This Finance Bill underpins the Government's priority objective — to maximise, on a sustainable basis, the job potential of our economy — in two respects. First, it confirms the revenue dimension of the strategy of fiscal responsibility at the heart of the budget I introduced on 24 February last. Secondly, it provides for a number of important new initiatives aimed at encouraging, on a focused and target basis, investment in Irish business and industry.
My primary and overriding purpose in the budget was to secure financial stability in difficult circumstances, thereby clearly signalling the new Government's commitment to sound economic and budgetary management. This was of particular importance in the aftermath of the period of unprecedented turbulence in financial markets which was set in train by Sterling's steep decline last September.
Overall financial stability is an essential condition for business development, sound economic growth and job creation. The responsible fiscal stance adopted in the budget is of far more value to employment prospects than any specific measure that might have been in the budget or in this Bill.
This was a budget which confirmed and consolidated the progress made in our public finances in recent years. By so doing, it contributed in no small way to the major improvement in interest rates and the financial markets in recent weeks. It provided for a major boost in investment in the economic infrastructure of this country, and can combine, with moderation in incomes, to enable this country to continue to surpass the employment performance of our EC partners.
The budgetary strategy went far beyond simply preserving the economic fundamentals necessary for growth in output and employment, vital though these are. Apart from the major investment boost to which I referred, it had at the top of the agenda the fostering of private enterprise and initiative, and the improvement of the availability of equity finance to Irish business, in order that job creation would not be inhibited by lack of funds.
Certain increases in taxation were proposed in my budget, both in the interests of responsible overall balance and to make possible other desirable reliefs. It is understandable that the increases should evoke protest from those affected. However, I challenge those critics who argue that I should now reverse those measures en bloc to spell out unequivocally what they think I should do instead. This means one of three things: to throw budgetary discipline to the winds and thus put at risk the welcome downward trend of interest rates; cut out or curtail public expenditure programmes to match, or raise the revenues lost in other ways, that is, to increase taxation under different heads or on different activities.
It is too easy to selectively fault limited elements of any budget, it is a different matter to put together and develop a balanced overall budget, which is what I presented on 24 February.
I reject emphatically the suggestion that this year's budget and Finance Bill represented a setback for tax reform, and that the measures adopted are in conflict with the recommendations of the Culliton report. Those who would have us believe that tax reforn means lower taxation are not being honest; lower taxation must be earned by controlling public expenditure and, most of all, by relieving the pressure from debt service costs.
Real reform involves reshaping the system so that the necessary revenues are obtained in a way that is more in tune with our economic and employment needs. This is the course which has been followed over the past five or six years, in particular in the 1992 budget and Finance Bill, and which has brought about a better tax structure all round. Despite the difficult circumstances of the 1993 budget, for reasons that largely lay outside this economy, I was able to consolidate that progress. Indeed, it was only through broadening the tax base, in such respects as the introduction of probate tax, taxation of certain welfare benefits and extending the coverage of the VAT standard rate, that it was possible to afford the general income tax improvements in the budget.
I also reject emphatically that the new incentive measures in this year's Bill represent a u-turn vis-á-vis last year's approach. Those critics need to appreciate that there is a basic difference between providing the type of limited and well-focused incentives I have introduced on this occasion and the withdrawal of measures which, whatever good intentions lay behind them on their introduction, had been taken for a ride by the tax planners to such an extent that they serve little purpose other than to allow the well-advised few to have tax efficient remuneration at the expense of the many.
I would like to issue a warning to those who might be inclined to see these new incentives principally as such an opportunity. I will keep the operation of these new measures under close scrutiny. If it emerges that they are being subverted from their central purpose, I will not hesitiate to take such steps as may be necessary to ensure that the focus on the key objective, to stimulate bona fide enterprise and promote job creation, is preserved.
The availability to Irish industry of adequate equity finance, especially for start up and development, has become of increasing concern over the last few years and this is a particular focus in this Bill. It contains a package of measures to assist the capitalisation of businesses and the funding of new business start-ups.
Each proposal is targeted on particular classes of investor and type of investment so that the overall package is designed to meet the various different needs of the economy.
The main features of this package are: the BES extension already announced in the budget, with abolition of the lifetime cap and an increased company limit: the legislation for special investment accounts giving 10 per cent tax treatment to a range of investment media having a strong orientation to Irish equities; a new seed capital scheme; relief for additional own capital investment by original entrepreneurs; the encompassing within the BES of research and development activities; extensions to capital gains tax roll over relief for entrepreneurs; enhanced incentives for employee investments; a new initiative aimed at increasing pension fund investment in small and medium-sized companies needing venture and development funds.
The Bill provides for a number of other measures which will assist various sectors in contributing to the Government's overriding objective of improving employment, for instance: a rationalisation of the tax treatment of "scrip dividends" issued by quoted companies, making them more attractive to certain investors, and so assisting businesses wishing to retain profits to increase their capital base; new arrangements allowing businesss which supply inputs to exporting companies to avail of VAT zerorating, thus putting them in a position equivalent to that of suppliers from other EC member states under the Single Market regime; in the interests of tourism, further measures to help improve the availability of hire cars; in the construction area, an extension of the foundation-laying deadline for the urban renewal scheme — as was announced in the budget — and a new provision for a reduction in the claw-back period for capital allowances for commercial buildings: in respect of the film industry, a new scheme for individuals investing in film productions, an increase in the amount of tax-relieved investment permitted for corporate investors and changes to facilitate the making of films under co-production agreements with other countries; a new scheme of stock relief for farmers to assist herd expansion or diversification of farm enterprises, together with the abolition of the clawback provisions of the scheme; the removal of stamp duty on corporate bonds, which will assist stability in the financial market to the benefit of both corporate borrowers and mortgage holders.
