The main purpose of this Bill is to give statutory effect to the budget measures but it also incorporates some other significant tax changes. This year, radical changes have been made in the income tax and VAT structures: these changes are already in operation. Our aim is to introduce more rational systems which result in a fairer distribution of tax and at the same time benefit the economy. We now have three-rate systems both for income tax and VAT and I believe there is general agreement that this is a substantial step forward. It is too early to assess the impact of these budget changes but the initial reaction has been most encouraging. We could have taken a much more cautious approach to introducing selective changes, but we would not then have come to grips with the main problems underlying our tax structure.
Tax changes, no matter how appropriate or effective they may be, inevitably bring some criticisms. There are those who are disappointed because the levels of taxation are not being reduced significantly. I have said repeatedly in recent months that we cannot reduce taxation until our budget situation is much improved. Otherwise, if we want to reduce taxation now, we must either severely cut public expenditure or take a more relaxed approach to borrowing.
Any cuts in public expenditure, no matter how modest, meet with vigorous opposition, not least from persons and interest groups who find no difficulty in advocating reduced public expenditure as a matter of principle. As long as this inconsistent attitude prevails, it is extremely difficult to secure a consensus.
There appears to be a consensus that we must curtail borrowing. The rapid increase in debt in recent years and the proportion of total taxation that is now required to service this debt are stark reminders of the burden which debt imposes on the economy. There are those who like to argue that higher debt is appropriate, provided it is used for productive purposes which give a good return. This is sound in theory but, in practice, we have learned the lesson in recent years that much of the so-called productive investment simply adds to our debt-funding difficulties. The practical conclusion which we must draw from this reflection is that if we wish to put added emphasis on productive investment we must devote less resources to less-productive investment.
What I am saying, in short, is that we cannot anticipate substantial reductions in taxation in the short term. These reductions would be most desirable both for the uplift in living standards that they would bring and for their beneficial economic effects. Unfortunately, however, they are beyond our reach for the moment unless we can reduce public expenditure dramatically. But there is some room for manoeuvre and the Government have made their position clear in the national plan. There will be no increase in the overall level of taxation and there is a commitment to adjust tax bands and allowances each year so that the overall income tax burden on taxpayers will not increase. I know that these targets will be seen by many hard pressed taxpayers as being rather modest, but they have to be measured in the context of the very tight budgetary constraints. I am confident that, if we stay on course, we can look to much brighter prospects in the not too distant future.
Despite all the difficulties, the economy has been performing well. Last year we had the highest growth rate in the EC. Inflation has come down to single figures and is falling. Our inflation rate, down to 6.2 per cent in February, is now lower than that of the UK, our main trading partner, and very close to the average among our EC partners. Our export growth has been consistently impressive and this has been largely responsible for the continuing improvement in our external accounts. We can and must build on these positive factors. The climate for expansion is more favourable than it has been for a number of years and prospects internationally look encouraging. We have every reason to be optimistic provided we are prudent. We must recognise that we have a serious budget problem which has to be resolved and which severely limits our options. We must recognise the critical need at this time to keep down wage costs so as to maintain and improve our competitive position.
Unemployment is our greatest problem. The recent improvement in the economy has not resulted in lower unemployment and this is disappointing. We are in a difficult position, however, because of the substantial increases in the labour force and our inability up to now to match these increases with jobs has overshadowed the solid progress that has been made in providing new jobs and protecting existing jobs against formidable odds at times. The worst is over. The rise in purchasing power and the general upturn in the economy will improve employment prospects and, while progress will be slow, it will be consistent.
In both the national plan and the budget the underlying policy is to improve the climate for creation of employment. This policy requires a combination of factors to succeed, including attractive incentives for employment, the maintenance of a sound economic background, a disciplined approach to the budget and competitive wage structures. It is a fallacy to assume that the Government can directly create jobs on anything like the scale that we now require. The scope for direct job creation schemes is limited and the Government are exploiting this to the maximum extent possible. The principal role of Government in this area is to create the best possible environment so that business will respond and take advantage of an improving situation. This alone will generate the levels of new jobs that we need. What the Government are doing directly is to supplement this approach with direct job creation programmes under the social employment scheme.
