Financial Resolution No. 4: Income Tax

(1) THAT the matter set out opposite reference number 47A in Schedule 25B to the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended by substituting “section 490, where the subscription for eligible shares is made on or before 15 October 2013 or on or after 1 January 2017” for “section 490”.
(2) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).

Section 1 introduces two new items into Schedule 25B. The new items are capital allowances and balancing allowances on specified plant and machinery, as defined in section 485C(1B) of the Taxes Consolidation Act 1997. These sections provide that the allowances on specified plant and machinery will be a specified relief, subject to the new section 485C(1B), whether granted directly under section 284, indirectly through the provisions of section 298 or deemed to have been granted to the individual under section 287. The allowances will be a specified relief whether they are claimed in the year of assessment or carried forward into that year of assessment from a previous year of assessment.

Financial Resolution No. 4 deals with the employment and investment incentive scheme. In budget 2013, the Minister for Finance announced plans to extend this scheme until 2020. In April, the Minister for Jobs, Enterprise and Innovation stated that he expected to have European Commission approval for the scheme by the end of June. Bizarrely, the Department of Finance only submitted the application in June, however. Will the Minister explain why this was the case? When will there be a decision on this scheme, as it is pointless talking about amending a scheme when we have not even got Commission approval?

This was one of the ten points announced by the Minister for Finance last December to support small and medium-sized enterprises, SMEs. It is a worthy proposal. I do not have any problem in principle with the changes proposed in Financial Resolution No.4. What is frustrating about the fact that it has not got Commission approval yet is that it is estimated by the Department of Finance that this scheme could create 1,200 new jobs a year. Recently, I spoke to one employer who told me he could increase his workforce from 60 to 70 if he had access to the scheme. There are many other employers in such a position. This is a mechanism that will get cash into businesses because the reality with the banks is that one almost needs to prove one does not need the loan before they will give it. This scheme will allow an investor to put cash into a business.

Earlier today, the Minister for Finance announced a 25-point plan giving additional tax incentives for investing in businesses. However, this scheme, announced in the last budget, is still not operational. When will it be put into operation? Why is there a delay? Why has the Minister for Jobs, Enterprise and Innovation been left out of the loop in terms of what is happening with this scheme?

Seo ceann de na ceisteanna a phlé muid leis an Aire Airgeadais sa choiste Oireachtais i rith na bliana. Cé gur moladh an scéim go huile agus go hiomlán mar scéim úr, sílim go bhfuil sé ceart agus cóir go bhfuil an leasú seo ag teacht os comhair na Dála anocht mar gur féidir leo sin atá ioncam an-ard acu mí-úsáid a bhaint as an scéim seo. Maidir leis na rialacha agus an srian atá orthu sin a bhfuil ioncam an-ard acu - go gcaithfidh siad céad codán den ioncam sin a dhíol mar cháin - feiceann muid go bhfuil dóigh inar féidir leo fáil thart ar. Sílim, mar sin, gur rud maith é go bhfuil an moladh seo ag teacht os ár gcomhair.

I discussed with the Minister for Finance on Committee Stage of this year’s Finance Bill the fact that certain high-income individuals are able to get around the high-earner restrictions we have. This was one of the measures that was open to tax avoidance. Financial Resolution No. 3 is a sensible proposal from the Government to ensure tax avoidance is closed down without delay.

Will the Minister explain in simple and understandable terms what the anti-avoidance measure in Financial Resolution No. 4 amounts to? Manufacturing businesses, by definition, are risky. They often require large investments in plant and machinery, which are not so bankable. From a businessman’s or businesswoman’s point of view, he or she may need the backing of high-earning wealthy individuals who are prepared to make an investment and to provide a shield for what would otherwise be a large tax bill. Sometimes it is a way of raising working capital for plant and machinery for businesses that may otherwise not get it.

It is not good enough just to say that because the measure is anti-avoidance, it is good. Sometimes it is not good. The avoidance of taxation is sometimes seen as a business philanthropy rather than a social philanthropy by people of enormous wealth. They know they are going to lose the money. Many film investors know they will lose their investments but they can see they can soften the blow of that write-off by having a slightly reduced tax bill. I would refrain from the knee-jerk reaction of thinking that anti-avoidance measures are always good. In the Budget Statement, the Minister said this would have a nil effect on the Exchequer. The Department should check with businesses that have attracted passive investment from wealthy and high-income individuals to find out what would have occurred if they had not raised that capital.

