This Bill confirms the taxation changes proposed in the budget of 25 March. It also provides for the introduction of further improvements in the tax code which are aimed at achieving a fairer and a more efficient system. Some of the new tax measures proposed in the budget, though perhaps of relatively minor importance in the overall context, involve substantial changes in existing tax provisions.
Before I describe the contents of the Bill, I want to refer briefly to recent developments affecting our budget and taxation policies. In the course of my budget statement I said that the Government's principal concern was to achieve a proper balance between reducing our dependence on borrowing and improving employment. We are making progress this year in reducing borrowing for day-to-day purposes. The budget targets are within the limit for the year recommended by the EEC. The special PRSI tax concession of £312 which was introduced in April will reduce tax revenue by £45 million this year and I have said on a number of occasions that this has to be made good. I am now examining the results of a review of departmental expenditures with a view to making proposals to the Government for savings this year. If the £45 million shortfall cannot be made good through expenditure savings, then I must consider taxation options, though I regard this as very much a second best approach.
There has been considerable publicity in recent weeks about the current budget deficit for 1982. When introducing the Finance Bill in Dáil Éireann, I gave notice that the trend this year would be highly unusual because of an accumulation of revenue in the final quarter of the year. The quarterly figures showed a deficit at end-June of £692 million which equals 102 per cent of the expected deficit for the year as a whole. This level of deficit was generally in line with our expectations and the deficit will continue to rise during the period to end-September. There will, however, be a substantial surplus of revenue in the final quarter due to a number of factors including the imposition of VAT on imports. I have indicated that it is the Government's intention that, for the year as a whole, the deficit will be kept close to target, despite the increasing cost of central fund services, and some shortfalls in revenue.
The first report of the Commission on Taxation was submitted to me last week and I am arranging to bring it before the Government immediately. I would like to take this opportunity to express my thanks to the members of the commission for the work which they have put into the preparation of this report. Until I have had the opportunity to consider its recommendations carefully, it would be premature to comment upon it, but I can say that it is a very comprehensive statement on direct taxation which, I expect, will invite widespread public attention and debate about the whole structure of our taxation system. Other aspects of taxation will be dealt with in later reports. The commission's terms of reference require them to make recommendations which will achieve an equitable incidence of taxation. In assessing these recommendations the Government will give a high priority to the need to work as rapidly as possible towards a fairer system of taxation.
There is at present considerable dissatisfaction with our tax arrangements. This has been manifested again and again in recent years. The protest on PRSI increases is the most obvious instance, but there is clear evidence of continuing unease about the level and distribution of the tax burden. Much of this comes from pressure groups who simply want to ease tax on their own members and transfer the burden elsewhere. They argue consistently for further concessions on the grounds that they are being treated harshlyvis-á-vis other groups, or that business will be severely damaged if no change is made. But, apart from the pressure groups, I think there is a general recognition of the need for significant changes.
I emphasised, however, in Dáil Éireann, and I want to emphasise here again, that it would be unrealistic to expect that we can achieve, in the short term at any rate, a reduction in the overall level of taxation. While the overall burden of taxation here is admittedly high, it is not out of line with taxation levels in other European countries generally. In any event, we simply do not have the scope for reductions because of our expenditure commitments and our unacceptably high levels of borrowing. I might add that all too frequently those who are clamouring for tax reductions are at the same time looking for more handouts from the State. They justify this inconsistent attitude by the spurious argument that there are large sources of taxation yet untapped. We must adopt a more realistic view if we are to bring our serious budget difficulties under control.
I would now like to deal with the individual items in the Bill. Sections 1 to 3 legislate for the changes announced in the budget in the income tax exemption limits, allowances and rate bands. These are designed to have substantially the same effect, for individual taxpayers, as the tax credit proposals of 27 January. A comparison of the two approaches shows this very clearly. Both the tax credit proposals and the budget changes involve a redistribution of the income tax burden to the benefit of lower and middle-income groups. In the proposals of 27 January this was to be achieved by tax credits. In the budget it is achieved by improvements in the personal allowances and adjustments to the 35 per cent rate bands. There has been considerable argument about the merits of a tax credit structurevis-á-vis the present system of allowances. The only criterion that ultimately matters is the burden imposed on individual taxpayers and it is not the structure but the level of taxation for different levels of income which determines this.
