before attending the ECOFIN Council. Both Deputies Michael McGrath and Pearse Doherty pressed me on what was Ireland's negotiating position and I stated the Government was trying to separate bank debt from sovereign debt and was trying to ensure there would be retrospective effects whereby any advantage that was granted to Spain also would apply to Ireland. In the process of the negotiation, since the Spanish situation is in need of an immediate solution whereas Ireland is working a programme and is not in particular crisis at present, the movement will be to deal with Spain. Thereafter, the Government will ascertain what are the details in this regard. This will give the Government a fairly strong negotiating position to apply similar solutions to Ireland, because it will invoke the clause of equality of treatment for people in similar circumstances.
Does the timeline extend to the end of the year?
Yes, it is tied into a banking supervisor being in place. However, it also is linked to President Van Rompuy's statement on a banking union. The banking union will develop a banking supervisor to supervise at least the main international banks in Europe, perhaps comprising 100 banks out of the 8,000 banks operating across the European Union. The timeline to have the banking supervisor in place is the end of the year. However, I hope we could go somewhat earlier, as there are reasons within Ireland's programme for October to be more in its interest than December.
We will now revert to Question No. 1 in the name of Deputy Michael McGrath.
Bank Debt Restructuring
1Deputy Michael McGrath asked the Minister for Finance if, building on the Euro Area Summit Statement of 29 June 2012, he will outline his specific objective in the negotiations that will now follow, with particular reference to breaking the link between bank debt and the sovereign; his views on the way the €64 billion of taxpayers’ money which has been injected into the banks can be revisited with the burden being lifted from the State; and if he will make a statement on the matter. [32959/12]
The Government welcomes last Friday's euro area summit statement. As the Deputy is aware, it has been working extremely hard to secure a deal on the Irish bank debt. The recent euro area summit statement represents a major shift in European policy in terms of breaking the vicious circle between the banks and the sovereign. It is particularly pleasing to note that last Friday's summit agreement reflects the proposals set out in the Taoiseach's letter to the other Heads of Government that was sent following the approval of the fiscal stability treaty. The Government's objective remains the same, which is to break the link between the banks and the sovereign, thereby making the debt more sustainable and to maximise the benefit to the Irish taxpayer.
The summit agreement provides an opportunity for the issue of the bank debt to be addressed at an EU level. It has been agreed that when an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area, the European Stability Mechanism, ESM, could have the possibility to recapitalise banks directly. While the policy position is very positive, it is not possible at this stage of the process to attempt to quantify the benefits that will accrue to the Irish economy. The details of how to separate banking from sovereign debt must now be discussed in detail, including the capital already injected into the Irish banking system.
While the details, structures and arrangements have yet to be finalised, the policy statement provides a basis for a euro area solution to what essentially is a euro area problem. This will be one of the Government's key priorities between now and the end of year with the initial formal steps, at a European level, taking place at the euro group meeting on 9 July.
At the outset, I apologise to the House and to the Minister for not being present at the beginning of Question Time. I was attending the Joint Committee on Finance, Public Expenditure and Reform meeting with representatives of Ulster Bank and was not aware the time set for Question Time had changed.
I thank the Minister for his response to this priority question and wish the Minister well in the detailed negotiations that will commence on Monday on foot of last week's summit statement. I believe the statement and what hopefully will flow from it to be highly significant for Ireland and this could be extremely helpful in respect of the public finances and Ireland's debt sustainability. Moreover, it has the potential to make easier the fiscal adjustment. The cost of servicing the national debt has grown significantly in recent years and will continue to increase as the stockpile of debt continues to grow. However, if it is possible to secure a better deal in respect of bank debt, it could have highly positive implications. I note the Minister has ruled out the possibility of a deal making any difference to the forthcoming budget next December. However, if the negotiations conclude reasonably quickly and if Ireland secures an overall deal, we may end up with a significantly reduced interest bill in 2013, which would make the budget arithmetic easier. In that context, why is the Minister ruling out the possibility of there being any benefit in respect of the next budget? As the negotiations on this deal are only beginning now, a conclusion could well be reached before the end of the year that could work its way into the budget arithmetic.