The targets set for the economy for the next three years are incorporated in the national plan. The plan has been criticised on two opposite counts, with the two criticisms often being made by the same people. On the one hand, it is claimed that the plan is too modest in its targets: on the other hand, it is claimed that it is based on assumptions that are too optimistic. These contradictory criticisms underline the realism of the plan. What we have set out to do is to aim for the maximum possible improvements in employment and the public finances in the period up to 1987. These objectives go hand in hand. Those who argue that our aims are too modest are out of touch with reality. The days when highly ambitious targets could be based on unrestricted borrowing are over. We have prepared a realistic plan, based on reasonably optimistic expectations. I have no reason to be other than confident that we will stay on course and achieve the targets that we have set.
Before I speak on the details of the Finance Bill, I would like to refer to the Commission on Taxation whose fourth report was published yesterday. This report deals with special aspects of taxation, including local taxation and mining and oil taxation. Pending full examination of the recommendations, I am not in a position to comment now on individual aspects of this report. The Commission on Taxation will, I understand, shortly complete the final report, which will be concerned with tax administration.
There has been much ill-informed comment on the Government's attitude to the commission's recommendations. The charge, made repeatedly, that these recommendations have been totally disregarded is untrue. On the contrary, the Government have made it clear that they are entirely in sympathy with the commission's preference for a simpler and more efficient tax system on a wider base and the changes introduced in this year's budget are a practical demonstration of this. I have said that we cannot at this time support the commission's proposal for a single rate of direct taxation, as the rate needed to sustain the present revenue yield would be too high and would be unfair to less well-off taxpayers. From this, some commentators have wrongly concluded that the commission's package has been entirely rejected. The commission themselves envisage that the proposals could be implemented only on a phased basis over an extended period. I agree entirely with that view.
I would now like to turn to the Finance Bill and outline the main provisions. I will concentrate mainly on the more significant items. The early sections legislate for the increased income tax exemption limits, for the restructured rate bands and for the revised personal allowances which I announced in my budget statement. Taken together, these changes will reduce tax liability right through the income scale for both single and married taxpayers. The elimination of the previous top rate of 65 per cent should reduce the disincentive effects of high marginal rates of tax. These adjustments are consistent with the policy outlined in the national plan,Building on Reality, in which we undertook that the overall income tax burden on taxpayers will not increase over the period of the plan. The net cost of the adjustments actually exceeds the estimated net cost of indexation of the previous tax bands in line with inflation.
Section 4, in addition to providing for the single parent allowance increase announced in the budget, also removes an anomaly which previously deprived a single parent of the benefits of this allowance if a child had an income in his or her own right of over £180 per annum. The fact that in some instances this resulted in harsh treatment was brought to the attention of the Revenue Commissioners by the Ombudsman. Hitherto, the single parent allowance has been available only to parents who qualified for the £100 child tax allowance. The section removes this direct connection and, while setting out similar basic eligibility requirements, provides for a much more generous limit on the child's own income than that applied to eligibility for the child tax allowance.
In section 6, the rules are being clarified to ensure that tax is payable under PAYE in respect of all salaries and wages except where it would be impracticable to do so. This clarification is necessary in response to increasing claims from professional people that, where they operate a private practice and also hold a public appointment, they have a right to be taxed on a schedule D basis on all their income.
Two sections will specifically benefit older people. Section 7 reduces the age qualification for entitlement to rent relief on private tenancies and increases the upper limit on such relief. Section 8 allows double levels of relief on deposit interest for taxpayers aged 65 or over and will encourage them to put their savings into financial institutions, thereby helping to reduce the risk to old people from attacks on their homes and persons.
Section 10 provides for the exemption from income tax of the first £2,000 of income from the leasing of agricultural land where the period of the lease is five years or more and the lessor is 55 years of age or over or is incapacitated. The £2,000 ceiling will apply separately to each spouse where both spouses engage in leasing. This new relief offers a valuable incentive to lease agricultural land which will, in turn, improve land utilisation. I would point out also that the new relief in the appropriate cases is available in addition to the exemption limits for which provision is made for increases in the Bill.