In my explanation of the detailed provisions in the Bill, instead of proceedings seriatim, I intend to start with the sections relating to the employment package. This Bill contains other measures which will be of value to businesses and thus indirectly assist in the preservation and creation of jobs. These are dealt with under the relevant headings.
The Bill contains the legislative provisions for two initiatives already announced and which I have already mentioned. Section 25 provides for the renewal of the BES for a further three years, together with the removal for the previous lifetime cap for investors thereby giving access to a wider pool of savings.
Chapter IV introduces from 1 February 1993, special investment accounts, the returns on which are liable to tax at 10 per cent. These accounts can be offered by life assurance companies, unit trusts and stockbrokers. There is a requirement that a minimum percentage of the funds in these accounts be invested in Irish equities, 40 per cent in 1993 rising to 55 per cent in 1996, and a further requirement that a minimum percentage is invested in companies whose capitalisation is less than £100 million — 6 per cent in 1993, rising to 15 per cent in 1996.
I am satisfied that the BES and special investment accounts, which cater for specific segments of the market, have the potential to make a significant contribution to improving the availability of equity funds to Irish business over the next few years, given normal conditions on investment markets. Notwithstanding these provisions and the improvement in the general climate for equity investment in recent months, the Finance Bill also contains a number of further specific measures to help to encourage investment in those areas of the economy which are of vital importance to self-sustaining jobs growth.
Section 25 also introduces a new seed capital scheme which is designed to provide an incentive to employees who propose to move from safe employment to start their own business. The scheme will work by allowing the entrepreneur to claim a refund of tax paid on previous income in respect of his or her investment in a new company. When the Finance Bill was published it provided for relief on investments on a retrospective basis against the income of the preceding three years, up to a maximum of £25,000 income relief per year. However, following representations which showed that this could render the scheme ineffective for those who had a period of unemployment in the last three years, I amended the scheme in select committee to allow the relief for any three of the previous five years. Thus, the scheme will in practice allow immediate relief on investments of up to £75,000.
The scheme will be of advantage not only to those currently in employment, but also to the unemployed, including persons made redundant. It will be of particular relevance to those with taxable redundancy lump sums. The main conditions of the scheme can be summarised as follows: (a) relief will be given in respect of investments in new companies engaged in manufacturing and certain service trades. To ensure that the relief is directed at areas where there is real potential to create additional employment, project approval from either the IDA or Bord Fáilte will have to be obtained to benefit from the relief, (b) the investor must take up employment with the company in which he or she is investing and remain employed by it for a period of 12 months, (c) the investor must hold at least 15 per cent of the issued ordinary share capital in the company for a minimum period of two years, (d) the investor must now own either directly or indirectly more than 15 per cent of the shares in another company for a period of 12 months prior to the new employment.
To provide a further boost to investment and employment, section 25 also provides for an increase in the BES company limit from £0.5 million to £1 million with respect to shares issued on or after 6 May 1993.
The BES currently excludes from relief anyone who owns more than 30 per cent of the company in which they are making an investment. To encourage additional investment by entrepreneurs in their own smaller or start-up early stage companies, the section further provides for this restriction to be lifted where the total capital of the company does not exceed £150,000. The section also provides that expenditure on research and development related to certain BES activities can qualify for BES relief in its own right.
I am aware that some commentators consider that these incentives should extend to a wider range of economic sectors, notably to the general area of services. While I concur with the view that the services sector has the potential to make a major contribution to meeting our employment needs, I have also to take into account the reality that the demand for domestically oriented services is, at the end of the day, constrained by the general level of domestic demand. It would make little sense, therefore, to offer the same range of incentives to new businesses in this area when the main effect would be the displacement of jobs in existing firms, or indeed in the firms themselves. Not only would this be an ineffective and wasteful use of public resources, it would be unfair to businesses which have been built up without such assistance to have them contribute through their tax contributions to the subvention of their competitors. It is the substantially lower risk of displacement in the exposed sectors that, in the final analysis, justifies the provision of special incentives.
Section 27 introduces a radical extension of the roll-over relief for capital gains tax in the interests of facilitating successful entrepreneurs wishing to embark on new ventures with the potential for self-sustaining job creation.
At present, such roll-over relief is available to a trader who sells physical assets and then reinvests the proceeds in other assets of that trade or another. Section 27 extends the roll-over relief to situations where an entrepreneur disposes of shares in a company and reinvests them, on a similar basis, in an unquoted company in manufacturing or certain exposed parts of the services sector i.e. sectors falling within the scope of the BES. For the purposes of this provision, the entrepreneur must be a person holding at least 15 per cent of the shareholding in an unquoted trading company who has been engaged full time in that company. The effect of the provision will be to defer the capital gains tax charge that would otherwise arise until such time as the entrepreneur leaves the new company. The purpose of the provision is to facilitate entrepreneurs who wish to reinvest the proceeds of the sale of their stake in an existing company in starting up a new company in these sectors.
Income tax relief is currently allowed for an employee who invests up to £750 in new ordinary shares in his or her employing company. The limit for this investment is being increased four-fold, to £3,000.
Members of the House will recall that in my budget speech, I indicated that I would be entering into discussions with representatives of the Irish pension funds with a view to their making, through their investment activities, a greater contribution to the development of the economy and to job creation.
I indicated to the Irish Association of Pension Funds during these discussions that what the Government have in mind in this initiative is greater involvement in the provision of development and venture capital, an area which is not well served by institutional investors.
