This Bill is being introduced at short notice because it is felt necessary to clarify the position in relation to the definition of income in computing tax liability. In recent days a succession of claims has been submitted to the Revenue Commissioners to the effect that health contributions, the youth employment levy and the income levy are deductible in computing income for the purposes of determining tax liability. This is not the case and never has been the case and, to put the issue beyond any doubt, it is considered desirable to introduce legislation at this point.
To put the matter in perspective, if the claims being made were allowed in respect of all taxpayers, the potential revenue loss to the Exchequer could be of the order of £360 million. This, of course, is out of the question. As I mentioned earlier, a large number of claims were submitted in recent days. Given this volume of activity and the general uncertainty that has arisen, it was considered appropriate on this occasion to remove any doubts about the legal position at this point. I do not know why the matter should have gathered such momentum in such a short period. There were rumours apparently that legislation was being prepared. There was presumably a widespread and mistaken belief that somehow claims made in advance of legislation might be allowable. There is no basis whatever for this. Much of the activity that has been engaged in was fruitless.
The technical background to the Bill is as follows. Section 110 of the Income Tax Act, 1967, provides that duties or other sums payable or chargeable by virtue of any statute on income which is assessed to tax under Schedule E shall be deductible for income tax purposes. The effect of this was to allow up to 1973 the deduction for income tax purposes of contributions made under certain statutory pension schemes. The law relating to pension schemes was comprehensively revised in the Finance Act, 1972, and by virtue of section 17 of that Act the contributions under all statutory schemes are deductible for income for tax purposes. There is no need to place any further continued reliance on the words in the 1967 Act which this Bill will remove. Pensions are already protected by the provisions of section 17 of the 1972 Act. The present legislation, therefore, does not in any way affect the deductibility of pension contributions for tax purposes. I want to emphasise this.
The Income Tax Act, 1967, provision became redundant following the introduction of the 1972 legislation. The claims to which I have referred attempt to use this redundant 1976 provision to support a case for allowing against income tax, the health contributions and other levies introduced subsequently such as the youth employment levy and the income tax levy. This was, of course, never the intention of the framework of the 1967 Act. What this Bill is simply doing is confirming this by removing the relevant and redundant provision of the Income Tax Act, 1967, lest there be any confusion or unduly favoured activity in this area.
Since the introduction of the health contribution and the levies, the clear and unequivocal understanding has been that these charges fall directly on income. They have been so applied in all instances and taxation policy has been framed on this basis. I am satisfied that all sides of the House are in entire agreement about this and share my view that, in the event of doubt about such a critical issue, it is totally appropriate to confirm the position in legislation. This legislation will remove any doubt or confusion that has arisen.
I should mention, of course, that the income levy has been terminated with effect from 5 April 1986. The claims being submitted, however, attempt to open the issue of deductibility for income tax purposes for a number of years past. Potentially several hundred thousand taxpayers are involved. The health contribution and the levies have made a big contribution to the State revenues since their introduction. The health contribution was introduced under the Health Contributions Act, 1979, the youth employment levy is yielding revenue since 1982 and the income levy has operated in the period 1983 to April 1986. Over these periods the total revenue yield from these sources was up to £950 million. Were deductibility to be allowed, it is clear that the revenue loss would be of such an order as to require fundamental changes in taxation policy. At the end of the day the average taxpayer would be no better off and in the meantime considerable confusion would have been generated.
There are a few other points I would like to advert to before concluding my introductory statement. Senators will perhaps ask: is it fair that we should have a levy on gross income when the average taxpayer, certainly the PAYE taxpeyer, never actually receives the gross income, he just receives the net income and yet he is levied on the gross figure? It is open to argument that we should not and we would have a simpler tax system if we did not have that. If you had a provision in law for the future which allowed deductibility of levies — and it would be simplier still if you did not have levies — if you raised the same amount of money, you would have to have the levies at a higher rate. If you had no levies to raise the same amount of money you would have to have income tax at a much higher rate than it is at present. The same differences are there, it is six of one and half dozen of another. If I were talking about an ideal world I would have to say I would prefer a system in which there were no levies and such money as you would have to raise was raised by one single simple tax on income, but we have to take the situation as we find it and deal with it as we find it. These levies have been introduced since 1979 on the basis that they were on gross income. Everybody paying them at the time understood that they were levies on gross income. They may not have liked having to pay and they may have objected to it, but they understood that legal position. All this is doing is clarifying and underlining what was the common understanding of the legal position.