If there is any benefit, the Deputy can be assured the Government will take it into account. However, Deputies Michael McGrath and Pearse Doherty are better aware than most Deputies that the Government is dealing with two problems. First, it is dealing with the problem of the debt and second, it is dealing with the problem of the budget. The budget problem is the Government is not collecting enough in taxation to cover what it spends in the provision of services. While that is one problem, there also is the size of the debt, which according to present figures will peak next year at 117% of GDP. It is true the two issues have an influence on each other, that there is a crossover effect and that one reinforces the other. If one is paying a lot of interest on one's debt, it makes one's budget position more difficult. However, even if there was no interest to be paid, the Government still is approximately €14 billion on the wrong side of a balanced budget and this problem must be dealt with as a distinct fiscal problem.
If there are benefits in reduced interest rates, then well and good. However, the timeline is quite long and the European supervisor of banking seems to be the key appointment. That triggers the other elements of the procedure.
I urge the Minister to be highly ambitious on behalf of the Government in the negotiations, given the scale of the capital injection into the Irish banks. If the principle agreed last week to separate bank debt from the sovereign is to be implemented in full, then we have a very strong case for the €64 billion issue to be revisited. The Minister's negotiating position will be supported by Fianna Fáil. We wish him well. This is critical for Ireland. It could certainly be of great benefit to the public finances, the national debt and the economic recovery we want to see. We want the Minister to be highly ambitious and put the entire €64 billion on the table as a starting point.
The key element of the communiqué is the sustainability of the Irish programme. That is obviously a clear reference to getting the debt down to a stage where we go back into the markets, and then we are entirely sustainable if we can fund in the markets at low interest rates. If Deputy McGrath puts his accountancy experience to use and thinks of it in terms of a balance sheet, then he will know that it is not really possible to work on one side of the balance sheet. If debt is moved off one side of the balance sheet, what is moved off the other side? We can see how complex it is to get matching collateral that we can shift as well. When the Government put money into the banks, they took the shareholding of the banks as well.
They can have the banks.
Yes, but we get into values then. Is it nominal value or market value? There will be quite a tricky piece of design work and then a very difficult negotiation phase.
Bank Debt Restructuring
2Deputy Pearse Doherty asked the Minister for Finance if in view of the fact that the European Council has agreed in principle to the separation of banking debt from sovereign debt, and agreed in principle to the possibility of ESM funds being used to directly recapitalise the banks, and agreed to consider the retrospective application of such funding in the case of Ireland, he will confirm that it is his intention to explore the possibility of European Stability Mechanism funds being used to directly refinance the Anglo Irish Bank promissory note; if he will remove the promissory note debt from the States debt to GDP ratio; and if he will remove the liability from the taxpayer for the repayment of this toxic banking debt. [32924/12]
The Government has been fully committed to reviewing the arrangements that were put in place to capitalise the Irish Bank Resolution Corporation, formerly Anglo Irish Bank. The purpose of this review was to determine whether there is a way to reduce the overall cost to the State. The first step in this process was the settlement of the March 2012 promissory note repayment with a long-term Government bond. It is for these reasons the end of March payment was seen as an initial step in a medium-term process. The recent and very welcome euro area summit statement represents a major shift in European policy in terms of breaking the vicious circle between the banks and the sovereign. This is something the Irish Government has been saying is needed at European level to help tackle the crisis. It has been agreed that when an effective single supervisory mechanism for banks in the euro area and involving the ECB is established, the European Stability Mechanism could have the possibility to recapitalise banks directly. This is an agreement in principle and the detailed work will now begin to advance the process further.
The Government has been working very hard to secure a deal on Irish bank debt. The agreement at last week's euro area summit as set out in the statement provides an opportunity for the issue of the bank debt to be addressed at an EU level. While the policy position is very positive indeed, it would not be possible at this stage of the process to attempt to quantify the benefits which will accrue to the economy and Ireland generally.
While the details, structures and arrangements have yet to be finalised, the policy statement released following the euro area summit provides a basis for a euro area solution to what is essentially a euro area problem. This will be one of our key priorities between now and the end of year, with the initial formal steps, at a European level, taking place at the euro group meeting on 9 July.
The agreement reached at Council level was significant and could have significant benefits to this State and to our citizens. The Minister was at the finance committee last week when I wished him well in his attempts to separate the sovereign debt from the banking debt. I have listened to the conclusions of the summit and the devil is in the detail. I am afraid that he is not being ambitious enough on what the Government is going to seek. I listened to his ministerial colleagues speak at the weekend on what this could possibly mean. They said that the vicious circle has been broken between banking debt and sovereign debt and that we have won the principle of retrospection. The litmus test on that is Anglo Irish Bank and the €28 billion promissory note.
