The Finance Bill has received considerable attention. It is a long and quite complex Bill and it introduces a number of major changes in the tax system. In addition to the budget changes, it contains a number of additional measures which are intended to encourage business activity and employment and to promote greater employee interest in share ownership. There are special provisions to encourage risk investment in industry, in line with the policies outlined in the Government's White Paper on Industrial Policy.
When introducing this Bill in Dáil Éireann, I made a number of references to general taxation policy and I would like to repeat on this occasion the general approach underlying the Government's policies. We gave a commitment at the outset to tax reform in our Programme for Government. By tax reform we had principally in mind a more equitable distribution of the tax burden, reductions in the overall level of taxation as far as budget constraints would allow, and an improved system of collection.
There was, and there remains, a widespread perception that our taxation levels are too high. I share this viewpoint but, I have to recognise that, while we continue to have a high expenditure profile, tax levels will continue to be high. Also, it is not true to claim, as some have, that we have the highest taxes in Europe. While exact comparisons are difficult to make, it is clear that some European countries have more severe tax regimes believe it or not. Most of them, however, have a wider tax base so that, on the surface, the tax burden is not always perceived to be as high as it is here. A choice has to be made and the degree to which taxation can be reduced is a function of our willingness to control expenditure.
In recent weeks there has been a number of pronouncements on new taxation policies. I welcome new ideas and I agree entirely that there is room for improvement and I would like to see more dialogue about taxation policies. It is interesting to note that there are widely diverging views about the general direction we should take. It concerns me, however, that in some instances new taxation policies are being advocated without any serious attempt to quantify costs and benefits. There are vague indications given that somehow the revenue lost in consequence of tax reductions will be recovered through improved economic performance, so that there will be no effect on the overall budget arithmetic. No effort has been made to acknowledge the link between tax reductions and expenditure cuts. Frankly this line of approach is dishonest and it is unfair to the general mass of taxpayers who will have to foot the bill in the longer term. Let us have some dialogue about taxation policy by all means but we must debate in an honest fashion and cost our proposals in every case.
I am concerned that self-financing tax cuts — that probably should be in inverted commas — may be put forward as the quick and painless solution to our difficulties. This is a dangerous folly. At best the scope for self-financing tax cuts is entirely marginal. We have already demonstrated this. The best illustration of this unfortunately is in the area of petrol consumption. There has been substantial fall in petrol prices in the past year as a result of the fall in oil prices. If self-financing tax cuts were to work one would expect to have seen a very big increase in petrol consumption, yet in the first three months of this year petrol consumption, notwithstanding its being at a lower price, is down on what it was in the first three months of 1985. If the notion of self-financing tax cuts were true, it would have risen but it has not. That indicates that while some tax cuts may pay for themselves in the very long term the long term is very long. As John Wayne said: "In the long run we are all dead".
To suggest that tax reductions can be made on a wide scale without loss of revenue and a consequent impact on the budget is irresponsible. If we offer the harrassed taxpayer the prospect of tax reductions, we have an obligation to him to say how those reductions will be financed and how they will relate to expenditure plans. I hope that future debate on taxation policy will be conducted on that basis.
After a long period of recession, there is a welcome economic upturn. Falling energy prices, lower interest rates and lower inflation have generated a new optimism and this will be reflected in higher investment, new job opportunities and a general improvement in business confidence. We are fortunate in that we are well equipped competitively to take full advantage of this upturn. We can look forward to higher living standards this year. Inflation is currently at its lowest point since the late sixties and it should fall to about 2 per cent in the second half of the year. Overall, the outlook is most encouraging and the Government will take maximum advantage of opportunities to increase growth and employment. In this regard the unemployment figures for April were also very encouraging. The unemployment figures fell again in April for the third month in succession. The fall of 4,900 was the largest reduction in unemployment to take place in any April, as against the month of March in any year since 1971. The situation by comparison with April of the previous year represented the best performance since May 1980 — again virtually the best performance in this decade.