That, of course, brings up another point which Senators might want to raise in the debate — the idea that by doing this at this stage, even though people did not think they had this claim and by making it quite clear that they did not at this stage, we were somehow or other introducing retrospective legislation in a sense that could be objected to as being parliamentary practice. I have set Senators minds at rest on that point. There is no question of this being open to such an objection and I will explain why. The criticism of restrospective legislation in this area is grounded on the principle that tax legislation should not be introduced which would do either of two things — impose a tax charge on a taxpayer for a previous year, being a charge of which the taxpayer was unaware at that time or secondly, deny a taxpayer relief for an earlier year, being a relief to which the taxpayer thought he had full entitlement at that time. As has been clearly established, nobody thought that any such deductibility existed at that time so we are not taking from anybody anything they thought they were entitled to, at the time when they were ordering their tax affairs. That being the case, there can be no objection on grounds of retrospectiveness so far as this legislation is concerned.
Another point that might be raised is with regard to the general question — and it is not directly relevant to this Bill — of avoidance of taxation and evasion of taxation. I would like to underline here in the Seanad as I have done in the other House my view and the view of the Government in regard to tax evasion. We regard it as unacceptable that there is still a substantial amount of tax evasion and considerable amounts of arrears of tax owing and collectible but not being collected. I announced last week a series of measures that are being considered to deal with this problem and I also set out a number of measures that are already in effect which over time will serve to catch up on tax evasion. For example, there is now a penalty representing a percentage of the ultimately determined tax liability which can be levied on taxpayers who are late putting in their return.
One of the big reasons for the buildup of arrears of tax is that people do not put in returns. In order to get the returns from them, the Revenue issue inflated assessments designed to frighten them into tax compliance. These assessments are then used by people who want to make a case if the tax system is not working as a basis for saying that this money is actually due which, as we all know, is not due at all except a very small proportion when the accounts are actually put in. The use of large estimated assessments as a means of getting people to make returns is not a good principle.
My anxiety is to move our tax system over to a system of self-assessment where people are obliged to make their own returns at their own peril if they do not, and that there is not the same need for the Revenue to come along and issue estimated assessments which give a completely misleading picture of the amount of tax actually outstanding. That would serve two purposes.
First, by replacing the obligation on the taxpayer to put in the return, it would relieve many Revenue staff from the routine drudgery, of going through everybody's return and pursuing every individual taxpayer which diverts skilled people away from concentrating on the real areas of abuse. Secondly, it would get away from the problem of those estimated assessments which give this totally misleading picture of the amount of taxes outstanding and cause great envy and misunderstanding between, in particular, the self-employed section of the community and the rest of the community where there is a belief that there is much more tax outstanding than there really is.
I am not saying that there is no abuse among self-employed people, but it is entirely wrong to categorise an entire group of people as being participants in tax abuse. What we need to do to protect the legitimate tax-paying self-employed trader from unfair competition from those who are not paying their tax and also to protect the PAYE sector from unfair treatment vis-á-vis others who are avoiding their tax, is to stamp out tax evasion in the interests of fair play for everybody wherever it arises. That is the objective of the Government.
Clearly we could not allow any doubt as to the position in regard to these income levies to which I am now referring because it is in respect of money that has already been collected and spent. The money has been spent in the areas of the health services and youth employment service and, in the case of the income levy, generally on all sorts of services provided by the State. The money has been spent and if suddenly that money had to be paid back we would find ourselves in an impossible situation so far as the finances of the country are concerned. That is why all sides in the other House were prepared to agree this legislation in order that the revenue of the State and the services which everybody enjoys and needs in our community and which depend on the revenue of the State could be protected. That is the very reasonable purpose of this legislation. I hope this explanation will commend itself and the Bill to the Seanad.