There is an interesting philosophical debate to be had about Deputy Mathews’s proposition that stamping out tax avoidance need not always be a good development. I can see certain circumstances in which this might be the case. However, in return for facilitating people in sheltering income, there has to be some kind of cost-benefit analysis: is additional economic activity generated, or are new jobs created?

In this particular case, we are not seeking to penalise the business that is the economic activity concerned. Rather, we are addressing the abuse whereby high-net-worth individuals are leasing plant and equipment to, for example, a manufacturing business in return for an annual or monthly rent while writing down the costs against their tax liabilities.

That is the point, Minister. It reduces the leasing charge.

Through the Chair, please.

The evidence presented to us by the Revenue Commissioners does not suggest that this is the case. Financial Resolution No. 4 amends item 47A of Schedule 25B to the Taxes Consolidation Act 1997 to provide for the temporary removal of the employment and investment incentive from the high earner restriction.

It is a positive measure. The restriction ensures a minimum tax rate is paid by high-income individuals by limiting the amount of tax reliefs that can be claimed in any one year if there is a cumulative claim of different tax reliefs. In the case of the financial resolution before the House the employment and investment incentive provides tax relief for investments in SMEs in recognition that such investments are risky, and as a temporary stimulus measure amounts subscribed for shares under the employment and investment incentive, EII, between budget day 2013 and 1 January 2017 will not be subject to the high-earners restriction. This is a positive measure to facilitate investment above that restricted figure into the enterprise. In that sense-----

Rather than into plant and machinery?

Regarding Financial Resolution No. 3 on the plant and machinery, there is very limited activity. It does not pass the test in terms of jobs created or contribution to-----

That is because we are in a recession.

I do not know. We are addressing only passive investors, not the kind of investor who wants to go into an SME, for example-----

Capital is always passive.

I refer to the investor rather than the investment. Active traders will be unaffected by this measure. This scheme of capital allowances is intended to provide relief for individuals who purchase plant and machinery for use in their business. Passive investors who are not actively involved in the business are claiming this relief for purchasing plant and machinery and subsequently leasing it to the manufacturing companies, as Deputy Pearse Doherty has said. It is not intended that this relief be available to such passive investors.

Am I correct in saying that Financial Resolution No. 4 represents a cost to the State of €1 million?

That is correct.

Can the Minister explain how the cost to the State applies, how it is calculated and where the extra charge comes from?

The information we have is that the relief was claimed by only 14 individuals and that this roughly realised a relief used up of just over €1 million. That suggests an average relief per investor of just under the limit of restricted higher earners, €78,000. This is an anti-avoidance measure. It is not designed to bring in a great deal of additional tax to the Exchequer.

Could the Minister come back on the delays in getting the Commission approval and when we will see that?

Deputy Naughten refers not to the scheme, which is in operation, but the extension of the scheme generally. The European Commission has assured the Department that approval will be received by year end. Up to now, before the application being submitted, as is normal in these cases, the case was being advocated and promoted in Brussels in ongoing discussions with the Commission. The latest communication from the Commission suggests the extension to which Deputy Naughten refers is likely to be approved before year end.

We are always warned we should declare any potential conflict of interest. I have concerns. If there is deliberate avoidance in this matter I can see where the Government is coming from, but I would not want genuine traders to be adversely affected by the Government's proposals. The Government must be 100% sure of its facts. I listened carefully to what the Minister just stated about the number of people who availed of it in the past. It would raise an alarm bell when one sees everybody claiming to the exact amount.

I should have said that those 14 were for a given year, 2011. I do not mean 14 in total.

The Minister can see my concern, in case it would affect legitimate operators who are going about their business. They may be at it in a bigger way than the usual person and that is why it comes across as a large amount of money.

I return to the figures. Will the Minister correct me if I go wrong? In 2011, 14 people availed of a relief that cumulatively reduced their tax bill by €1 million. These are high income earners. We are getting rid of that and this will cost the State €1 million. I do not understand that.

No, as a result of the abuse being obliterated the investor will not have this facility in the future. It will be subject to the restriction.