Section 4 deals with the benefit-in-kind from the use of a company car. For the future the benefit to an employee from the private use of a company car will be calculated as a percentage of the original market value of the car. The percentage will vary from 12½ per cent, where the car only is supplied, to 20 per cent, where all costs are met by the employer. Tapering relief will be available where the business mileage exceeds 10,000 miles. Where the business mileage exceeds 25,000 miles there will be no chargeable benefit.
The proposal to grant income tax relief to elderly persons in respect of private tenancy rents is contained in section 5. The maximum amount of rent on which relief will be granted is £500 in the case of single or widowed persons, and £1,000 in the case of married couples jointly assessed. Relief will commence in 1983-84 and it will be based on rent paid in 1982. There was a very lengthy debate on this section in Dáil Éireann and there was considerable pressure to extend the relief to include those on lower incomes. While this might be desirable in principle, it had to be ruled out for financial reasons. The special PRSI allowance of £312 for those who pay PRSI contributions at the higher rates is confirmed in section 6.
There is a concession in section 7 for those who are obliged to pay excess life assurance premiums because of ill-health. Section 8 legislates for loans to employees at preferential interest rates. These changes are necessary because preferential loans could be used to circumvent the new benefit-in-kind arrangements and the revised loan interest provisions. In future, the benefit from a preferential loan, that is the difference between paying interest at the preferential rate and at the specified rate of 12 per cent, will be charged to tax. The amount of interest so charged will be treated as if it were interest paid by the employee and will qualify for income tax relief subject to the normal restrictions. In practice, ordinary employees should be largely unaffected by these changes.
Section 9 exempts military service pensions paid to veterans of the War of Independence, their widows or dependants. Sections 10 and 11 bring the limits which deal with recovery of tax from defaulters into line with the new jurisdiction limits of the District and Circuit Courts, and section 12 extends for a further year the residence-related employment scheme which was first introduced in 1979.
Sections 13 to 16 implement the measures announced in the budget relating to the taxation of farming profits, that is improved stock relief, payment of tax in instalments, the rates credit and treatment of certain capital expenditure. Section 17 provides for the abolition, from the date of its inception, of the agricultural resource tax, which was discontinued last year. The resource tax which has been collected in respect of the year 1980-81 will be refunded.
Payments under the employment contribution scheme and grants towards employment in the service industries are exempted from tax under section 18, and section 19 gives effect to the budget proposal to provide tax relief for the cost of repairs to buildings and upkeep of gardens which are of significant scientific, historical, architectural or aesthetic interest. This relief is conditional on reasonable access being allowed to the public. Section 20 disallows business entertainment expenses incurred on or after 26 March as a deduction for tax purposes.
The revised arrangements for loan interest relief are set out in sections 21 to 23. Because of serious technical problems, it was not possible to implement in full the earlier budget proposals on mortgage interest. In general, relief will be confined to interest on loans to purchase, improve or repair the borrower's sole or main residence. In the case of other loans no relief will be allowed for interest on the amount by which the borrowings exceed the specified limits. These limits are £5,000 for married couples, £3,600 for widowed persons and £2,500 for single persons. Transitional arrangements will apply for loans in existence before 26 March or 6 April, as appropriate. In the case of overdrafts and credit card facilities, only the amount outstanding on 25 March will qualify for relief and for 1982-83 only. Special provisions will apply where overdrafts or credit card facilities in existence on 25 March are subsequently replaced by loans. The existing overall limits on the total amount of interest qualifying for income tax relief will remain in effect. As an anti-avoidance measure the new arrangements are also being extended to companies in respect of their non-training interest.
Section 24 continues stock relief for a further year. Under the following section, the special arrangements between the Revenue Commissioners and the building societies for determination of tax due on interest and dividends are, broadly, to remain unchanged for 1982-83. Following an agreement on mortgage interest rates between the Minister for the Environment and the building societies, provision is also being made for a decrease in the overall tax payable in 1982-83 by societies which maintain certain interest rate levels on housing loans.