I am happy to report that I have been assured by the association that it fully supports the principle underlying my initiative. The discussions with the association revealed not only the limited expertise and experience among pension fund trustees and their investment managers in this area but also the mixed performance of such investments. Accordingly, it has been agreed, in the interests of redressing this difficulty, that a detailed study of the venture capital field will be carried out within a short time frame. The study will also look at other opportunities for pension fund investment that would benefit the economy. Terms of reference for the study are at this moment nearing finalisation and the study should get underway shortly.
Based on my discussions to date with the industry the Government proposes that the pension funds will work towards a target investment of £100 million in venture or development capital, subject to the outcome of the study and to sufficient suitable projects being brought forward. This increased investment will be pursued on a phased basis over a period of five years. It is my intention that pension funds will achieve an investment level of £15 million in this area by mid-1994, also subject to the same provisos.
I am confident that the initiative will redress some of the structural problems which are an impediment to investment in this field so that it will provide a worthwhile avenue of investment for pension funds, help to address the funding problems of developing indigenous business and thereby promote employment prospects in the Irish economy.
I now turn to the area of corporation tax. Section 34 deals with the treatment of grants for the purposes of capital allowances. Since 1986 the general position has been that any State grants in respect of capital assets are deducted from the expenditure on those assets for the purposes of determining the associated capital allowances. This covers both grants paid directly from State funds or from the funds of any board established by statute or any public or local authority as well as grants paid from an outside agency such as the EC but routed through a Government Department, statutory body, or public or local authority.
The section clarifies and extends the existing legislation to ensure that the capital allowance entitlement is restricted to the net of grant expenditure no matter how or by whom the grant aid is made. I point out it is not proposed to alter section 25 of the Finance Act, 1987, which specificaly exempts companies in the food processing sector which purchase their own plant and machinery from the net of grant approach to the calculation of capital allowances.
Section 36 deals with the taxation of scrip dividends in the case of quoted companies. A scrip dividend is the issue by the company to the shareholder of additional shares instead of the normal cash dividend. Scrip share issues enable a company to increase its equity while avoiding transaction costs normally associated with share issues. Under existing legislation, for historical anti-avoidance reasons, scrip dividends are taxed more severely than cash dividends. The section changes the existing taxation treatment and taxes scrip dividends with reference to the reality of the situation. Thus instead of existing income tax charge on the shareholder on the receipt of scrip dividends, the shareholder will now be regarded as having received an asset for tax purposes. This means he or she will be taxed under the capital gains tax code if he or she later sells these shares. The abolition of the income tax charge will act as an incentive for individual and corporate shareholders to take up the scrip dividends instead of cash dividends. This will benefit the company issuing the dividends since it will mean an increase in its share capital and allow it to retain a greater amount of profits.
Section 37 gives tax exempt status to employment grants paid by Údarás na Gaeltachta under its schemes of employment grants to international service industries and small manufacturing companies. The section also affords tax exempt status to grants paid by the IDA under its scheme of employment grants to small industrial undertakings. IDA employment grants to international service industries are already exempt from tax.
Section 38 gives a tax exemption in regard to payments from the market development fund and the employment subsidy scheme in the hand of the recipients. While both of these schemes have now terminated, the exemption will have retrospective effect to the commencement dates.
Sections 39 to 41 implement my budget announcement that the payment date for corporation tax would be aligned with that for advance corporation tax, the change to take effect in respect of all accounting periods ending on or after 1 May 1993. In practice, a substantial amount of corporation tax is paid after banking hours on the latest day for payment of the tax and at the end of the year this can mean that payments may not actually be lodged to the benefit of the Exchequer until the following year. In order to safeguard the £37 million yield n 1993 from this budget measure, it is now being provided that where the payment date for corporation tax and advance corporation tax for an accounting period falls after the 28th day of the month concerned, the tax should be paid not later than the 28th day of that month.
Sections 42 and 43 provide for the bringing of the Trustee Savings Bank into the corporation tax net for the first time. The Trustee Savings Bank will be taxed at the standard rate of 40 per cent on an increasing level of its trading income over four years, such that by year four it will be paying the standard 40 per cent corporation tax rate on 100 per cent of its trading income. As the Trustee Savings Bank is in competition with all the other licensed banks in the State, the imposition of corporation tax puts it on the same footing as its competitors.
Section 44 makes a number of changes to section 39 of the Finance Act, 1980 which defines goods for manufacturing relief purposes. Paragraph (a) ensures the general exclusion from the scope of the 10 per cent rate of corporation tax of goods sold to the intervention agency does not apply in the case of subcontracted deboning services carried out by a meat processing company for the agency. To allow the present legislative position to remain would put at risk the commercial viability of these beef deboning services which are bona fide manufacturing process and are of considerable importance in generating added value and employment in the meat processing industry.
Paragraph (b) amends the legislation introduced last year allowing certain coops to qualify for the 10 per cent rate in order to deal with certain problems that have arisen.
Paragraph (c) provides that income from the production of a newspaper which is published at least fortnightly for sale to the public qualifies for manufacturing relief. This will apply irrespective of whether the income arises from the sale of newspapers or from an advertising service provided in the course of the production of a newspaper and whether the company producing the newspaper actually prints it. This change in the tax treatment of newspapers reflects a review of the position by the Government following representations made in the wake of provisions included in the Finance Act, 1992 which specifically disqualified income from advertising services provided by a newspaper from the 10 per cent tax rate.
Sections 45 to 47 make a number of amendments to section 84 (a) of the Corporation Tax Act, 1976. Section 45 (a) provides that where, on or after 6 May 1993 the repayment period of a section 84 loan is extended, the lender is to be regarded as having received repayment of the loan and as having advanced a new loan which will not qualify as a section 84 loan. This ensures against such loans being extended beyond the original termination date.