A large part of the improvement was due to the great success of the PRSI exemption scheme. There were 2,800 people taken on under this scheme by private employers. I am delighted with the success of the scheme and, on becoming Minister for Finance, I made a special effort to promote it during the month of March leading up to the deadline on 5 April. I believe that these trends will now make it possible for there to be a further downward reduction in the projection for unemployment in the year as a whole. Already this projection has been significantly reduced from what was expected earlier in the year.
I must, however, also sound a note of caution. We have had statements recently from the Opposition benches, not in this House but in the Dáil, which imply that somehow the general economic upswing will pass us by, if we do not go for growth on an unprecedented scale, whatever that means. Whatever it is, it is a dangerous philosophy. It exaggerates the scope for Government-induced expansion. More significantly, it implies that we should put aside our concern about the state of the public finances and spend without worrying about the financial consequences. This approach is discredited. It has caused enormous problems for us previously and it would be foolhardy to go down this road again. The economic upswing will not pass us by. It has not passed us by.
In every month for the last nine months retail sales in shops are up on what they were in the same month the previous year. This is the longest sustained period of recovery in retail sales in this country in this decade. That clearly indicates that people have more money in their pockets and what is more they are spending it. That is also before the full effect of the oil price reduction will be felt, before the full effect of the fall in inflation will be felt and before the increase in income, as a result of the recent wage round, will be felt and before the reductions in income tax in the budget will be felt.
For the last nine months we have been on a path of increased consumer spending and that is going to increase still further. It would be a dangerous mistake for us to think that we need to spend ourselves out of the boom and to make the same mistake that was made in 1977, when we tried to spend ourselves out of a recovery into a depression by spending more, and by trying to prime the pump when it is already gushing water at a very rapid rate. The present recovery, to a good degree, is due to the fall in oil prices. That fall came quite rapidly recently. There was, in inflation-adjusted terms, a fall over quite a considerable period up to that, when you took account of the fact that oil prices were static when others were going up.
While this involved a transfer of resources to the developed industrialised world from the oil-producing countries, it can be reversed. Remember 1973 and 1979. This can go in reverse. We should not ourselves get into a situation where there is no leeway because we spent all our money when things were going well, where there is no cushion available to us if things start to go badly as they could if this process were to be reversed. If OPEC for example, were to extend its membership and be able to control the market again by bringing in countries like Norway, Britain and Mexico that have hitherto been out of OPEC, we could quite suddenly find ourselves in an extremely exposed position where we would need our borrowing capacity and where we would need reserves to get ourselves out of the difficulties that would then ensue. We need to manage our country prudently and not to assume, as Governments have mistakenly done, that whatever is happening at present will go on happening forever and there is no need to provide for the future. Just as the depression we suffered in the past was inevitably not going to go on forever, the recovery, as a result of oil price falls, will not necessarily go on forever either. We need to prudently manage our finances so that we are in a position to counteract bad times and to enjoy good times, rather than be in a position where, essentially, we have no freedom of manoeuvre because we spend it when we did not need to.
If we allow our public finances to fall into disarray, if we let the borrowing requirement rise again, then we will ultimately lose the benefits to be gained from the improving situation. We have a policy of phasing down the budget deficit gradually. Last year the outturn was 8.2 per cent of GNP and this year we have a target of 7.4 per cent. Likewise the Exchequer borrowing requirement is projected to fall from 12.9 per cent in 1985 to 11.8 per cent. The latest returns show that we are on target for 1986. It is essential that this policy of phasing down our dependance on borrowing be continued. It does not inhibit our capacity to benefit from the improving international outlook. On the contrary, it is for the good of the economy that we follow such a course.
The present Bill has some very significant contributions to make towards the objective of increasing growth and employment. There are three aspects of this legislation, in particular, which I would like to highlight — (i) the reductions in personal taxation, as announced in the budget and (ii) the incentives for productive investment and the extension of tax concessions to encourage greater employee participation. The reduction in personal taxation will lead to greater disposable income with a consequent improvement in living standards. The tax reductions are relatively modest but what is most important is that we have now turned the corner and real incomes are on an upward trend. The tax improvements are costing £120 million this year and £200 million in a full year and they go far beyond the commitments given in the national plan.