The basic rate of corporation tax is increased from 45 per cent to 50 per cent in section 26. There are consequential adjustments in the small companies' rate from 35 per cent to 40 per cent and in the low rate applicable to certain bodies from 30 per cent to 35 per cent. In section 27 the due dates of payment for corporation tax are brought forward by three months.
As part of the reduced interest scheme for farmers in severe financial difficulty announced by the Minister for Agriculture on 31 March, section 28 provides for a tax credit to be made available against the corporation tax payable by the Bank of Ireland and Allied Irish Banks. The other participating institutions — the Ulster Bank, Northern Bank and Agricultural Credit Corporation — will receive a direct grant for which provision has already been made in the budget.
Section 30 provides for the abolition of tapering relief and for the increases in the general rates of capital gains tax announced in the budget including the special higher rates for short-term gains. These rates are applied to companies, for corporation tax purposes, in section 31. The yield from capital taxation has been much too low and substantial increases are fully justified. However, to cater for the small investor the present annual exemption limits for capital gains tax are being increased fourfold in section 32 and the new thresholds will be £2,000 for an individual and £4,000 for a married couple.
Section 33 brings forward the assessment and payment dates of capital gains tax for non-residents. In regard to section 34, the 30 per cent deduction which came into force on budget day in respect of disposals of development land was an interim measure and will not be continued after the enactment of this Bill. The pre-budget criteria for clearance certificates will be restored and these certificates will be issued automatically to Irish residents. The section also provides for refunds in regard to the special deductions made since budget day where no liability to capital gains tax arises or to the extent that any deduction made exceeds the capital gains tax liability.
Sections 36 to 40 deal with the taxation of disposals of development land. The provisions will apply to disposals made after 27 January, the date on which the new measures were first announced. The rate of tax applicable to transactions which took place between that date and 26 March will be 45 per cent. The new 60 per cent and 50 per cent rates will apply as and from 26 March. Where an individual disposes of small sites and the total consideration in any one year does not exceed £15,000, he will be taxed under the general capital gains tax rules rather than under the special development land arrangements.
Indexation relief will apply only to the current use value of development land on the date from which the gain is computed. Roll-over relief will not be allowed in the case of disposals of development land, but an exception is being made where the land is being disposed of by sports clubs. While these clubs may continue to avail of roll-over relief, they will otherwise be subject to the arrangements for development land transactions. Only development land losses may be set off against development land gains. Where a disposal constitutes trading in development land by a builder or land-developer, the tax charge will, as at present, be to corporation tax or income tax and the new provisions relating to the special capital gains tax on development land will not apply.
Sections 43 to 49 make provision for a tax relief in respect of increases in employment. A deduction of £10 per week will be allowable in computing profits chargeable to corporation tax for each week in which a new employee, taken on by a company between 1 July 1982 and 30 June 1983, is retained in employment.
Sections 50 to 58 introduce the scheme of income tax relief, announced in the budget, for shares given to employees under profit sharing arrangements. Ordinary shares up to a maximum value of £1,000 in any one tax year will qualify for tax exemption if they are held for seven years. If the shares are disposed of within seven years the full tax charge may be reduced depending on the number of years they are held. This is an entirely new development and I am sure that it will help to improve the industrial relations environment.
I am very concerned that we should make further progress in countering tax evasion and tax avoidance and this Bill contains a number of sections which will strengthen the law in this regard. The rate of interest charged in back duty settlements is being increased from 1.25 per cent to 2 per cent from 1 November and section 59 provides for this. The monetary penalties for a range of offences are being increased in section 60, and section 61 is designed to strengthen existing measures which counter tax avoidance through dividend-stripping. Sections 62 and 63 are designed to combat schemes for avoidance of capital gains tax which, if not negatived, could result in the loss of millions of pounds of tax revenue.
I announced in the budget the introduction of a travel tax. The charge is £2 per passenger on cross-channel sea routes and £3 per passenger on all other sea and air routes. Section 65 of the Bill implements the proposal and it will apply to tickets purchased in the State on or after 1 September. The charge will not apply to travellers going to Northern Ireland. As regards disabled persons, the charge will not apply to those who because of physical handicap are transported in wheelchairs or on stretchers, and invalids in general will be exempted when travelling to a recognised place of religious pilgrimage.