Section 45 (b) changes the section 84 rules to allow a company connected with an IFSC company to obtain a section 84 loan where such a loan is included on an approved IDA list. This will ensure that a project which was intended to have access to such loan facilities is not deprived of that simply on account of being associated with a company in the IFSC.
Section 46 alleviates a problem experienced by loss making companies whose activities are financed in part by section 84 loans. These difficulties are likely to arise in the early years of a company's trade when substantial start-up losses can be incurred. Under existing legislation, if a loss-making manufacturing company pays interest on a section 84 loan the company may be liable to pay advance corporation tax six times greater than if it were in a profit-making situation but will be unable to offset the advance corporation tax against its mainstream tax because it has no mainstream tax liability due to losses. Section 46 provides relief for companies in those circumstances by ensuring that their advance corporation tax liability will be one-eighteenth of the interest paid. This is the same rate that would apply if the company had income from its manufacturing activities.
Section 47 provides that the currency exchange gains on high-coupon section 84 loans are to be treated as income from the sale of manufactured goods, thus making them taxable at the special 10 per cent tax rate. The provision will have retrospective effect to when the gains on such loans first arose. These particular loans are section 84 loans in a high interest rate foreign currency where the borrower obtains a capital gain through foreign exchange transactions and offsets this gain against his or her interest cost, thereby achieving a very low net interest rate on the loan. The Government approved in 1990-91 the issuing of such loans in the case of two lists of loans for specified IDA projects and this change in the law is necessary to ensure that these borrowers obtain the desired low interest rate. If the gains were taxed at 40 per cent or higher as non-trading income, or under the capital gains tax code, this would considerably increase the cost to the borrower. Since other high-coupon loans which are not on these IDA lists could also have been used for projects involving increased employment, it is also proposed to apply the 10 per cent trading income treatment to all high-coupon loans.
Section 51 provides for tax relief for donations made by companies to First Step Limited, a company established for the purposes of assisting job creation by supporting enterprise in areas of high unemployment. Donations between £500 and £100,000 made by a company in an accounting period from 1 June 1993 to 31 May 1995 will qualify for relief subject to an upper limit of £1.5 million on donations received in each of the years ending on 31 May 1994 and 31 May 1995.
Like the Enterprise Trust, which can also avail of tax relieved corporate donations, First Step is attempting to harness financial support from the business community towards addressing the problem of unemployment through encouraging and supporting business start-ups in disadvantaged areas. The company has been operating since 1990 and has a proven track record in the area of seed capital. Just as important, it provides management expertise to projects and assists in opening up marketing outlets for them. Section 51 will facilitate the company in attracting funds to allow it to expand its operations.
I now turn to personal income tax, which is dealt with mainly in Chapter I. Income tax reform has made significant progress during the currency of the Programme for National Recovery and the Programme for Economic and Social Progress. The standard rate was cut from 35 per cent to 27 per cent and the higher rates consolidated into a single 48 per cent top rate. In addition, the tax base was broadened so as to make the system more equitable and more consistent with the economy's needs and, of course, to provide funding for the tax improvements. Significant improvement was also made in the exemption limits and the standard band was widened. Further such improvement is contained in this Bill.
Sections 1 to 3 provide for the implementation of the income tax reliefs announced in the budget, which will cost an estimated £37.6 million in 1993. The main personal allowances are raised and the standard band is widened. There are also increases in the general and age exemption limits and in the child addition to those limits, which will benefit many low paid persons, especially those with families. Overall, the changes will remove an estimated 13,500 taxpayers from the tax net and bring a further 18,000 taxpayers from the higher marginal rate to the standard rate.
Section 5 provides for an increase in the interest ceiling for mortgage interest relief from £2,000 single/£4,000 married to £2,500 single /£5,000 married. In recognition of the higher mortgage rates that prevailed over the period since last autumn, it also provides, as an exceptional temporary measure for 1993-94 only, for an increase from 80 per cent to 90 per cent in the percentage of interest qualifying for relief. In addition, to assist first time purchasers, the percentage of interest allowable is increased to 100 per cent for the first three years in which they claim mortgage interest relief, subject to the general interest ceilings. To help offset to some degree the cost of this overall package of improvements, a de minimis exclusion for mortgage interest relief is introduced. This will disqualify for the purpose of relief the first £100 single/£200 married of interest currently allowable. The estimate net cost of the package at the time of the budget was about £17.5 million in 1993. Due to favourable developments in interest rates, it is now estimated that it will cost £15 million.
As I indicated in a press release on 26 November last, the Bill — in section 7 — provides for the taxation of severance payments to outgoing Members of the Oireachtas and former holders of ministerial parliamentary offices from the commencement of the new payments. In addition, the legislation makes severance payments to certain public servants subject to the same tax treatment as applies to similar payments in the private sector.
Section 8 increases the exemptions from tax in respect of non-statutory redundancy payments. Currently, the first £6,000 of any such payment is exempt from tax. In respect of an employee's first redundancy, this £6,000 may be increased by up to £4,000 in certain circumstances. As an alternative to the £6,000, or the £6,000 as increased, the taxpayer may, where it is more beneficial to him, claim an amount known as the SCSB — the standard capital superannuation benefit. Briefly, the SCSB is one-twentieth of the average salary — over the last three years of service — for each year of service, less any pension lump sum entitlement. Section 8 increases the basic exemption of £6,000 by £500 for each year of service in the employment in respect of which the redundancy payment is made. This £500 replaces the £250 which I announced when the Bill was published. In addition, the value of the SCSB is being increased by exempting one-fifteenth of salary per year of service rather than one-twentieth as heretofore. I intend that the change will be effective from 6 May, the date of publication of the Bill.