It is essential for our economic growth that we generate higher investment by Irish people in Irish business. We have been too conservative in this respect. We need business growth to generate more employment and more prosperity. In particular, we need investment in manufacturing and related activities. These are areas of relatively high risk and it is proper that we should provide incentives for those prepared to take this risk. We also need to encourage more employee participation. Where possible, employees should have a share in the ownership of the firm in which they work. This gives them a new perspective, and where they stand to benefit, a stronger interest in generating profits. We must get away from the traditional mould where employers and employees stood apart. We should look to developments in other countries where considerable progress has been made on employee participation and try to emulate the advantages that have resulted from this. I am making a strong appeal to interested groups to consider the merits of financial involvement by employees and to avail of the new incentives offered in this Bill and those already incorporated in earlier legislation.
I will now deal with the individual sections of the Bill and I will focus attention on the more significant items. As the Bill is long and much of the text is of a technical nature, it would be impractical to speak on all sections.
The early sections give effect to the income tax changes announced in the budget. These provide for the increases in the exemption limits, the new rate bands and the changes in personal reliefs. These changes taken in conjunction with the abolition of the 1 per cent income levy will mean a substantial improvement in take-home pay for practically all workers. For example, a single PAYE taxpayer on £12,000 will have a reduction of £320 in tax, while a married couple with two children on £16,000 will be £332 better off as a result of the tax changes and the new child benefit. These are the most significant improvements in income tax for several years and they will give a boost to living standards.
In recognition of the special circumstances of elderly people the age allowance has been doubled from £100 to £200 and the age exemption limits have been increased by 5 per cent. The abolition of the 1 per cent income levy and the reduction of the top income tax rate to 58 per cent will, together, have a significant positive effect on key employees with highly marketable skills who might otherwise feel that there is little incentive for them to earn additional income. Their income tax on each additional pound earned is being reduced from 61 pence to 58 pence.
The Bill contains a number of new significant incentives to encourage business. Sections 9 and 10 provide for significant changes in relation to stock options. The current tax treatment of stock options is based on the date on which an option is first exercisable. This may act as a disincentive for some companies to make use of stock option schemes to buy shares at below the market price and it leads to uncertainty about ultimate tax liability in this and other cases. Provision is being made so that, in future, in the case of stock options issued below the market price, a charge to income tax will arise at the date the option is actually exercised and capital gains tax will be payable on the difference between the market price at the date of acquisition of the shares, irrespective of the price paid for them, and the proceeds received on sale of the shares.
The provisions in relation to approved share option schemes, however, go much further than this. Where options are issued at the market price, there will be no charge to income tax. The gain on the ultimate disposal of shares will be treated as a chargeable gain for capital gains tax. In the case of options in manufacturing companies which are liable to the 10 per cent rate of tax, export sales relief and Shannon companies, the period of ownership for calculation of the capital gains tax rate will be reckoned by reference to the date on which the options are granted.
In support of my belief that increased share ownership can only help to improve the general industrial climate of the country and increase the productivity of workers, I am in section 11 reducing the qualifying period for full tax relief from seven years to five for shares issued under approved profit sharing schemes. There is also in section 12 an entirely new tax incentive to encourage employees to purchase shares. This is intended to promote wider employee participation. I urge firms to study the new incentives and to consider what they can do to further employee participation. This, I believe, is a key to improved industrial relations and to closer links between management and the workforce.
Given the success of the business expansion scheme, which in its first full year of operation caused some £5 million to be invested in qualifying companies, I have extended the scheme to 1991. In 1985, some 570 investors have qualified for tax relief under the scheme. The attractiveness of the scheme has been further enhanced with the recent launching by the Stock Exchange of the smaller companies market. This market will provide an additional exit mechanism for investors in the shares of qualifying companies.
Section 14 of the Bill provides for a scheme of relief from full rates of income tax on dividends paid out of the income of companies qualifying for the 10 per cent rate of corporation tax, in other words manufacturing companies. The aim is to improve substantially the after-tax return to Irish shareholders in such manufacturing companies so as to provide an enhanced incentive to encourage increased equity investment from Irish sources in Irish firms. The mechanism by which relief will be given under the new scheme is to exclude from the charge to income tax an amount equal to 50 per cent of all dividends received by individual taxpayers. The balance of a taxpayer's dividend income will then be liable to income tax at his marginal rate after deduction of the full tax credit. It follows that the effective rate of income tax on the distributed profits of companies qualifying for the 10 per cent rate of corporation profits tax will be 23.74 per cent. Compared with a rate of 58 per cent tax on wages this shows that investing in industry is very good value under this Bill. The total tax take on such profits, inclusive of corporation tax in the hands of the company and income tax in the hands of shareholders, will fall from 60 per cent to 32.55 per cent under the scheme.
