I understand that arrangements have been made to circulate copies of the speech. I had understood that they would be available now.
The tax evasion measures contained in the Bill this year are important and overdue in my opinion and will be welcomed by the vast majority of taxpayers who abide by the law. I want to emphasise at the outset that it is about a great deal more than tax evasion. It gives statutory effect to the taxation policies which I introduced in the budget last February and it also incorporates a number of taxation changes which will remove anomalies in our tax system.
Because taxation levels are high, our whole taxation system is now being subjected to a degree of scrutiny that we have not experienced before. I welcome this new interest and, provided the current debate and protests are carried through in a rational manner, I believe this can only lead to good. I said in Dáil Éireann and I repeat here that I hope that we can lower the general level of taxation for a majority of taxpayers over the years ahead but I must caution that this will not be possible unless we can at the same time contain public expenditure. The Government will consider new sources of taxation. Greater efficiency in collection arrangements will bring some improvement. At the end of the day, however, there is an immediate relationship between public expenditure and taxation. If we ignore this fact of life, it is hard to have a balanced discussion about taxation.
While I have said that I look forward to some reductions, it would be unrealistic to expect that we can achieve dramatic changes in a short time.
There is a widespread demand for greater tax equity but there are widely divergent views as to what should be done. The present system has serious defects and these need to be corrected, but much of the criticism of the system arises because of the high level of tax rather than its distribution and there is considerable confusion about this. Many people are under the impression that high taxes are a consequence of inequity. This is simply not true and it is highly misleading. A fairer system will bring down the burden to some extent for many taxpayers but it cannot achieve the kind of reductions that many people want unless it is accompanied by cuts in public expenditure. I keep returning to this point because it is central to the whole issue of taxation.
When the Finance Bill was being discussed in Dáil Éireann, the criticism was made that it was strong on evasion but not strong enough on equity. Countering evasion is one aspect of equity and I would be the first to acknowledge that we must go much further and consider more fundamental reforms, if we want to claim that we have made major progress. We must aim for a system where each pays according to his means, irrespective of his role in society, where anomalies that still persist are eliminated and where the system is demonstrably fair as between the different demands in society. This is a difficult target, not least because people will disagree on what is fair, but there are some objectives which are clearly desirable. In the short time since coming into office the Government have shown clear evidence of their commitment to a better system and the Finance Bill confirms this.
There have been considerable protests in recent weeks over the levels of taxation borne by the PAYE sector. I can appreciate the sense of frustration that has given rise to these protests. At the same time I must unequivocally condemn protests which involve breaches of the law. This is wrong and futile and the workers concerned are only doing harm to their own prospects. Those who are encouraging them to withhold taxes and to get into a position of dispute with their employers on this issue must realise the damage they are doing at this stage. While I acknowledge that there are legitimate grounds for dissatisfaction it is only fair to point out also that much of the criticism of the present tax system is misinformed. Exaggerated figures, especially in relation to unpaid taxes, have been used to make the case for tax reductions. Unless we approach the situation in a constructive manner, rather than with an attitude of allegation and counter-allegation, we will only add to the confusion and unrest.
On the details of the Bill, I would propose to concentrate on those sections which involve substantial changes which have not been fully detailed already in the budget statement. During the course of the debate in Dáil Éireann a number of significant amendments were made to the text.
Sections 3 and 4 provide for a radical change in arrangements for taxation of separated spouses. I am glad to see that they have been welcomed on all sides as a necessary reform to give a fairer deal to separated couples. The present law in relation to the treatment for income tax purposes of maintenance payments is unfair to the couples concerned and has given rise to many complaints. What is proposed here is to go as far as reasonably possible to provide the same arrangements for these people as for married couples generally and to allow them the option of single or joint assessment. Where joint assessment is chosen the separate assessment provisions will apply. The effect of joint assessment will be that their combined after-tax income will be the same as if they were living together and for many couples this will be a substantial advance.
The changes will apply in respect of new maintenance arrangements. They will also apply in respect of existing arrangements where both partners request them and I expect that many separated couples will be anxious to avail of this. The approach put forward in the Bill has the great advantage of flexibility and, in future, couples will have options and the right to select the method of taxation that best suits their circumstances.
Section 8 reduces the exemption limits for certain bank deposit interest from £70 to £50 and from £150 to £120. There is also provision in this section for an extension to the Agricultural Credit Corporation of the £50 exemption limit on interest income from deposits. The corporation specialise in lending to agriculture and I consider it important that they should not suffer any disadvantage in securing adequate deposits to finance their activities.