My understanding of separating banking debt and sovereign debt is that if Anglo Irish Bank was to emerge in Germany in two years, it would be the ESM that would fund that bank and it would be the ESM that would absorb the losses if such losses were incurred. If we are to work on the principle of retrospection, then regardless of the fact there is not any longer any value in Anglo Irish Bank, the same solutions that would be applied in other member states in the future must be applied to what happened in Anglo Irish Bank. While I know we cannot determine the outcomes, is that the Government's starting point at least? Is the Government putting up the full €30 billion and more that we have put into IBRC, and does it want that to be absorbed by the ESM and the losses absorbed across the euro system?
I am not too sure the devil is in the detail in this case. The eminent economist, Colm McCarthy, was saying during the week that in this case, the devil is in the principle. Getting the principle right is probably the most important thing and we can work out the detail subsequently. It is not as clear cut as the Deputy saying that the ESM will be the funder. It looks as if that will be the way it may go, but there is no power within the ESM treaty at the moment to recapitalise banks. There is a catch-all provision at the end which it is stated that the governors or the ministers for finance may, by unanimous decision, take almost unlimited powers of intervention and give them to the ESM. Therefore, that step is there before the ESM can act.
Doing something about Spain's banks is imminent and I think it will occupy our work on Monday and Tuesday to a large degree. However, I understand that the funding mechanism in the first instance will be the EFSF and not the ESM, and there will be subsequently some transfer from the EFSF onto the ESM. That seems to be the general intention at the moment. We will be watching that very carefully, because if the principle of equality is sacrosanct, the manner in which the Spanish banks are dealt with will be an important precedent for our negotiations.
The agreement is that this vicious cycle of sovereign and banking debt is to be broken. If that were the case and if Anglo Irish Bank were to emerge in France and massive losses were to be incurred, it is likely the ESM would incur those losses. Is the Irish Government going to argue that if that is the process to be put in place - the ESM absorbs the losses rather than taxpayers - then we should put that on the table? Are we going to argue that we want the losses which we know exist in Anglo Irish Bank, or IBRC, to be absorbed by the ESM if that is what will happen with other banks? I know there will be difficulties in Europe with this because they are realising losses immediately. However, if they are willing to countenance realising potential losses into the future and if the principle of retrospection is to apply properly, then they need to realise the losses we have already incurred within our banking system.
I am fearful we will just end up with a longer duration for the promissory note and that we will swap our shares in the living banks for the current value of the €28 billion injection, which is estimated by the NTMA to be €9.6 billion and which is probably overvalued. That is of no direct benefit to the State for a long-term solution because there is a value in the shares. As Deputy McGrath said, we must show more ambition. The €64 billion in total must be put on the table and the principle of retrospection must be enforced. The Minister has to fight hammer and tongs on the principle of retrospection. If it is good enough for Spain, Italy, Germany or any other European country, then it needs to be applied to Ireland, given what we have experienced.
There will be no lack of ambition as we proceed. As I said, a lot of bottom-up solutions were being introduced on an instalment basis but they were all behind the curve and the market did not believe in it. There is change now and an overarching policy has been put in place, so we will now fill in in accordance with the overarching policy. A lot of the detail will have to be worked out, not only in respect of Ireland but also in respect of Spain and of Cyprus, which has also applied for a programme. It is the banks that are also dragging Cyprus down as a result of the kick-on effects from Greece. It is like a very detailed line drawing which we have to colour in. It will take a while before we can do that and I do not want to jump any fences before the fences in front of us. I believe the Deputy knows my negotiating position. I was clear about it at the finance committee and it has not changed. We will not lack ambition.
Bank IT Systems
4Deputy Michael McGrath asked the Minister for Finance his views on the handling of the crisis at Ulster Bank following the IT problem which occurred on 19 June 2012; if he is satisfied with the response of the bank and the Central Bank of Ireland; if he will state the steps that are now planned to ensure that the affair is fully investigated and that the contingency plans of the other banks are rigorously tested; and if he will make a statement on the matter. [32960/12]
I am fully aware of the negative impact that Ulster Bank's technical problems are having on the bank's personal and business banking customers throughout the country. This issue has been ongoing for far too long at this stage and, as I have made clear already, it is essential it is resolved as a matter of absolute priority. From my perspective, it is totally unacceptable that it has taken Ulster Bank so long to solve the technical problems and that customers of the bank have been given mixed messages on when the problems will be resolved. My officials and the Central Bank are getting regular status updates from Ulster Bank and are closely monitoring the situation to ensure it is resolved as quickly as possible. In that respect, the Central Bank has officials on the ground in Ulster Bank to ensure immediate priority is given to the backlog issue and that all customer accounts are brought up to date as soon as possible.