Relief will, however, be subject to a limitation in the form of a ceiling on the amount of dividend income which may be excluded from the charge to income tax in any year. The ceiling for each taxpayer will be set at £7,000 per annum. Given average rates of return on investment in Irish industry today, the level of relief available under the new scheme will be sufficient to enable an individual to invest a sum of almost £300,000 and still obtain the full benefit of relief. It is, therefore, extremely generous by any standards. By providing a facility to receive investment income of an amount up to £7,000 per annum completely free of income tax, the new relief will represent an incentive to encourage Irish investment in qualifying companies which is unequalled in the member states of the EC and may be without parallel anywhere in the world.
I will just explain why that is being done. We have relied, as a country, to too great an extent on foreign investment to make our manufacturing base grow. Irish money has tended to be tied up in relatively passive forms of investment and in relatively risk free forms of investment including Government gilts.
In the Finance Bill we want to achieve a major shift in the way people use their savings, to put them instead into productive investment in the manufacturing sector which includes, of course, the food sector. This is the way self-generating growth can be established, using Irish money to grow more jobs in Ireland.
We must realise that we cannot rely in the future on American or Japanese investors to solve our unemployment problems. We have also got to realise that we have a limited amount of money in the country, either in private or in public hands, and that we have got to use it to the best possible effect. The purpose of this tax incentive is to shift money out of the safe havens and the relatively unproductive uses into the most productive use of all which is in the manufacturing sector of the economy.
The intention as I said is to promote investment in manufacturing and certain other activities by permitting the benefits of the 10 per cent rate of corporation tax to flow through to the shareholders in qualifying companies. If the section should be exploited as a mechanism for rewarding executives in such companies by issuing tax-relieved dividends to them in substitution for normal forms of remuneration which would attract full rates of income tax, this will be regarded as an abuse of the relief. I wish to give fair warning now that, in the event of instances of such abuse being brought to my attention by the Revenue Commissioners, I shall not hesitate to take action against it by legislation which will have retrospective effect. The acid test in determining the occurrence of abuse will be whether all dividends paid are realistically related to genuine investments.
Section 15 provides for the continuation for a further year of the existing stock relief arrangements for farmers. Section 16 provides for a credit for farm tax paid against the income tax liability relating to farming profits.
In chapter III there is a new mechanism designed to encourage taxpayers to invest in research and development projects, where the risk is high, but where the rewards may be equally high when they materialise. The level of research and development in this country is disappointingly low by international standards and we must do something about this. Expenditure in 1984 on industrial research and development in Ireland accounted for 0.4 per cent of GDP as compared to 1.2 per cent average for the OECD. The scheme for relief for investment in research and development may appear detailed and lengthy as it is set out in the Bill. The need for complex legislation arises in order to prevent the provisions of the scheme being abused and serving solely as a means of avoiding tax rather than facilitating the objectives of the scheme. Such detailed legislation will also assist genuine prospective investors by removing any uncertainty as to the scope or application of the relief.
Under the scheme, qualifying investors may get tax relief on up to £25,000 a year invested in a research and development company. The investment may be short to medium term and it is unlikely that many long term investment projects will be involved.
Qualifying research and development is defined in terms broadly similar to those used in the Industrial Development Act, 1969. Because of the varied nature of the projects which it is desired to promote, it is not possible to provide a more detailed definition of "qualifying research and development" without running the risk of excluding some worthwhile product. There is a requirment that the benefits of any such project must accrue substantially to this country. In order to encourage involvement by outside investors, the ceiling on investment by the sponsoring company, which must be a manufacturing company incorporated in this country was originally limited to 20 per cent. On further consideration and, in the light of the commitment and risk borne by sponsoring companies I have agreed to allow them to have a greater involvement in the research and development company and I have accordingly raised the 20 per cent to 49 per cent. This incentive will supplement the existing provisions of the business expansion scheme which may be used for raising capital for research and development in the case of a manufacturing company.