Section 29 extends tax relief for heritage gardens. Up to now tax relief has been available in respect of the cost of the maintenance, restoration, etc., of significant buildings and of gardens attached to such buildings. The Bill provides for the extension of this relief to gardens which are not attached to significant buildings where the gardens are deemed to be of significant horticultural, scientific, historical or aesthetic interest.
Section 9 provides for the new temporary income levy announced in the budget. The new levy will apply for the year 1993-94 at a rate of 1 per cent on all income on a similar basis to the existing health and employment and training levies. The levy is payable by all individuals over 16 years of age but with a specific income exemption in order to protect the lower paid. In the case of the self-employed, exemption will apply where income for the year is not greater than £9,000. In the case of employees, the levy is payable in any week where income is greater than £173.
Following consideration of the case of seasonal workers, I provided on Report Stage in the Dáil that, where income levy is deducted from the employment earnings of any individual whose total income over the year does not exceed £9,000, that levy will be repaid. In addition, all medical card holders, including those whose income is above £9,000 per annum, are exempt from the levy. All social welfare payments are also exempt and such payments will not be taken into account in determining whether an individual qualifies for an income exemption from the levy. Unlike the existing levies and the income levy which applied in the early 1980s, employers are not liable to pay the new levy in respect of their employees who are medical card holders. In order to ensure that the levy is paid this year by all liable taxpayers, the Bill further provides for an appropriate amendment to the rules governing the payment of preliminary tax by the self-employed.
As regards the criticisms made of the levy, it is, of course, the case that the Government would have preferred not to have had to introduce the temporary 1 per cent income levy had the quite exceptional budgetary pressures allowed of any realistic alternative. Taxpayers are being asked to accept this limited sacrifice against the background of the Programme for National Recovery and earlier years of the Programme for Economic and Social Progress, which have seen progressive and substantial increases in real take home incomes. Furthermore, the levy is not a tax on employment, as a number of critics and commentators have said. The levy will only impact on employment if taxpayers seek to compensate themselves through higher charges and wages rather than accepting that they should make a limited contribution towards the exceptional unemployment and other costs imposed by the protracted slowdown in the international economy.
Section 10, which was introduced on Committee Stage of the Bill in the Dáil, makes significant changes to the current tax treatment of married couples. I am making these changes in response to the concerns expressed by the Commission on the Status of Women and others on the treatment of married women by the tax system. The changes made in section 10 will ensure greater equality in the tax treatment of married couples. The section allows all married couples on joint assessment to choose which partner should be the assessable person. At present, the husband is automatically selected to be the assessable person. The couple's other options, of separate assessment or separate treatment, will, of course, continue to be available.
In the case of a couple who marry in the 1993-94 or subsequent tax years, where no option is chosen, joint assessment will apply automatically with the higher earner in the previous year as the assessable person. This higher earner could, of course, be either the husband or the wife. For couples who married before 6 April 1993, the husband will continue to be treated as the assessable person, unless an alternative option is chosen. I am pleased to be able to inform the House that the Revenue Commissioners will be undertaking a publicity campaign to inform couples of the options open to them.
The section also makes changes in the payment of tax refunds to jointly assessed couples. At present, refunds in respect of a jointly assessed couple made after the end of the tax year are almost always paid to the assessable person who, at present, is the husband. The section provides that refunds will be payable to the two spouses in proportion to the tax paid by each spouse. This means that if a refund is due, and one spouse paid two-thirds of the couples total tax, that spouse will get two-thirds of the refund. Furthermore, the inspector of taxes will have the power to arrange in individual cases that, where the refund is clearly due to an overpayment by one spouse, the full refund will be paid to that spouse.
Chapter IV provides for the new system of taxation of life assurance companies which came into effect from 1 January last. It also provides for a similar system of taxation for the unit trust industry. The new system will apply to new unit trusts from the passing of the Bill and to existing unit trusts, with a small number of exceptions, from 6 April 1994. The new system of taxation comprises a single 27 per cent annual tax charge on the income and capital gains of the investments payable at the level of the life company or unit trust. No further tax liability arises when the return is made to the investor.
Capital gains tax will be charged without indexation or the application of the small gains relief. Realised gilt gains and both realised and unrealised non-gilt gains will be subject to taxation, the latter on a seven year spreading basis. The question of applying similar confidentiality rules to unit trusts as currently apply to life assurance companies will be examined by my Department over the coming year.
The chapter also provides for the taxation of foreign life assurance products sold to Irish investors. As the returns on the investments made by foreign life companies will not be subject to an annual Irish tax charge, it is necessary for equity reasons to tax the return in the hands of the policyholder.
Section 28 concerns stock relief for farmers. The old stock relief scheme which lapsed on 5 April 1993 is not being renewed and is being replaced by a new scheme of relief from 6 April 1993 to 5 April 1995. Having regard to the changes in the Common Agricultural Policy and to avoid the related difficulties that could arise for farmers with declining stock values, clawback arrangements under the old scheme are being abolished, which should benefit a considerable number of farmers. The new relief gives an incentive for developing farmers and for farmers diversifying into new areas of agricultural activity and there are no claw back provisions attached.
There are five changes to the tax reliefs for the designated areas; three of the changes are designed to assist in the development of these areas while the remainder deal with tax avoidance loopholes.
Section 23 provides that where a life assurance company locates its new business activities in a new or refurbished rented building in a designated area, the seven year spreading of expenses rule for such business will not affect the full immediate availability to the company of the double rent allowance.
Sections 30, 31 and 32 provide for an extension of the time limits associated with the urban renewal scheme in the general designated areas. The deadlines for the expiration of the reliefs are being extended by six months to end November 1993 in the case of "new build" projects, and by two months to 31 July 1994 in the case of the overall deadline for the reliefs.