The venture capital scheme implemented under the provisions of last year's Finance Act is now beginning to make an impact. One of the constraints still to be overcome before the scheme comes fully into operation is the restriction on advertising imposed on designated funds by the requirements of existing unit trust legislation. The Minister for Industry, Trade, Commerce and Tourism has circulated draft legislation which will remove this restriction. Section 13 of the Bill makes a concession to allow companies which face start-up delays, because of a substantial research and development commitment connected with their business, to commence trading within three years and still qualify for the benefits of the scheme.
Further changes provide that close relatives, who are now excluded, may avail of the benefits of the scheme and that there will be no statutory ceiling on fees which may be charged by fund managers to investors. The promoters of a fund will be expected, however, to publish their charges in the prospectus. In addition, the scheme will be broadened by allowing companies with "51 per cent" subsidiaries, or with certain foreign subsidiaries, to qualify for benefit under the scheme.
It is still too early to make an informed assessment of the progress of the venture scheme. Claims for relief became allowable only on 1 January of this year. Two designated funds have already been launched successfully, despite the existing constraints of the unit trust legislation and this is indicative of the scheme's potential. During the 1984-85 tax year ten companies submitted claim documentation covering investments of more than £1.5 million and an additional 20 companies sought outline approval for estimated investments of £2.15 million. The Revenue Commissioners have also received over 100 inquiries from various interested parties.
It has been proposed that tax relief should become available once moneys are placed in a designated fund. In my view, this would simply have the effect of delaying investment in productive activity, since there would then be no pressure on the funds to select suitable projects. The scheme is confined to manufacturing and certain internationally-traded services because this is an area of high risk where the benefits to the economy can be very substantial. If we were to yield to demands that the scheme be open to other business activities, then investors would prefer areas of lower risk and industry would no longer benefit.
Section 14 imposes a restriction on the tax exemption of income from stallion fees. In future, this exemption will apply only to income earned from stallions at stud within the State and from shares in foreign-based stallions acquired and held for the purpose of obtaining access to such stallions for Irish-based mares.
At present, tax relief is allowed in certain circumstances where a person carrying on a trade or profession makes a donation to an Irish university for research in or the teaching of approved subjects. In response to requests, this concession is being extended to other third level institutions which provide training for jobs in trade and industry. A tax relief is also being allowed in respect of gifts made to the President's award scheme.
The composite tax rate arrangements for the building societies are incorporated in section 19. For this tax year the composite rate will be 28 per cent and the ceiling for accounts to which the composite rate applies will be fixed at £25,000 instead of £15,000. This section also makes permanent the new instalment dates for payment of tax by the societies.
As announced in the national plan and in the Budget Statement, provision is being made in section 21 to extend the tax incentive which is available to lessors of residential accommodation to encourage the refurbishment of buildings now or previously in multiple residential occupation. Up to now, incentives have applied only in respect of the construction of a new building or the conversion of a building into two or more dwellings. A further new incentive in section 22 permits a wider interpretation of conversion to include structural repair work generally. In addition, relief will apply where a building, which is not a dwelling, is converted into a single dwelling. Expenditure on these new categories of work in the two years up to 31 March 1987 will be allowed for tax purposes against future rental income receivable by the lessor of residential units to which the expenditure relates subject to the requirements as regards size and standards which already apply in relation to apartments. This is a generous extension of the present incentives and it is hoped that there will be an immediate impact on activity in certain sectors of the building industry as lessors take advantage of the new incentives to undertake major repair work on properties which perhaps had been postponed because of the non-availability of relief for such work in the past. Senators will appreciate that relief in respect of new rented accommodation under section 23 of the Finance Act, 1981 — as amended by section 29 of the Finance Act, 1983 — and in respect of the conversion of a building into two or more dwellings under section 24 of the Finance Act, 1981 — as amended by section 30 of the Finance Act, 1983 — remains in force also until 31 March 1987 and is a very considerable benefit to the building industry provided at a net cost to the Exchequer despite present budgetary pressures.