It has been argued that the present rates of capital gains tax are a disincentive to investment. This Finance Bill will go a considerable way towards ensuring that this is not the case. In addition to the planned reduction in the 40 per cent rate of capital gains tax announced in the budget, the Bill also provides for a new lower rate of 30 per cent which will apply to assets held for six years or more and also to gains made on disposal of shares on small companies which are incorporated and are resident here. This incentive is directed in particular towards the smaller companies market which is in its infancy. It is important that this market should succeed and open up new sources of capital to companies which could not at present qualify for quotation on the Stock Exchange. With this in mind, the Bill provides that, for a period of three years, gains realised on trading in shares in certain companies will be subject to the 30 per cent rate. This, I hope, will provide an impetus to the new market and will help to ensure its success.
The incentives for industry in this Bill should give a major impetus to investment in an already very favourable investment climate. There is no reason why industry should not be able to utilise this climate to create new jobs on a significant scale.
Chapter IV of the Bill gives effect to the deposit interest retention tax scheme. The retention tax, as announced in the budget, has received a mixed reaction. The financial institutions generally have welcomed it as a major step forward in harmonising the tax treatment of invested funds. There has been criticism of the tax because of its impact on certain individuals and institutions. The order which has now been brought to the tax treatment of deposit interest is overdue and, together with the uniform reporting arrangements, it will create an environment for fairer competition among the financial institutions. For a long time some of these institutions have been asking for standard tax arrangements to apply across the board and this is now happening.
I should like to take this opportunity to clarify some aspects of the tax which appear to have been causing confusion. First, the tax is deductible from deposit interest paid or credited after 5 April 1986: it is not a tax on the capital sum invested. Secondly, the tax does not represent double taxation since the interest earned by a capital sum is regarded as a new source of income and has always been liable to income tax in the hands of taxpayers. Finally, there have been allegations that taxpayers will have to pay double tax on deposit interest for 1986-87. This is not true. As a transitional measure, the previous-year basis for taxing deposit interest is being suspended for relevant deposit accounts on 5 April 1986, and the 1985-86 liability for deposit interst will be switched to an actual basis. That is, 1985-86 liability will be based on interest paid or credited in 1985-86 only.
The imposition of the tax itself will not materially alter the tax position of the bulk of depositors who are liable to income tax: the measure is a more effective tax collection system for that liability. The tax as originally announced was to apply to the deposit interest of all resident depositors. In granting concessions to charitable bodies, incapacitated persons and individuals aged 65 and over, I feel that the best possible balance has been reached in minimising the extent of genuine hardship while at the same time maximising the yield from the tax. It should not be forgotten that the tax will also apply to deposit interest paid in respect of moneys earned in the black economy. In response to criticism concerning the potential delay in making repayments of tax, I have requested the Revenue Commissioners to ensure that the repayments procedure is operated as speedily and efficiently as possible.
A tax of this nature will ease considerably the administrative difficulties involved in collecting tax on deposit interest. No doubt there will be continuing demands from other bodies and groups of taxpayers to have exemptions similar to those granted to charities and older and incapacitated persons. I must emphasise that, since exemptions are costly to administer, increase the complexity of the tax code and reduce the tax yield, there can be no question of any further concessions being granted.
When the Bill was published, I said that the Government had decided to exempt the over 65s and incapacitated persons as these are the categories most likely to be solely dependent on interest for income, because of inability to engage in other income-earning activities. Obviously, there will be a small number of individuals outside these categories who may be able to make a similar case. Wherever the line is drawn, however, there is the risk of genuine cases on the wrong side of it. Refunds for all non-liable persons cannot be considered, however, because this would be far too costly.
Chapter V gives effect to the tax incentives which have been announced by the Taoiseach and the Minister for the Environment to promote development and reconstruction in certain designated inner city areas in Dublin, Cork, Limerick, Waterford and Galway. The precise areas in which the incentives will apply are defined in the Fourth Schedule to the Bill. This chapter complements the Urban Renewal Bill, 1986, which provides for the establishment of a new statutory authority to promote and control development of the Custom House docks site in Dublin and for schemes of rates remission in relation to development on that site and in the other designated areas.