Section 30 also introduces a 13 year claw-back period for capital allowances on all commercial buildings in the designated areas, bringing the tax life of the buildings into line with the 13 year period over which the accelerated allowances would normally be claimed.
In addition, section 30 closes off two tax loopholes. First, the double rent allowance, in the case of a refurbished building, from now on will be conditional on the capital expenditure on refurbishment amounting to at least 10 per cent of the market value of the building before the refurbishment took place. Second, section 30 provides for the closure of a loophole in relation to the cross-leasing of property by means of controlled companies which was designed to claim both accelerated capital allowances and a double rent allowance.
A number of important changes are being made to section 35 of the Finance Act, 1987, the section which provides relief from corporation tax in respect of investment in Irish film making companies.
First, the present ceiling for investment under section 35, which is £600,000 per corporate investor, is being increased to £1.05 million. This can be invested either as a £1.05 million investment in a single film production in any one year in a three year period, or as £350,000 each year for three years in one or more film projects.
Second, in future, individuals will be able to avail of the section 35 relief up to an annual limit of £25,000. Third, the qualifying period for the relief, which was due to expire on 31 March 1995, is being extended to 31 March 1996 for companies, and for individuals the relief will run to 5 April 1996.
Finally, in order to facilitate the making of films under co-production agreements with other countries, section 48 of the Bill provides for the waiving of the 75 per cent Irish production test for a film to qualify for the relief. At present, at least 75 per cent of the production work of the film must be carried out in the State and not more than 60 per cent of the cost of producing the film may be met by section 35 investments.
The waiving of this requirement will be subject to certain conditions. These are, that at least 10 per cent of the production work must be carried on in the State, that the approval of the Minister for Arts, Culture and the Gaeltacht must be obtained, and that the percentage of the cost of the production of the film allowable to be met by section 35 investment cannot exceed the percentage of production work carried out in the State, subject to the overall 60 per cent cost of production ceiling referred to above. These changes are designed to boost investment in the Irish film industry.
The maximum acceptable degree of freedom from tax for foreign trusts is provided for in section 49 in order to facilitate the generation of employment in Ireland from the management of such trusts. "Foreign trusts" are those where the settlers and beneficiaries are not domiciled or resident in the State, the assets are located outside the State, and the income is from sources outside the State; only the professional trustees, who must be licensed banks, authorised trustees for collective investment undertakings or similar persons, and approved by the Central Bank as suitable trust managers, may be located in the State.
At present, legislation allowing the Central Bank to give such approval does not exist. New legislation is required and will be prepared as quickly as possible this year. In view of this, the Finance Bill provisions enable the Minister for Finance, by order, to bring these provisions in relation to the taxation of foreign trusts into effect when the necessary regulatory legislation is in place.
I now come to Customs and Excise. The Bill confirms the changes announced in the budget with regard to the increases in duty on cigarettes and certain other tobacco products and on cider and perry. It sets out a single rate of duty for heavy fuel oil which is necessary to comply with EC rules. It provides for the duty reductions on certain low alcohol products, for example spritzers and coolers and on auto LPG.
The Bill confirms the combined high season-weekend category of licence for amusement machines introduced in the budget. Reflecting representations from the trade, the Bill also provides for an amendment of the gaming licence regime so as to treat certain gaming machines as a single machine, irrespective of the number of playing positions. Other technical amendments to the gaming duty system are also included in the Bill.
The House will be aware of the importance of the short term car hire sector for the tourism industry and of the shortage problems that can arise at peak demand periods. This Government has decided to tackle these problems in a fundamental way through reshaping the fiscal environment for such cars.
The Bill contains a number of significant initiatives to increase the availability of cars for short-time hire. As well as confirming the scheme of partial repayment of vehicle registration tax (VRT) for cars in the short term hire fleet announced in budget, a further relieving provision is proposed in regard to the arrangements for paying vehicle registration tax on such cars.
These measures address the concerns of the car hire interests; they create a framework and climate which should allow for a substantial increase in the hire fleet during the summer season and should underpin the financial viability of the sector generally.
I have decided to defer the proposed introduction of standard VAT rating for short term car hire originally proposed for 1 September 1993. The Bill also provides for other minor adjustments to the VRT in respect of mini-buses and demonstration vehicles.
The Bill provides for the enactment of certain residual matters in the vehicle licensing road tax area set out in the "Government Proposals for Legislation to be included in a Second Finance Bill" published last November which were not subsequently enacted. These deal with underpinning the legislative basis for the national vehicle file; the provision of a framework for the renewal of road tax and driving licences at any motor tax office in the State; updating road tax penalty provisions and enabling local authorities to pass information to the gardaí about cars that have been registered for VRT but, in respect of which, an application for a road tax licence has not been received within seven working days.
Internal market obligations require that we cease using the intermediate prefermentation worts system as the basis for levying excise duty on beer. Instead, a system based on taxation of the end-product must be adopted. The Bill, accordingly, provides for a new rate of duty on beer based on the end-product. It is a revenue neutral rate of £14.62 per hectolitre per cent alcohol in the finished product. As part of the new regime, which I intend to introduce on 1 October next by means of ministerial order, revised deferment arrangements are also proposed for payment of excise duty on beer. The revised deferment arrangements will also apply to the payment of excise duty on wine.
The Bill also clarifies the position of certain minor categories of spirits retailers' on-licences to ensure that they will be subject to the appropriate licence duty and the associated tax clearance requirements.
As far as excises are concerned, the Bill provides for certain other technical amendments to Customs and Excise law in order to align domestic law with EC requirements. Part III of the Bill gives effect to the legislative changes relating to VAT.