Section 9 makes significant changes in the tax appeal procedures. In future, applications for late appeals made later that 12 months after the date of the notice of assessment will not be considered for admission unless the tax charged in the assessment, together with any interest thereon, is paid and the necessary returns and accounts to enable the appeal to be determined have been submitted. Applications for re-hearings of tax appeals in the Circuit Court are being used by some taxpayers to delay finalising their tax liability and I propose to restrict this right of a re-hearing to genuine appeals. In future, where no returns or accounts are submitted, or the documentation submitted is inadequate to determine the appeal, the appeal commissioners, if an application for a further adjournment is refused, will dismiss the appeal. Where an appeal is dismissed, the original assessment will become final and conclusive. The section also provides that hearings by the High Court and by the Supreme Court of cases stated will no longer be held in camera.
Chapter II of the Bill deals with farming profits. The principal change is the extension of income tax liability to fanners who up to now have been excluded because of their low rateable valuations. This change has become necessary following a recent High Court judgment which held the poor law valuation system to be unconstitutional. At present approximately 35,000 farmers are liable for tax. An estimated additional 90,000 will now come within the tax net. Only a minority of these will actually pay tax, because most of the farmers concerned are on low incomes, and for this reason we should minimise the extra work involved both for the farmers themselves and for the Revenue Commissioners.
A certain amount of confusion has been generated with regard to the administration of this change. The Joint Programme for Government stated that the poor law valuation system would be replaced by a system based on standard results per enterprise and per region taken from the farm management survey. Those gross results would be adjusted to take account of capital depreciation, interest payments and other factors, in order to calculate taxable income. The object of the proposed system was to ensure that farmers becoming liable for income tax for the first time, many of whom would not have a taxable income, would be able to discharge their income tax responsibilities on a simplified basis, without having to submit detailed accounts.
On further examination, I have concluded that the standard results system is unsuitable as a basis for calculating farmers' taxable incomes. Being based on regional averages, it would attribute unrealistically high incomes to those farmers who fall below average regional incomes per enterprise, and unrealistically low incomes to farmers whose income levels are higher than average. If farmers were allowed the option of a system under which taxable incomes would be based on standard results, the more profitable farmers would be systematically under-taxed, while the less profitable would have to keep accounts to avoid excessive income tax charges. Thus, in those cases for which the simplified arrangements were intended — small farmers who would not be likely to have taxable incomes — they would not derive any benefit from the system. In any event, a notional system of taxation for farmers would be inconsistent with the objective of treating all taxpayers on an equal basis.
I consider that the farm profile approach which we have developed since then will achieve the objective underlying the passage in the Programme for Government more fairly that would a standard results approach, and I believe that the great majority of the farmers affected by the extension of liability will see this, and support the farm profile approach.
I have already referred to the current interest in defeating tax evasion and avoidance. Some of the Government's proposals for improvement are incorporated in Chapter IV. A number of these were announced in the budget but there are further changes.
The provision in section 17 requiring depositors to produce an affidavit as evidence of residence abroad has caused some concern in that it might discourage investment by genuine non-residents. I have taken account of this concern and I have modified the provision so that generally there will be no obligation on non-residents to produce an affidavit. Where, however, residents here make an investment on behalf of a non-resident, an affidavit will be required from them. There is strong evidence that the exemption from reporting arrangements for foreign residents is being abused on a wide scale and it is necessary to take action to curb this abuse. Section 18 will allow the Revenue Commissioners, on foot of a court order, to obtain information on transactions made through financial institutions where they have reason to believe that the taxpayer is withholding information on personal taxation.
Up to now profits from illegal activities have not been liable for income tax or corporation tax and this situation is rectified in section 19. There is a significant new anti-evasion measure in section 20 which provides that, where the inspector of taxes is not satisfied with a taxpayer's income tax return, he may request a statement of assets. I have already given assurances in Dáil Éireann that these new powers will be used selectively and only in circumstances where the inspector has good reason to believe that the taxpayer is not making proper returns. Section 22 provides that in certain circumstances tax reference numbers must be shown on invoices and receipts. The other provisions in this chapter are budget items and I would draw attention again to the intention, expressed in section 23, to give effect to the proposal to publish particulars of those convicted of tax offences and of those with whom larger back-duty settlements, above a threshold of £10,000, are made.
Section 27 gives effect to the announcement regarding the arrangements for 1983-84 in relation to the taxation of building society deposits. It provides that the deposit ceiling for the application of the composite rate will be restored to £15,000 from the level of £30,000 which applied temporarily and in particular circumstances for 1982-83. It also provides that the existing composite rate of 24.5 per cent will be continued for this year, except that in cases where a building society does not undertake to co-operate with the Revenue Commissioners in a survey to arrive at a true composite rate, an increased rate of 26.25 per cent will apply.