For many years, inner city areas of the major urban centres in Ireland have been decaying and large areas have become derelict. For decades, there has been a significant tendency for new development to locate in suburban areas and in outer-urban areas which are perceived by the property market to be more favourable. There has been a consequent increase in the extent of physical decay, unemployment, crime, vandalism and the dispersal of established communities in the inner city areas. Inner-city decay also poses a continuing and increasing threat to the architectural character of urban areas. Although public sector housing of a high standard is being provided in inner-city areas, efforts to encourage private development have had little or no success. Activity by the private sector has, in general, been painfully slow in securing the redevelopment of inner-city areas.
The Finance Bill, in conjunction with the Urban Renewal Bill, 1986, represents a major effort by the Government to stimulate activity to redress this situation and I am hopeful that the private sector will now respond to the needs of the areas in question in a positive way. A further objective of the incentives is employment creation. I am pleased to report to the House that the anticipated activity in the designated areas, along with the activity generated by the home improvement grants and the general pickup in housing demand, have an employment potential of more than 3,000 jobs per year.
Section 46 contains the promised legislation to counter abuse of limited partnership arrangements for tax avoidance purposes. The legislation has retrospective effect from 22 May 1985, the date when my predecessor announced in this House the Government's intention to introduce such legislation. The abuse in question arose from the fact that, in a limited partnership arrangement, the limited partners have had the right to set off losses and capital allowances arising out of the partnership trade against other income without restriction. Limited partners could thus circumvent their tax liabilities by manipulating in a contrived way a partnership arrangement so as to create highly inflated tax losses. Their investment in the partnership need only have been nominal, but limited partners were in a position as a result of that investment to obtain a guaranteed return in the form of a reduction in their tax liability which could be, and most often was, a multiple of the investment.
A number of instances of such blatant abuse indicated that there was a significant loss in tax revenue occurring as a consequence of limited partnership arrangements. In these circumstances, the Government have had no alternative but to move against the abuse in the interests of tax equity. In commending this section of the Bill to the House, I wish to put formally on record my intention to extend the scope of the proposed measure with retrospective effect to all general partnerships if these are used for the purpose of continuing the abuse which heretofore has been confined to limited partnership arrangements.
Section 48 provides for the application of a surcharge on ultimate tax liability where certain income returns are not received by an inspector of taxes within a specified period. This change was announced by the Taoiseach in this House last October as part of a tax reform package. The charge will be 10 per cent of tax ultimately payable. This measure is aimed at improving compliance by self-employed and corporate taxpayers in submitting income returns at an early date.
The ceiling on the restriction on capital allowances for business cars (and the pro rata restriction on the running expenses of such cars) is being increased from £3,500 to £4,000. This is a modest increase which, of course, does not take account of the increase in the general level of car prices since the introduction of the £3,500 restriction in 1976. This is the first time that anything has been done to increase this limit since 1976 and it is not bad in that context. There is no doubt that a lot of distribution companies have been very badly hit by this restriction. It has been a common cause for complaint as Senators will agree from meeting their constituents and I feel that we are on the right path by doing something about it at this stage, however modest. However, the cost to the Exchequer in raising the restriction to a level consistent with present prices since 1976 for appropriate cars would be quite prohibitive and it is out of the question at this time. It would also be inequitable since it is clear that many of those who have business cars enjoy a considerable advantage over other taxpayers who must meet all their motoring expenses out of after-tax income. This is due to the fact that the private benefit derived from a business car is subject to less income tax than monetary income. In these circumstances, it would not be fair to ask these other taxpayers and, indeed, taxpayers who cannot afford to run a car at all — to bear the cost of a substantial increase in the restriction.
For the future, I am prepared to consider raising the restriction beyond its present, revised level on the basis that the cost of doing so is matched in large part by an appropriate increase in the benefit-in-kind charges which apply in respect of the private use of business cars and by taxation of business mileage payments.