The current focus is to get all transactions processed and, following that, Ulster Bank has said it will commence the process of refunding customers for any interest or fees and charges that have occurred as a result of this incident. The Central Bank has also indicated it will be putting in place a full restitution regime for all persons who have been affected and that it will work with the Irish Credit Bureau to ensure customer ratings are not affected.
The Central Bank met with the Joint Committee on Finance, Public Expenditure and Reform yesterday. The bank's representatives informed the committee it has already begun to scope out the parameters of an investigation into the matter with its UK counterparts. In that respect, the investigation is complicated by the fact that the payment processing system at Ulster Bank is, in fact, outsourced to its parent, the Royal Bank of Scotland, where the technical problems first arose.
All credit institutions are required to have in place contingency and business continuity plans to ensure they have the capacity to operate on an ongoing basis and limit losses in the event of severe business disruption. They are required to adopt policies and processes to evaluate and manage exposure to operational risk, including low-frequency, high-severity events. It is important that the Central Bank satisfies itself independently, as regulator, that these requirements are being met by other credit institutions to avoid similar problems elsewhere.
This has developed into a complete mess over the last two weeks. Yesterday, the Central Bank came before the finance committee and, today, Ulster Bank came before the committee and confirmed that more than 500,000 customers of the bank in Ireland have been directly affected by this debacle. It still has a backlog of 4 million transactions to clear and its latest update, as the Minister knows, is that by the week beginning 16 July it hopes the vast majority of customers will have a normal service. Therefore, four weeks after the incident first occurred, not all customers will have full access to normal banking services. It is completely unacceptable and a scandal.
From a regulatory point of view, one issue that arose during the course of the hearing yesterday was that the Central Bank confirmed it does not have the IT expertise to go in and interrogate the IT systems in the banks. In its own words, the Central Bank "has instructed all banks ... to review their contingency plans and to formally reconfirm that a robust recovery capability is in place." Essentially, the Central Bank is asking the banks to review their own plans and systems and confirm that they think everything is in order. That is the type of regulatory approach that contributed to the mess we got into and it needs to change. There needs to be far more active engagement. The Central Bank should be arranging for teams to go into the banks and actually test the systems instead of relying on what the banks are telling it.
Perhaps the Deputy is right. Certainly, I would agree with him that this was an absolute disaster and it has been extremely badly handled by Ulster Bank and by RBS as well. It has taken far too long. Deadlines that were solemnly given have been broken time and again over the last two weeks.
What the Deputy is suggesting is that the Central Bank should have a unit that duplicates the IT expertise of the banks. There is only so far we can go. I do not think we need literally hundreds of public servants on stand-by waiting to move in when an accident happens once in five years or once in ten years. There is a limit to how far we can go.
Come on. Inspectors go into primary schools.
The inspectors go to primary schools but there are not enough inspectors to allow them to move in and replace what the teachers inside are doing. There must be a limit to the manner in which we regulate. I would have thought the directive from the Central Bank, whereby it is obliging the banks under law to do an assurance check of their systems and give a guarantee they are able to deal with any eventuality that discontinues business, was appropriate. That is a pretty good step.
We have another problem, of course, with Ulster Bank, which has indicated to us it is moving to regulation by the Bank of England because its parent is a British bank, with a subsidiary in Northern Ireland and trading down here. Therefore, it is still regulated by us but it is changing the legal base of the bank so it will be regulated by the Bank of England. We have to keep that in mind as well.
We have all of the world's top technology companies in Ireland. I am not suggesting the Central Bank hire permanent staff and duplicate the work the banks are doing with their IT systems. However, it can bring in expertise from the private sector on a needs basis, which is what I am suggesting. The expertise is out there. The major risk factor in the Irish banks now is clearly technology. It was lending but that is not now a problem because they are not taking much risk. I am suggesting the Central Bank should go in there and do that work.