As regards the rate changes announced on budget day, the Bill confirms all of these apart from two. The first relates to the proposed application of the standard rate to short term car hire, which was to take effect from 1 September next. In response to the many representations received from the tourism industry, I have decided that this change should be deferred.
When taken in conjunction with the proposed reliefs for the short term hire sector in relation to vehicle registration tax, this concession should further underpin the financial viability of the sector, thereby facilitating an increase in the size of hire fleets. Thus, short term car hire remains at the parking rate of 12.5 per cent for the moment. Ultimately, however, it will have to be taxed at the standard rate in accordance with EC law.
The second concerns the treatment of ready to pour concrete and concrete blocks, which were formerly taxed at the 10 per cent rate but to which the standard rate has applied from 1 March last. The increase announced in the budget was primarily intended to combat black economy activity in the overall building and construction sector. However, following discussions with the industry and the benefit of further detailed analysis which highlighted the danger of distortion of competition, particularly in the Border areas, I decided to avail of the parking rate facility provided for under EC law. Therefore, from 1 July 1993, the rate of VAT on concrete and concrete blocks will be 12.5 per cent, the rate that now applies to building services generally.
Regarding the VAT rate increases on adult clothing and footwear, I confirm that I have no intention of reversing my decision to place these items at the standard rate. The primary reason for the increase in rate was to raise revenue. This revenue was part and parcel of overall budgetary strategy, which was framed with the need firmly in mind to give Irish industry conditions in which jobs generally could be protected and which has now paid off in terms of creating an environment of currency stability and substantially lower interest rates. I would point out that to put adult clothing and footwear at the 12.5 per cent rate would cost £77 million in a full year.
I do not accept that the difficulties being encountered in the clothing industry are wholly or even largely due to the VAT rate increase. Without labouring the matter, I want to repeat that the two-thirds of the output of the Irish clothing sector which is exported will not be affected by the change. Moreover, given that the higher rate applies equally to the 80 per cent of consumption here which is imported and the 20 per cent which is domestically sourced, the relative position of these supplies has not been distorted.
I would like to point out to Senators that the new zero-rating facility introduced in section 90 of the Bill will benefit many of our clothing and footwear manufacturing companies where they qualify to participate in the scheme. Overall, I am satisfied that the balance struck in the budget was the right one from an overall employment standpoint.
Finally, I would draw the attention of the Seanad to the package of measures which I announced recently, aimed at improving the cost-competitiveness of the manufacturing side of the industry. It includes a temporary scheme for assistance where the viability of firms and employment levels can be demonstrated to be threatened by the application of the standard rate of VAT to their domestic sales, a review of the impact of employers' PRSI and a review of the criteria under which the IDA assist technological development in the industry. I will continue to monitor the situation and keep in touch with the sectors representing footwear, fashion manufacturing and retailing, led by IBEC.
There are two measures provided for in the Bill which are designed to offset, to a considerable extent, the major cash-flow loss to the Exchequer arising from the abolition of VAT at point of entry on intra-Community trade.
The first involves a special advance payment in December by the larger tax remitters, equivalent to one-twelfth of their annual liability, to be set against actual liabilities in the following January's normal VAT return. This initiative, which is restricted to some 2,000 taxable persons whose VAT liability exceeds £120,000 per annum, will yield an estimated £145 million in cash-flow terms. Provision is made to impose a surcharge of 0.25 per cent of the advance payment per day where a taxpayer fails to make the advance payment by the due date.
I believe that, overall, this initiative is a balanced one, as it gives the business community the benefit of the cash-flow gain arising from abolition of VAT at point of entry for most of the year. As there are some 128,000 businesses registered for VAT, Senators will appreciate that the vast majority of traders, and all small and medium size operators, will be unaffected by the initiative.
The other cash-flow proposal contained in the Bill involves a change in the method of charging VAT on the removal of alcoholic goods from bonded warehouses. The Bill provides that, in the case of all taxable transactions involving such duty suspended goods — that is, sales made within warehouses, acquisitions from other member states and imports from outside the Community — VAT will be charged on the last sale, if any, within bond and on the duty inclusive price as the goods leave bond. It is estimated that this measure, which is designed specifically to counter certain tax evasion practices which have been found in the drinks trade, will yield £15 million, in cash-flow terms, to the Exchequer.
The Bill proposes granting zero rating for supplies made to companies the bulk of whose output is supplied to other member states or exported outside the Community. This initiative will represent a significant improvement in the trading environment for companies authorised to participate in the scheme, who, up to now, would be in a repayment position in relation to VAT. Many Irish exporting manufacturing companies, for example, will be able to participate in the scheme and should benefit from a cash-flow gain and savings in administrative costs arising from simplification of the system.
While the cash-flow effect on traders supplying authorised companies will vary, depending on credit terms, they will, however, gain the very significant commercial advantage of being able to zero rate their supplies to the companies concerned and thus, from the VAT point of view, will be on a level playing field, so to speak, with out-of-State suppliers of the same type of goods and services. Irish hauliers, who transport goods of authorised companies to other member states, will gain a similar advantage. Finally, the Exchequer will improve its cash flow position by an estimated £20 million as a result of the measure.
Provision is made in the Bill to enable a flat rate farmer who purchases goods in other member states above the threshold of £32,000 to register in respect of those acquisitions but remain a flat rate farmer in all other respects. The farmer will, of course, be required to pay Irish VAT — without deductibility — on such acquisitions but, it will, as always, remain open to individual farmers to opt for full taxable status should they wish to do so. This measure will represent an important facility for all flat rate farmers, but particularly those in the horse breeding industry.