Section 56 empowers the Minister for Finance to withdraw certificates entitling a company to claim relief or exemption from corporation tax in respect of certain trading operations within Shannon Airport where the Minister is of the opinion that a company is engaged in activities which amount to an abuse of the certificate, for example, tax avoidance activities.
The tax benefits which are available for companies at Shannon and for their shareholders are conferred by means of certificates granted at the discretion of the Minister for Finance where he is satisfied that a project to which the tax benefits are being extended will contribute to the use and development of the airport. The relevant legislative provisions provide for the withdrawal of the certificates in question only if the companies in receipt of them cease trading or fail to meet any conditions which are specified in the certificates. These conditions have invariably been of a very general nature.
In the past year, my Department have become aware of at least one company established in Shannon which have abused their favoured tax status to facilitate several instances of large-scale tax avoidance. While the company in question was persuaded to desist from this objectionable activity, it became clear in the course of dealing with this matter that a Minister for Finance when faced with such activity by a Shannon company, has insufficient powers to take in the last resort the only action which would be effective against a recalcitrant company, that is, to withdraw their certificate. This is a serious anomaly, which could compromise the good standing of Shannon as a development centre. It is with a view to correcting the position that this section has been included in the Finance Bill. So as not to alarm the many responsible companies in Shannon, who might otherwise feel that their tax status is in jeopardy, the section provides for withdrawal of a certificate only in the event of a company refusing to desist from activities which they have been informed by the Minister for Finance are not acceptable.
I come now to indirect taxation. Part II of the Bill which deals with Customs and Excise mainly confirms the changes already announced in the budget. In this regard the duty on tubes and tyres will be abolished from 1 September 1986; the duty on spare parts will be reduced from 10 per cent to 5 per cent on that date and abolished from 1 January 1987.
Section 71 amends the betting duty legislation to strengthen the Revenue Commissioners' hands in dealing with evasion of duty in non-registered premises. The law is being strengthened also to provide more effective measures for the Revenue Commissioners in the control of red diesel oil. Section 77 provides for the new rates of road tax on private motor cars announced in the budget, with effect from 1 March 1986.
Part III of the Bill gives effect to the VAT changes announced in the budget. These comprise the increase in the standard rate to 25 per cent; the rate reduction to 10 per cent for many services currently liable at the 25 standard rate; and a measure to exempt the services supplied by dental technicians.
In addition, some further measures are included. These deal with the taxation of services received from abroad that can currently avoid tax, the use for VAT record-keeping purposes of data stored in electronic form, and the withholding of VAT repayments in certain cases involving associate companies and the application of the zero-rate to supplies of goods between VAT-registered traders in a free-port. The existing 10 per cent rating of newspapers is being extended to benefit certain fortnightly newspapers.
I confidently expect the substantial VAT reductions which come into effect on 1 July next to have positive and lasting economic benefits. The initial response of the tourist industry to the proposed VAT reduction on meals has been very encouraging and I am sure they will capitalise on the concession to achieve maximum impact. Taken in conjunction with the tax decreases for repair and maintenance services, body care services, cinema admissions and certain entertainment these changes represent proof of our determination to encourage employment and to fight back against those operating in the black economy. I look forward to consumers benefiting through lower prices.
This is a very deliberate policy on the part of the Government to reduce the levels of VAT on employment intensive service activities. We had already reduced the level of VAT on hotel accommodation. We have now reduced it on meals. We have reduced it on the services I mentioned, cinema admissions, hairdressing and all those services that are provided and which are extremely employment intensive. It is very important that these services be provided by legitimate traders operating in the white economy rather than in the black.
The very high levels of VAT that previously applied to these services when provided by legitimate traders represented something of an encouragement to people to go into the black economy at least, either whole time or part time. By reducing the VAT rates in this way to the reasonable level of 10 per cent we are both encouraging employment in services that are labour intensive and we are encouraging people to stay in the white economy. This strategy, which has been pursued consistently over a number of budgets, should be recognised as such: as a strategy to depress the black economy and encourage maximum employment in the white economy. It is beneficial generally to the development of our country and will ensure that the current recovery in the economy is trapped in Ireland by people using Irish services rather than using it on foreign holidays and exporting our money which we have gained with such difficulty.