At the committee today, the CEO of Ulster Bank, Mr. Brown, had the cheek to say he might accept a bonus for the current year and he refused to rule out that possibility. That is absolutely ridiculous. It is rubbing the noses of its customers in it - customers who have been affected over the last two weeks and will continue to be affected for another number of weeks. Has the Minister a view on this? Would it be appropriate for Mr. Brown and senior management at Ulster Bank to accept a bonus given all that has happened?
There are many problems in banks and, obviously, technology is one problem and lending is another problem. The biggest problem of all is credibility. We cannot believe the banks; we cannot believe what they say. Look at what is happening in the City of London at the moment and one will get examples in nine-foot-high letters of what the key problem is. There is a credibility problem and I hope Ulster Bank and RBS move very quickly to restore credibility because they must be suffering considerable reputational damage. Senior management in those banks then have to accept responsibility, but that is what a board of directors is for.
5Deputy Finian McGrath asked the Minister for Finance if he will outline any tax or financial incentives to assist small businesses. [32961/12]
A broad range of tax reliefs and incentives are available to assist businesses. While some are specific to small or start-up businesses, the full range of reliefs and incentives are available to them. Some of specific provisions available are as follows. The employment and investment incentive is available to the majority of trades. Under this scheme, companies can raise up to €2.5 million per annum, subject to a lifetime limit of €10 million. Investors will receive an initial 30% relief on their investment, with the possibility of a further 11% subject to certain conditions.
The seed capital scheme is available to certain individuals who start a new business venture. Income tax paid over the previous six years can be refunded, subject to certain conditions.
The revenue job assist scheme is available to employers who employ an individual who has been unemployed for the previous 12 months. Employers may claim a double deduction when computing the profits of the trade or profession in respect of the first three years' wages paid to qualifying employees. This double deduction may also be claimed in respect of the employers' PRSI contribution on such wages. Qualifying employees, in addition to their normal tax credits, can claim certain income deductions, including additional deductions for qualifying children for the three-year period after taking up employment.
The foreign earnings deduction is a deduction from income tax to assist companies seeking to expand into emerging markets. Subject to certain conditions, a deduction of up to €35,000 per annum when calculating income tax is available for employees who travel to the so-called BRICS countries, namely Brazil, Russia, India, China and South Africa, as part of their duties of employment.
There is also a three-year tax relief for start-up companies. The scheme was introduced in budget 2009 which provides relief from corporation tax on the trading income and certain gains of new start-up companies in the first three years of trading. It was modified in 2011 so that the value of the relief will be linked to the amount of employers' PRSI paid by a company. The Finance Act 2012 extended this scheme for the next three years to include start-up companies which commence a new trade in 2012, 2013 or 2014.
Additional information not given on the floor of the House.
The research and development tax credit scheme has been enhanced in most budgets and Finance Acts since its introduction. A recent independent study by Mazars on the cost of global research and development initiatives after tax and other cost incentives has placed Ireland among the world's most competitive locations in this regard. Tax credits available as cash refunds are particularly attractive to start-up companies or SMEs which are not making profits as the credit can effectively part-fund the research and development activity and acts as a valuable source of cash flow.
The Finance Act 2012 also provided for a number of changes to the research and development tax credit scheme. The first €100,000 of qualifying research and development expenditure will benefit from the 25% research and development tax credit on a volume basis. The tax credit will continue to apply to incremental research and development expenditure in excess of €100,000 as compared with such expenditure in the base year 2003. This will provide a targeted benefit to SMEs.
Regarding outsourcing limits, before the Finance Act 2012, sub-contracted research and development costs were eligible where they did not exceed 10% of total costs or 5% in the case of sub-contracting to third level institutions. This limit had the effect of disproportionately affecting smaller companies who may have greater need to outsource research and development work than larger multinationals with greater internal resources. The outsourcing limits for sub-contracted research and development costs were increased in Finance Act 2012 to the greater of 5% or 10% as appropriate or €100,000. This will provide a targeted benefit to SMEs.
Companies in receipt of the research and development credit now have the option of using a portion of the credit to reward key employees who have been involved in the development of research and development. It is envisaged that there would be no additional cost to the Exchequer as the bonus comes from the research and development credit already received by the company and the employee still pays the full tax liability on their other income. This change will be monitored closely and if abused will be removed.
The qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects has been extended from 31 December 2011 to 31 December 2014. The purpose of the scheme is to encourage investment in renewable energy projects and to facilitate the growth of electricity generation capacity using these sources.
Regarding VAT incentives, small businesses with a low turnover can opt to be exempt from VAT thereby avoiding the administrative burden that it entails. Traders established in the State and making supplies in the State are obliged to register for VAT where certain turnover thresholds are exceeded or are likely to be exceeded in any continuous period of twelve months. The current thresholds are €37,500 in the case of a person supplying services and €75,000 in the case of a person supplying goods. Businesses with a turnover below these thresholds have the option of being exempt from VAT. Where small businesses are registered for VAT, in order to reduce the administrative burden on such businesses, the Irish VAT system provides for less frequent VAT returns. Whereas the general VAT returns are bimonthly, the Revenue Commissioners offer the facility of filing returns twice or three times annually for small businesses. Taxpayers that have an annual VAT liability of up to €3,000 have the option of filing for VAT half-yearly; in January and July in respect of the periods January-June and July-December respectively. The facility of filing three times yearly is offered to taxpayers that have an annual VAT liability of between €3,001 and €14,400. These taxpayers pay and file in May, September and January in respect of the periods January-April, May-August and September-December respectively.
In addition, small businesses can avail of the option to pay VAT on a cash receipts basis. VAT is normally accounted for on the basis of invoices issued regardless of whether the trader has been paid for the supply in that period. However, small businesses with an annual turnover of €1 million or less can avail of the cash basis of accounting which provides traders with the option to account for VAT on a cash receipts basis. This means that the trader is not required to pay VAT until payment for the supply is actually received. The VAT cash accounting option assists a significant number of firms and focuses in particular on small firms in the critical area of cash flow.
While general in nature, I remind the Deputy that last year I introduced a number of changes in the jobs initiative that would assist small businesses. These include the introduction of a temporary second reduced rate of VAT of 9%. To support the tourism industry, a new temporary second reduced rate of VAT of 9% was introduced with effect from 1 July 2011 until end-December 2013. The new 9% rate mainly applies to restaurant and catering services, hotel and holiday accommodation and various entertainment services such as admissions to cinemas, theatres, museums, fairgrounds, amusement parks and the use of sporting facilities. In addition, the new rate also applies to hairdressing and printed matter such as brochures, maps, programmes and newspapers. The lower rate of PRSI until end-2013 on jobs that pay up to €356 per week was also halved.
I thank the Minister for his response. I welcome the introduction of the employment investment incentive and the seed capital scheme. Does the Minister accept that in the current economic climate many small businesses are really hurting? Is he aware that 177,547 small businesses employ under ten staff, 9,769 employ between ten and 19 staff, 5,215 employ between 20 and 49 staff and 37,488 employ between three and 12 persons? These are the people who need our maximum support. Will the Minister accept we have to ensure these small businesses are part of the overall strategy of economic recovery? We can talk about getting back into the markets but those small businesses have to be in the engine room of the recovery of the economy.
I agree with the Deputy. Foreign direct investment is flowing strongly into the country now. Although it is a significant volume of investment, it is still not the main employer in the economy. The main employers are all the small businesses, as outlined by the Deputy, employing small numbers of people. Until they are restored to health, no impact will be made on reducing unemployment in the country. I agree in general with what the Deputy has said.
There is no shortage of schemes to assist small companies. Sometimes I feel many of these small companies do not know these schemes and write-offs are available to them. We must look at a way of communicating better, possibly through their representative organisations.
I am glad the Minister accepts small businesses are the economy's main employers. The information issue seems to be a regular problem. When I engage with small businesses and self-employed people, a high percentage of them are unaware of all the schemes available to them. Will the Minister and the Minister for Jobs, Enterprise and Innovation, Deputy Bruton, be more proactive on this issue?
Many small businesses and self-employed people feel penalised on the PRSI issue. Many of them will have paid it, along with tax and VAT, for nearly 30 or 40 years. They often feel they are left down by the State in this regard when they retire or their business closes.
The Minister for Jobs, Enterprise and Innovation is aware of the lack of knowledge of some employers and small businesses of the schemes that are available which would be to their benefit. I understand he is taking steps these weeks to ensure a better flow of information of such schemes to small businesses. I will draw his attention to the Deputy's question and ask him to continue to prioritise the issue.