The Bill provides for the abolition of the threshold relating to certain services, including accountancy and advertising, supplied from abroad. Under existing rules, it is only if a trader's expenditure on such services is in excess of £15,000 that he is obliged to account for the VAT on them. In contrast, all similar services being supplied by a domestic practitioner would be taxable. Abolition of the threshold will eliminate this anomaly and remove any potential distortions of trade for Irish providers of such services.
Part VI, Chapter I, of the Bill contains the detailed provisions of the new probate tax which will be charged on the estates of persons dying after the date of enactment of the Bill. I have already had the opportunity of addressing this House on the question of the probate tax. The purpose of the tax is to increase the yield from capital taxation on inheritances by applying a relatively modest charge to the majority of estates passing on inheritance. At present only a small proportion of inheritances attract a charge to capital acquisition tax. This is mainly because of the generous exemption thresholds under the capital acquisitions tax code, which for a transfer from parent to child is currently £171,750.
Inheritance tax yields £30 million per year out of total annual capital acquisitions tax receipts of about £35 million. This represents only about 3 per cent of the total value of estates passing on inheritance and less than 0.5 per cent of the total yield from all taxes. The probate tax will earn an estimated £11 million in a full year and will increase the overall yield from the taxation of inheritances by about 30 per cent. This is in line with a commitment in the Programme for Economic and Social Progress to increase the yield from capital taxes. It is also justified by economic circumstances since other taxes. It is also justified by economic circumstances since other tax heads are also required to contribute additional revenues.
The probate tax will involve a 2 per cent charge on the net taxable value of estates over £10,000 passing under will or intestacy. There will be full exemption for the family residence where there is a surviving spouse and, where there is no surviving spouse, the share of the family residence passing to dependent children or dependent relatives will be exempt. In this regard, I introduced a Report Stage amendment in the Dáil which will ensure that the family residence will include normal house contents.
The Bill also provides exemptions for pension benefits, bequests to charities, heritage property and the proceeds of assurance policies used to pay inheritance tax and/or probate tax. There will be a special relief, subject to certain conditions, where two spouses die in quick succession. The tax will be allowed as an expense for inheritance tax purposes and there will be a discount for early payment. Special arrangements will apply where payment would cause hardship and where there are insufficient liquid assets to pay the tax.
The Government has given very careful consideration to the detailed provisions of the probate tax in the light of the various representations and suggestions received since the introduction of the tax was announced in the budget. Having regard to the generous reliefs and exemptions proposed, the relatively low rate of tax and the deferred payment arrangements which cater for situations of illiquidity and hardship, the Government is satisfied that the provisions contained in the Bill are reasonable and equitable and that the probate tax will not place a significant burden on the taxpayer. At the same time the tax will make a valuable contribution to the Government's economic and social expenditure programmes.
In line with the commitment in the Programme for a Partnership Government, section 128 of the Bill provides for an increase in agricultural relief in respect of capital acquisitions tax on gifts from 55 per cent of eligible assets with a ceiling of £200,000 to 75 per cent with a ceiling of £250,000. So far as the farming sector is concerned, this increased relief, and the fact that there is no probate tax on gifts, will considerably reduce the tax on gifts as compared to inheritances and as such it should provide a positive incentive to the early transfer of farms. This increased relief will mean that a young farmer will be able to acquire over £420,000 worth of agricultural property from his father or mother before any tax liability arises.
The Bill also provides for a number of amendments to existing capital acquisitions tax legislation which are designed to safeguard against attempts at avoiding tax on the transfer of assets. These anti-avoidance provisions are contained in Chapter II of Part VI of the Bill.
I would like to highlight just one of the changes in stamp duty legislation provided for in the Bill as I have not had the opportunity of doing so up to now. I am referring to section 106 which I introduced on Committee Stage in the Dáil. This is an important measure which deserves special mention. Section 106 grants an exemption from stamp duty for the issue and transfer of certain debt instruments, known generally as corporate bonds. Under present legislation, corporate bonds are subject to either a 1 per cent duty on transfer or a 3 per cent duty on issue.
The abolition of these duties for most categories of such bonds is designed to encourage the development of a corporate bond market in Ireland and to improve access to longer term fixed rate finance for private sector corporate borrowers and individual mortgage holders. Greater availability of fixed rate finance would enable borrowers to reduce their exposure and that of the whole economy to short term fluctuations in interest rates. The high proportion of fixed interest credit in most EC countries makes it easier for those countries to cope with high short term interest rates during periods of turmoil in the financial markets.
The market in bonds normally operates on very tight margins, and the 1 per cent stamp duty on the transfer of these securities, rather than generating significant amounts of revenue, has served instead to hinder the development of a corporate bond market in Ireland and to drive such financial activity offshore. As a result there has been limited availability of medium and long term finance in the Irish financial market which has rendered borrowers vulnerable to interest rate pressure. The turbulence in financial markets in the past year, which thankfully has now abated, illustrates just how vulnerable we are to interest rate and exchange rate volatility.
The development of an Irish corporate bond market should help in bringing about greater stability in the Irish financial system, to the benefit of corporate borrowers and mortgage holders alike. The change has been strongly welcomed by the financial services sector and business commentators.
The stamp duty exemption will not extend to all types of loan capital. The duty will remain in place for those bonds and other negotiable loan instruments which could be considered to offer certain of the advantages of equities to investors, such as convertible bonds, irredeemable bonds, deep-discount bonds and index-linked bonds.
The Bill makes legislative provision for two extensions of the tax clearance system announced in the budget, to cover the issuing of various excise licences, to which sections 79 and 140 relate, and to ensure that the residential property tax liabilities have been discharged when houses are being sold, which is in section 107.
I commend the Bill to the House.