Section 66 confirms the budget increases on petrol, road diesel and auto-LPG. The increase will not be passed on to scheduled road passenger services and excise duty will be repaid on oil contained in goods which are exported. The present duty repayments scheme for excise duty on oil used by the horticultural sector is being extended by providing on a temporary basis for repayment of the total amount of excise duty.
The rate of duty on motor vehicle parts and tyres is reduced by one-third in section 67. The reduction should help improve the standard of maintenance of the existing motor vehicle stock, adding to its useful life and raising safety levels. I am happy to be able to propose the implementation of this constructive measure which is expected to cost about £5 million in a full year. At the request of the trade, the reduction for motor vehicle parts is being phased in, with a reduction from 37½ per cent to 33 per cent from 1 October 1982, to 29 per cent from 1 February 1983 and to 25 per cent from 1 June 1983. In section 68 the rate of duty on dance hall licences is reduced. This should be of benefit to community halls in particular.
Section 69 increases penalties for betting duty offences. The penalty is increased from £500 to £800 for non-payment of duty or for breach of regulations and for unlicensed bookmaking. The penalty of £50 for obstructing an officer of Customs and Excise in the course of enforcing betting duty provisions is being increased to £500. Penalties for excise duty offences may be mitigated by the courts to one-quarter of the full penalty at present and, in section 70, this threshold is now being raised to one-half.
Sections 71 and 72 provided for the changes in road tax announced in the budget and for increases in the fines for certain road tax and vehicle registration offences. In section 73 a number of orders made under the Imposition of Duties Act, 1957, are being confirmed in accordance with the required procedure, including the orders made by the Government which came into effect on 13 March increasing various excise duties.
In the value-added tax provisions in the Bill there are only minor changes from the budget proposals. Section 75 provides for the introduction of the 18 per cent VAT rate for auctioneers' and estate agents' services in respect of the purchase and sale of land and buildings. Section 76 is a technical provision relating to the application of VAT to barristers' fees. Sections 77, 80 and 81 provide for the maintenance of the existing unregistered status of racehorse trainers except to the extent that their purely horse training services exceed £15,000 a year in value. The latter portion of racehorse training services will be liable at the 18 per cent VAT rate from 1 September 1982. Section 77 also provides for some technical changes in the definition of farmer and fisherman. The remaining part of section 81 confirms the increase, from 1 May 1982, of the flat-rate VAT compensation for unregistered farmers from 1.5 to 1.8 per cent.
Section 79 confirms the budget increases in the VAT rates, as from 1 May, from 15 and 25 per cent to 18 and 30 per cent, respectively, and maintains the special 3 per cent effective rate on building and certain agricultural contracting services. It also extends, from 1 September 1982 this special low rate to auctioneers', estate agents' and solicitors' fees relating to the purchase and sale of agricultural land and farm accountancy and farm management services.
Sections 78, 80, 82, 84 and 85 provide for the technical changes necessary to allow the imposition of VAT at point of importation. The Revenue Commissioners have already issued an initial public notice giving details of the new system which will take effect from 1 September. The key feature is that it will apply to all goods whether for immediate use or for warehousing. While the new system will increase the working capital requirements of industry, its dampening effects on economic activity generally will be substantially less than that of the alternative of increased rates of taxation. It will also help to reduce losses from tax evasion, arrears and insolvencies and to equalise the VAT treatment of imported and domestically-produced goods. It is not proposed to allow any exceptions to the new arrangements. Corresponding with this change, the usual domestic system of charging VAT will, under section 88, apply to sales by registered persons in Shannon to persons elsewhere in the State. The monetary penalties for VAT offences are increased in section 86 as in the case of other taxes.
Sections 87, 88 and 89 amend the various schedules to the VAT Act, 1972, to give effect to the decisions to apply VAT to the services of the legal and accountancy and related professions from 1 September, and the reductions in the rates of VAT on furniture and joinery, furnishings, floorcoverings and books from 1 May. Section 83 contains a technical provision to clarify the application of the cash receipts system of VAT accounting, particularly in the case of hitherto exempted services.