Sections 29 and 30 extend for a further period of three years, from 1 April 1984 to 31 March 1987, the period in which expenditure incurred on the provision of rented residential accommodation can qualify for tax relief under sections 23 and 24 of the Finance Act, 1981. Some modifications in the scheme will apply during the extended period. The upper floor area limit for flats will be increased from 75 square metres to 90 square metres and qualifying expenditure may be written off only against the amount of the rental income from the property on which the expenditure was incurred, rather than against rental income in general as at present. Where flats exceed 75 square metres, there will be a requirement that they must have a minimum of three bedrooms. I would emphasise that these provisions are an expansion compared to the three-year scheme in operation which, other things being equal, would end next year. We have added some new provisions, although much of the discussion during past weeks would give the opposite impression.
Chapter VII provides for a new system whereby advance corporation tax, or ACT, will be payable by Irish resident companies. The system is designed to ensure that, where tax credits are available to shareholders, sufficient tax will have been paid by the company to ensure that no loss accrues to the Exchequer from the benefit accorded to the shareholders by the tax credits.
Payments of ACT may be set off against normal corporation tax on a company's income. There is provision that a company receiving distributions from another company which has paid ACT on them is entitled to deduct the tax credits in respect of those distributions from the tax credits in respect of its own distributions in calculating its ACT liability. The purpose of this deduction is to avoid a double charge to ACT.
There is a transitional arrangement for distributions made under bank loans known as section 84 loans. It relieves from a charge to ACT, distributions under such loan contracts entered into before budget day or finalised within four months after budget day where negotiations were in progress on that day. This provision is designed to avoid disruption of settled and currently pending section 84 loans. ACT will apply to distributions under all such future loans in the same way as to distributions generally. Dividends which had been declared or announced before budget day but paid on or after budget day will not be liable for ACT subject to certain conditions. This provision is designed as a matter of equity to meet cases where a company, in accordance with its normal practice, had decided on and declared its dividend, on the basis of the pre-budget legislative position, but with actual payment of the dividend not being made until after budget day.
ACT will fall due six months after the end of the accounting period in which the distribution is made. This is the same due date as that for payment of the first instalment of normal corporation tax. It ensures an early set-off of ACT against normal corporation tax in contrast to requiring advance payments of corporation tax during the accounting period with a lengthy interval before any set-off could be availed of. As a transitional arrangement, I am providing for the phasing-in of ACT so that only 50 per cent of the charge will be payable in respect of distributions made in the year to 8 February 1984. This will halve the anticipated Exchequer yield of £10 million which would otherwise arise in 1984. Following the enactment of this Bill, I will consider representations with a view to ascertaining whether changes in the ACT provisions would be appropriate in the context of the 1984 budget. I would point out that it will not be until next year that the generality of companies will actually make their first ACT payments on foot of distributions made this year.
Part II of the Bill, that is sections 57 to 76, confirms changes in a wide range of excise duties and in road tax. Most of these changes have already been implemented. Section 61 provides for an increase in the excise duty on category A motor vehicles, from 50 per cent to 54½ per cent for those of up to 16 hp and from 60 per cent to 64½ per cent for those exceeding 16 hp. Motorcycles are not affected. This additional revenue is required to off-set the reduction in the VAT rate to 5 per cent for garage services. Section 76 confirms certain impostion of duties orders, including those which were made in 1983, varying the rates of duty on the main excisable goods. I would like to draw special attention to section 73 which provides for the reclassification of dump trucks as on-site vehicles for the purpose of road tax.
The value-added tax provisions in Part III relate for the most part to the budget proposals. There are, however, a number of significant new items. The VAT rate on hotel and similar accommodation is being reduced from 23 per cent to 18 per cent. This is in recognition of the fact that this industry must sell its services in the international market place in the face of severe competition and of the important contribution made by it to improving the balance of payments. I introduced amendments in Dáil Éireann to provide for a reduction in the VAT rate on garage services and repairs from 23 per cent to 5 per cent and, as I have already mentioned, an offsetting increase in the excise duty on cars. This decision was made after discussions with the Society of the Irish Motor Industry, which put the proposal of a switch from VAT to excise duty at no cost to the Exchequer, to me. I am glad to have been able to meet this request and I am assured by the society that the change should give a big boost to business at a time when its members were facing more redundancies. The new VAT rate will apply also to the servicing of farm machinery and a corresponding reduction is being made in the flat-rate rebate paid to unregistered farmers to compensate them for VAT borne on farming inputs.