Section 93 imposes a once-off stamp duty at a rate of 9 per cent on the investment income and the profits on the realisation of investments of life assurance companies. The life assurance companies have enjoyed extremely favourably taxation arrangements and this special duty is intended to recoup to the Exchequer some of the tax revenue foregone under these arrangements. A further reason for this new charge is that there would be an unfair competitive advantage for life assurance investment if the tax regime applicable to it remained unchanged at a time when a retention tax is being imposed on deposit interest.
Since a special tax imposition may sometimes present particular difficulties for the sector affected, it has been decided to reduce the impact of the charge, as originally announced in the budget, in a number of respects. The rate of duty is being reduced from 15 per cent to 9 per cent, industrial branch business and business relating to credit unions are being exempted in addition to pension and foreign branch business, and the final 10 per cent of the duty will not fall to be paid until mid-1987.
As already mentioned, this charge will not apply for future years. Instead, changes in the corporation tax rules applicable to life assurance companies are incorporated in this Bill. These will provide no additional tax yield of consequence in the short term but they hold out the prospect of a reasonable yield in the longer term. Up to now the tax contribution from the life assurance industry has been disappointingly small and a higher contribution will be expected for the future.
Section 101 provides for the continuation of the stamp duty exemption for transfers of agricultural land to young trained farmers. I am conscious of the fact that this scheme has, in the past four years, facilitated the transfer of land to young farmers but I am also conscious of the fact that its indefinite extension would remove the urgency for an early transfer of land and so would defeat the object of the scheme. Accordingly, the Bill provides that the scheme will expire at the end of September next year and that, for the final 12 months of its operation, the age limit will be reduced from 35 to 30 years and the qualifying ACOT courses will be extended from 100 hours to 150 hours. This will give an added urgency to the need for an early transfer of land and will also encourage more in-depth agricultural training, both of which should lead to an improvement in agricultural productivity.
The Bill gives effect to the decision announced in the budget to impose a 1 per cent annual charge on those discretionary trusts which were made subject to the 3 per cent once-off charge introduced in the 1984 Finance Act. The charge is directed at those trusts which are set up essentially to avoid or delay indefinitely the payment of capital acquisitions tax. As such it will not apply where the disponer is still alive and any one of the principal beneficiaries is under 25 years of age. I do not feel that a charge of 1 per cent is in any sense excessive or that it is a threat to the viability of any ongoing business concern. If, over a period of time, a return of greater than 1 per cent per annum cannot be secured from the assets in a trust economic pressures should force an adjustment. The effect of the tax might even be to speed up this adjustment.
Section 115 of the Bill provides that the holder of a fixed charge on the book debts of a company may be liable for the tax arrears of the company in certain circumstances. A recent Supreme Court decision — the Keenan case — which confirmed the validity of a fixed charge held on the book debts of a company has had the effect of seriously undermining the position of the Revenue and other preferential creditors in a liquidation situation. The purpose of this provision is to deter the creation of fixed charges on book debts. The fixed charge holder's liability is confined to arrears of PAYE and VAT and the provision only encompasses charges taken out after enactment of the legislation. Failure to act on this matter would leave approximately £10 million of tax revenue per annum at major risk.
This Bill is quite complex and it would not be feasible to explain all the details in an opening address. I have touched briefly on the more significant items and, in the course of the debate, particularly on the Committee Stage, there will be opportunities to go into more detail. I commend the Bill to the House.
There are a number of items which I think are very important in this Bill. First there is a major incentive to profit sharing and worker shareholding in industry. Secondly, there is a major incentive to research and development being undertaken by Irish industry. Our big failure has been that we have not done enough research on new products. Old products will not do five years from now. Thirdly, there is a major incentive to people to put their money into manufacturing and the food processing industry creating wealth rather than putting it elsewhere. Fourthly, there are major tax incentives to urban renewal in our major cities. Fifthly, there is a further incentive to encourage farmers to transfer land to younger farmers to increase productivity. These are probably the most important highlights of the Bill which I would like to bring to the attention of the Seanad. I hope that the Bill will be strongly supported by the speakers in the debate.