Provision is made in section 90 for the postponement until next January of the increase in the 15 per cent VAT rate in respect of hotel, car and boat-hire services to non-residents in accordance with fixed price contracts entered into prior to 1 January 1982. This measure is expected to cost nearly £1 million and should be of considerable benefit to those sections of the tourist industry who have long-term arrangements with overseas tour operators.
Section 91 provides for the imposition of the levy of £20 million on the banking sector. A levy of 1 per cent on certain insurance transactions is introduced in section 92. Stamp duty on gifts of land to young trained farmers is being removed for a two-year period under section 93. In order to avail of this concession, which will apply from the date of enactment of this Bill, a farmer must be under 35 when the deed of transfer is executed and be in possession of an appropriate training qualification.
In section 94 provision is made for various increases in stamp duties as well as for the introduction of a fixed duty of £1 for all new insurance policies other than policies of life insurance. Transactions between close relatives, which are at present liable to a maximum stamp duty of 1 per cent, will in future be liable at half the normal rates which range from ½ per cent to 6 per cent. The following two sections provide for the continuation of two stamp duty measures which were implemented by Government orders in 1981.
Sections 97 to 102 are concerned with capital acquisitions tax. The upper limit on the special agricultural relief for farmer benefits will be increased by £50,000 to £200,000 in regard to gifts or inheritances taken on or after 1 April 1982. Gifts and inheritances received by a beneficiary from different sources on or after 2 June, the date of publication of the Finance Bill, will be aggregated to determine a beneficiary's capital acquisitions tax liability on a particular benefit. This changes the previous arrangements whereby only gifts and inheritances acquired from the same disponer were added together. From now on all gifts and inheritances taken by a beneficiary from all disponers of the same class will be added together for tax purposes but there will be no aggregation of benefits received before 2 June as it is considered that the new aggregation system, which will greatly increase the tax liability in some instances, is in itself a sufficient additional tax imposition without taking into account gifts and inheritances taken before that date.
In a few areas the Bill contains significant modifications of proposals made in the budget. These modifications are being introduced either because of technical problems, as in the case of mortgage interest, or because on further examination it became clear that the original proposals were imposing too severe an extra burden on some taxpayers. The overall effect of these changes on revenue this year will amount to a reduction of approximately £2½ million.
I have outlined for the House in, I hope, reasonable detail the main features of this Bill. Because of the various import changes being made in our tax arrangements, the Bill is quite complex.
Before I conclude, I would like to deal briefly with an item within my area of responsibility which is not of direct relevance to the Finance Bill but which will be of general interest. In the 11 years since the introduction of our present decimal series of coins, inflation has taken its toll of their real value. The result has seen quite a change in the pattern of demand for coins. In particular, the use of the 10p piece has increased considerably. The average person must carry more coins to meet normal day-to-day transactions. The inconvenience is added to by the fact that our coins, in contrast to the coins of many other countries, are relatively large and heavy.
In consultation with the Central Bank I am considering the desirability of introducing a new coin between the 10p and 50p. There seems to be a definite need for a 20p or 25p piece. The advice available to me suggests that 20p would be the more suitable as it would reduce substantially the need for 10p coins. It also fits naturally into the decimal system. The highest value coin at present is the 50p. Traditionally, in this country the standard unit of value, the £1, has been provided only in the form of a legal tender note. There may now be a case for introducing a coin of this denomination.
I have requested the Central Bank to undertake detailed studies, in consultation with my Department, into the introduction of a 20p or 25p coin; the possible introduction at a later date of a £1 coin, and in the longer term, changing the existing cupro-nickel coins—that is the 5p 10p and 50p pieces—to provide a relatively less heavy coinage. It would not be appropriate to decide these matters without taking account of the views of the public. Over the next few months my Department will be consulting representative bodies closely concerned with these matters. That will help me to formulate firm proposals on the denominations and specifications of any new coins for Government approval and presentation to the Dáil and Seanad. I recommend the Finance Bill to the House.