Section 23 provides for the payment of corporation tax by all companies in a single instalment six months from the end of their accounting periods. At present, all companies pay a first instalment of tax six months after the end of an accounting period but the due date for payment of the second instalment varies as between companies from one day to almost nine months after the due date for the first instalment. It is important in the interests of equity to have a uniform payment date. Provision is made to ease the transition to the new system by limiting the advancement of the due date for the second instalment to three months in any one year.
As announced in the budget, section 25 extends to 31 December 1985 the transitional arrangements under which advance corporation tax (ACT) in respect of distributions made by companies is payable at 50 per cent of the full rate. There is, as Senators will appreciate, an important issue at stake in relation to ACT. Where, irrespective of the circumstances, a tax credit attaches to a distribution made by a company, that tax credit is in part recognition of corporation tax paid. Thus, when a company makes a distribution but, for whatever reason, have no corporation tax liability, the tax credit attaching to that distribution would represent an unjustifiable subsidy by the Exchequer to the shareholders of the company in question unless ACT is payable. It is for this reason that ACT must always be paid in respect of tax credits attaching to distributions made by a company. My purpose, however, in continuing the transitional concessionary rate of ACT for one more year is to reduce the difficulties which the introduction of ACT creates for some companies still enjoying the benefits of capital allowances in respect of investment which was decided upon on the basis of projections of returns from that investment which did not take account of liability for ACT. The effect will be that Irish companies will have had the benefit of the reduced rate and of the Exchequer subsidy which it involves for a period of almost three years.
Part II of the Bill, which concerns customs and excise, deals for the most part with changes already announced in the budget. Some additional measures of a minor nature are included; these deal with management of the table waters duty and betting duty, the time limit on taking proceedings for excise duty cases in the District Court and the penalty for having unlicensed gaming machines on a registered premises.
I would also like to draw attention to section 33 which provides that horsepower will be replaced as the road tax chargeable unit by engine cubic capacity, expressed in cubic centimetres. This will bring our law into conformity with EC requirements. It will not change the amount of tax payable in respect of any motor vehicle.
Part III of the Bill gives effect to the rationalisation of the VAT system introduced by the budget. The system now comprises, under section 43 of the Bill, just three main rates, namely, zero, 10 and 23 per cent. This new system will have a number of important positive effects. The abolition of the 35 per cent rate provides a big stimulus across a wide range of economic activity. A number of individual sectors — especially the tourism and newspaper industries — will benefit from special reductions in taxation. The changes will bring about a considerable reduction in the cash flow burden of the VAT at import system, both by reducing the overall impact of that system and by spreading the burden over a wider range of importers. Finally, the reduction in the complexity of the rate structure should have a big impact on the administrative and compliance costs of the tax for traders and facilitate better administration of the system.
Because of the need to maintain Exchequer revenue from VAT, these advantages cannot be gained without some costs. However, it should be noted that the effect of the increases in the VAT rates on most footwear, clothing and fuel on domestic productive activity in the areas concerned will be limited because of the relatively high proportions of such goods which are imported. The increased rate on construction activity must be seen against the background of the continuing support for this important sector in the Public Capital Programme, the doubling to £2,000 of the housing grant for first time house-buyers and the deferment for two months of the increased VAT rate for new private housing, as provided for in section 54.
Section 55 imposes the £25 million levy on the banks as announced in the budget. The base period is being extended from three to 12 months to give a more representative base and to counteract any tendency to manipulate deposit holdings so as to reduce an individual bank's liability in respect of the levy. Deposits held in foreign currencies will be excluded from the base in order to make the holding of such deposits in domestic branches more attractive.
The budget proposal to exempt from capital acquisitions tax inheritances taken between spouses is confirmed in section 59. There is evidence that the imposition of a tax on the surviving spouse in such circumstances may create hardship. Therationale of an inheritance tax is that it should be a tax on property moving between generations and thus it is not appropriate that it should apply on inheritance when a spouse is the beneficiary.