Some of the 14 individuals do no wrong but just use the existing tax code. They would not be able to write down their tax liability to €1 million if they were going to lease their plant to other companies. Therefore they would have to pay the full €1 million in taxes.

We are confusing the two financial resolutions. The value of this resolution is that it removes the ceiling so that an investor could invest up to €150,000 in the enterprise. This is the positive side of it. The previous resolution is an anti-avoidance measure. This is for a temporary period of three years in the hope that it will act as a spur to innovation, enterprise growth or employment creation. The EII provides that a maximum of €150,000 now can be invested by the individual per annum. The high earners restriction was effectively reducing the amount to €80,000, so it is a plus.

Let us reverse. Financial Resolution No. 3, on which I spoke earlier, is fine regarding closing that avoidance measure. How did the Government calculate the €1 million cost to the State from Financial Resolution No. 4? That is where the Minister spoke about the 14 investors but those investors were in Financial Resolution No. 3. The Government is opening the potential for another tax avoidance measure. The intended outcome is good but the Government is relaxing the restriction that forced high earners to pay a certain proportion of their income in taxes. How did the Government calculate €1 million? Where did this lobby come from? Earlier the Minister mentioned that Financial Resolution No.3 came from the Revenue. Who is lobbying for this? How many individuals does the Minister think will increase their investment as a result of this?

To clarify, with regard to family run machinery or agricultural machinery businesses, would it be permitted for an individual connected with the family to invest? Would a member of the family be allowed invest the value of the machine? Is that allowed or is that provision changed in any way under this resolution?

Will the Minister clarify further for me? My understanding is that the scheme under Financial Resolution No. 4 lapsed at the end of 2012 and that in budget 2013 it was rolled over and requires EU Commission approval to be active in the current year. Will the Minister clarify that? If I am wrong, that is great. However, if I am correct, will Revenue recognise the intention was for the scheme to continue in operation and that if someone invests now, he will get the relief once the approval comes before the end of the year? That is a concern for people.

I assure Deputy Moynihan that there is no concern in the farming area in that regard. The same point was raised by Deputy Healy Rae in a different way - whether the real investors will be impeded. The answer to that question is "No". It is only in regard to an application to the passive investor. The real plant hire company that is eligible at the moment to benefit from the scheme will continue to be eligible to benefit from the scheme.

In regard to Deputy Naughten's question, as I understand it, subject to correction, it is not that the scheme has expired or closed. The issue the Deputy raised relates to the extension of the scheme to activities or enterprises not encompassed at the moment for a period of time. There is an application to that effect in Brussels and the indications are that it will be approved.

If that extension had been approved already, more investment could go into businesses. I understand that from the point of view of investors and taxation, once it is done by the end of the year, there is no difficulty with it. However, I understand there is a concern among investors that if they make the investment prior to Commission approval, the Revenue Commissioners may interpret it as not having had approval at the time and they may not be able to avail of the relief.

No, that is not the case, on the basis, as I understand it, that the Department has had an assurance that the extension to which the Deputy referred will be forthcoming. Applications can be made and accepted in the interim. The expectation is that it is a matter of getting the formal stamp of approval.

The Minister did not respond to my question in regard to the €1 million cost to the State. Where did the calculation come from and how many investors are involved? What is the cost based on and how many additional investors are required? Who is lobbying for this change and for this resolution to be moved tonight? This is not something that will have people running to their tax accountants tomorrow morning. Why is the resolution being taken tonight instead of in the Finance Bill?

There is an age old rule of thumb regarding what is required to comply with being a Financial Resolution on the night of the budget and I am advised this fits the requirement. The figures tend to show that December is the busiest month of the year in the context of this kind of investment. This was the case going back to the old BES and other schemes. With regard to where the figures come from, the figures mentioned by the Deputy are the assessment of the Revenue Commissioners. I do not know what the cost is, in terms of the extension Deputy Naughten advocated or of motion No. 4 in the context of the three-year stimulus period. It is difficult to make a stab at whether people will be running out or not and it is difficult to calculate. However, the idea behind it is not that there was particular lobbying, but that it is just another measure in the suite of measures the Minister for Finance announced today that is calculated to stimulate economic activity.

Question, "That Financial Resolution No. 3 be agreed to", put and declared carried.
Question, "That Financial Resolution No. 4 be agreed to", put and declared carried.