The annual turnover threshold limits, above which VAT registration is mandatory, are being reduced. The reductions are intended to eliminate the advantage which legitimately unregistered traders would otherwise have had as a result of the increases in VAT rates since 1981. I accept that these reductions may bring some small businesses back into the VAT net — I estimate some 300 businesses — but this is an unavoidable part of trying to set thresholds at a level which is fair to those just above and below the limits. The Revenue Commissioners will continue to take all possible steps to curb the activities of illegally unregistered traders. I would like to welcome in this connection the increased co-operation being received from legitimate businesses in helping to locate such illegal outlets. The information provided has been most valuable and I would appeal to those organisations which complain about the impact of illegal trading but which have not so far transmitted information to Revenue to do so without further delay.
During the debate in Dáil Éireann concern was expressed about section 94 which provides for terms of imprisonment — in addition to monetary penalties — for a wide range of offences against tax laws. The point was made that while these severe penalties are appropriate for serious tax offences, they would be inappropriate in relation to the ordinary taxpayer who for understandable reasons may have failed to make his return at all or within the prescribed time. I want to make it quite clear that it was never intended that these stiffer penalties should be applied to the ordinary taxpayer for what everybody would agree would be relatively minor offences. These penalties are aimed at those who deliberately set out to evade payment of tax either by making false returns or statements or by refusing to make any return so as to conceal their incomes.
I considered how the views expressed by Deputies in Dáil Éireann might be met and how this penalty question could be clarified so that all might be assured that only cases of serious and deliberate offences would be brought before the courts under this section. The use of the word "negligently" in the original Bill caused unease, although this word has already been held by the courts to mean something that a reasonable person would not have done. Notwithstanding the judicial view on the meaning of this word, which would limit its application, I proposed on Report Stage in the Dáil to delete it from each provision in the section and to replace it with the word "wilfully". This alteration means that the State will have to prove that the defaulter knew exactly what he was doing when he committed the offence.
I also proposed omitting the reference to "neglect" in relation to directors, and so on, in subsection (5) and to delete the word "delays" in paragraph (g).
These amendments have clarified the position and will limit the application of the section to serious tax offences including, in the case of failure to make returns, only those cases where the failure is in fact an act of defiance and a deliberate refusal to comply with the tax law.
To copperfasten the position still further, I have asked the Revenue Commissioners to apply the section only to cases of serious tax offences and not to ordinary cases of default where, due to carelessness or oversight, taxpayers have not complied with their tax obligations. I have been assured by the Commissioners that this will be done. The ordinary cases of failure to make returns in time or failure to comply with other tax obligations will continue to be dealt with under the old penalty provisions which provide for monetary penalties only. No proceedings under section 94 will be initiated except under the signature and approval of one of the three Revenue Commissioners. I hope that these amendments and the assurances I have given to the Dáil and to this House will alleviate any concern which may have arisen. In addition I would make the point that section 94 in general does not provide for new offences but provides for new penalties for serious offences.
Part VI of the Bill makes provision for the residential property tax announced in the budget. The tax will involve a charge of 1½ per cent on the excess of the market value of property over an exemption limit of £65,000 where the household income exceeds £20,000. Both the market value and the income exemption thresholds are to be indexed annually. Residential property rented at arm's length will be exempt, as will houses of historic or architectural value where reasonable access is allowed to the public. Relief for families will be provided in the form of a 10 per cent reduction in the tax charge in respect of each dependent child. The property tax will be implemented on the basis of self-assessment. Those who have reason to believe that they are liable on the basis of the provisions of the section will be obliged to make a payment to the Revenue Commissioners by 1 October.
When the Bill was before the Dáil, Opposition Members were critical of it at different times for being anti-PAYE taxpayer, anti-farmer and anti-self-employed. The only people who have reason to feel concerned about the provisions of this Bill are those who are evading tax. I have already described it as a substantial step forward towards a more equitable tax system. We are going in the right direction and I look forward to further changes of a more fundamental nature. I look forward to a time when the different lables, such as PAYE taxpayer and self-employed taxpayer, which now unfortunately generate such division, will no longer have any significance. Much of this present division is artifically created by misrepresentations of facts and by exaggeration but at the same time there are anomalies which must be corrected and we must aim for a system in which equality not only is applied but is seen to be applied.
In conclusion, I repeat my statement that this Bill implements the budgetary provisions announced in my Budget Statement. In some cases one would get the impression, listening to the debate on the Bill, that it contains a series of new measures not previously foreshadowed which have been brought forward as an additional response to our situation. That, in fact, is not the case. This is the Bill which gives effect to the provisions of budgetary policy. We have already had in both Houses of the Oireachtas a detailed discussion on the provisions of budgetary policy. What we are now doing is giving effect to the detailed legislative provisions which will implement that budgetary policy.