Section 60 provides for the exemption of the proceeds of insurance policies from capital acquisitions tax where these policies have been executed for the purpose of meeting the tax liability. This is intended as a protection for people who in facing an inheritance tax liability may be obliged to dispose of assets, which are not liquid, to meet this liability. The exemption is confined to amounts which are actually required for payment of capital acquisitions tax and any surplus will be subject to tax in the normal way. I do not envisage that this will involve any significant tax loss: on the contrary, it should have the beneficial effect of a speedier collection of capital acquisitions tax in some instances.
Sections 61 to 63 provide for reliefs where a double capital tax charge arises on the same event. Because of an unusual combination of circumstances, it is possible that an unreasonable double charge to capital acquisitions tax or a change to capital gains tax and capital acquisitions tax may arise and it is only fair that there should be relief in such situations. Section 65 provides relief from discretionary trust tax in cases where a property, which is the subject of a discretionary trust, ultimately comes into the possession of the State. There is no merit in imposing a charge on a property that is to come into State ownership.
In section 68 statutory provision is made in respect of the requirement announced in the national plan that contributions be made by Bord Telecom to the Exchequer over the next three years. The section also provides that full compensation will be given to Bord Telecom over a period in respect of these payments through purchase of shares by the Minister for Finance to support capital works.
Section 69 provides that tax free Government securities may be issued to subsidiaries or branches of foreign companies which are carrying on a trade here. Companies, the business of which consists of banking, insurance, retailing and dealing in securities are, however, excluded. The intention behind this section is to reduce outflows of profits and to retain at an acceptable cost a source of funding for the Exchequer that would otherwise be lost. The securities may be denominated in Irish or in foreign currency. I have no estimate as to what impact a new investment facility on special terms may have on this profit outflow. There have been indications, however, of significant interest in a facility of this nature, and it is only sensible that we should make special arrangements to tap whatever resources might be available. These arrangements will complement existing Government policy, which is to encourage reinvestment in Ireland of the profits of Irish subsidiaries of multinationals by creating an attractive investment environment here and to encourage linkages with Irish suppliers. I cannot at this point give the House the precise terms of securities to be issued under this section. The purpose of the section is simply to provide taxation relief on interest from these securities, and the precise details of the securities will be determined at a later date.
A security in respect of which tax exemption will be granted will not be transferable to another company but must be held by the company to which it is issued. This is a safeguard designed to prevent abuse of a provision which has been framed in very general terms. As Senators will readily understand, it is important to ensure that companies which are not qualified to hold the securities and which are expressly not intended to be eligible shall not be in a position to obtain access to the benefits by means of contrived arrangements, the purpose of which is to frustrate the spirit of this provision.
The Bill provides for substantial changes in our taxation system. There has been general agreement on the need for rationalisation and simplification of the system, which has grown increasingly complex. The Commission on Taxation have put forward the case for change strongly in all of their reports to date. The measures announced in this year's budget and incorporated in this Bill add up to the most radical changes in taxation for a long time. They are a recognition of the importance of more rational tax structures in moving towards a system that will be simple and efficient, a system that will be fair and will be seen to be fair and a system that will have beneficial effects on the economy. In making further changes in the years ahead, the emphasis will continue to be on simplification and on movement towards a fairer system. I recognise that we still have a long way to go before we can claim to have a fully equitable system of taxation. This is not a matter of tax structures alone. It is also a matter of tax levels and tax rates. It requires an extension of the tax net and it requires a much stronger effort against tax evasion. Those are the considerations that must shape future tax policy.
Before I conclude, I would like to make an announcement about a tax avoidance practice. It has come to my attention that the limited partnership arrangement is being used on an increasing scale to circumvent tax liability. What is happening is that such partnerships are being manipulated to create losses which are then set off against the other income of the limited partner. These arrangements, which are artificially created, are a tax abuse. I propose to introduce legislation to counter this abuse, and I want to serve notice now that this legislation will have retrospective effect from today.
I commend the Finance Bill to the House.