The focus in this year's Finance Bill is firmly on taxation policies which will promote and assist the creation of sustainable employment. The Bill's provisions pursue this goal on two fronts. First, it takes tax reform, particularly in the area of personal income tax, a further and significant step forward. This Bill must be seen in the context of the Government's broadly based strategy for economic progress in the interests of job creation. The key elements of this are the continued observance of budgetary discipline, the responsible pay arrangements in the new Programme for Competitiveness and Work, and the commitment to reforming the taxation system to make it more employment friendly. The Bill implements a range of targeted measures aimed at enhancing business competitiveness, promoting productive use of resources and stimulating and rewarding genuine enterprise.
In bringing forward these latter measures, I have taken account of the views of many interested parties, notably the Task Force on Small Business and the Task Force on Jobs in Services. Accordingly, this year's package places particular emphasis on improving the climate for smaller and start-up enterprises. It also reflects the Government's conviction that the services sector can continue to make a major contribution to fulfilling our employment needs. I would emphasise that the measures in this year's Bill should not be viewed in isolation but rather as complementing and enhancing the initiatives for enterprise and employment enshrined in the Finance Act, 1993.
Among the significant items in the Bill in this connection are the introduction of a special capital gains tax rate for individuals in respect of shares in most unquoted trading companies so as to help in attracting investment funds to this area and to reward those who put their funds at risk in developing job creating businesses; an extension to the wider services sector of the roll-over relief under capital gains tax for equity investment by entrepreneurs in unquoted trading companies, introduced last year for reinvestment in businesses in certain sectors; a new business assets relief in capital acquisitions tax so as to facilitate the transfer of family businesses and to improve incentives for those trying to build-up businesses; an easing of the income qualification test for access to the seed capital scheme which assists new business start-ups by employees and the unemployed; an increase in the company value limit for the purpose of BES investment by the "original entrepreneur"; a raising of the VAT thresholds for both goods and services thus relieving the very small business from the obligations associated with VAT registration; the cash basis of accounting for VAT is being made available to businesses in all sectors with an annual turnover of up to £250,000; a new and better focused scheme of incentives for urban renewal, with new incentives for industrial buildings in the interests of more balanced development in inner city areas; improved annual capital allowances for hotel development and farm buildings; an increased allowance for business cars, and the granting of capital allowances to the purchase of computer software or the rights to use such software; the introduction of a new provision into the relief for investment in films aimed at assisting low budget Irish films; simplification of the payment arrangements, subject to EU approval, for VAT on long term leases of property; a range of relieving stamp duty measures, including a new appeals procedure and a special relief for young trained farmers; modernisation of the tax treatment of businesses' foreign exchange gains and losses; unilateral credit relief for foreign withholding taxes incurred by computer software companies; a range of measures to underpin the further development of the International Financial Services Centre and amendment of the tax provisions relating to bearer bonds so as to assist the development of Irish financial markets.
This Bill marks a major step forward in the Government's tax reform programme. This programme is aimed at reducing the tax on low income earners and families and removing as many taxpayers as practicable from liability to the higher rate of tax. This year I have been in a position to provide for a substantial package of income tax reliefs.
It is worth while repeating the main improvements contained in this Bill which are as follows: the tax free allowance for a single person is being increased from £2,175 to £2,350; the tax free allowance for a married couple is being increased from £4,350 to £4,700; the tax allowances for widowed persons and widowed and single persons are being increased accordingly; the standard rate band is being increased by £525 for a single person and £1,050 for a married couple; the child additions to the exemption limits are being increased by £100 per child; the marginal relief rate of income tax is being reduced from 48 per cent to 40 per cent; the PAYE and PRSI allowances are being retained and the PAYE allowance is being extended to the children of the self-employed and proprietary directors who are genuinely employed by their parents.
In addition, while not provided for in the Bill, the 1 per cent income levy is being abolished and a threshold of £9,000 is being introduced for the health contribution and the employment and training levy. These changes will be felt in the paypacket of the average taxpayer. For example, a single person on £9,000 a year will be almost £5 a week better off, while a single person on £13,000, near the average industrial wage, will be more than £6 a week better off. A married couple with one spouse earning an income of £10,000 a year will be almost £7 a week better off and the same couple where the spouse is earning £24,000 a year will be over £10 a week better off.
More important than the actual gains to individual taxpayers is perhaps the fact that these improvements are tangible evidence that the Government's tax reform policy is working. I assure this House that I intend to ensure that this policy continues to work and that the trend we have established of removing taxation from work will be continued.
Tax reform cannot be progressed if the whole matrix of existing reliefs was to be regarded as an untouchable edifice. These reliefs grew up in different times reflecting the particular needs and concerns of society at that time which, in the context of a tax structure, are quite different to that which pertains today. This Government is, of course, committed to maintaining the main discretionary reliefs, such as mortgage interest relief and health insurance relief. These reliefs have a significant part to play in the provision of housing and health care. However, this Bill seeks to address some of the less desirable effects of how these reliefs operate at present. In particular, it will ensure that these reliefs are of equal value to the more well off taxpayer. This is being achieved by the standard rating of these reliefs on a phased basis.
During my budget speech I indicated that I intended to raise the limit below which unreimbursed medical expenses would be allowable for income tax to £150 for an individual and £300 for a family; indeed, were the individual limit to have kept ace with inflation it would be £500 today. During the passage of the Bill through the other House, however, I reconsidered the matter and decided that the new limits should be fixed at £100 for an individual and £200 for a family. These new limits can be in no way considered onerous on the taxpayer.
The Government is committed to maintaining the core element of this relief which is designed as a means by which the taxpayer can be assisted with unpredictable and emergency expenditure. I note that from amendments brought in last week this change went unnoticed. I am sure that from today's debate it will be picked up that we have made a significant amendment to that provision which is of great benefit for individuals who have no medical cards, normally no VHI but who have high medical bills. They can claim these reliefs through the tax system and I am glad we have been able to improve this position. The above provisions are contained in the first eight sections of the Bill.
There are a number of other income tax measures in the Bill. These relate to the rates used for determining the benefit-in-kind charge on preferential loans, the payment of the 1 per cent income levy by the self employed, the income qualification requirements and the certification agencies for the seed capital scheme, the small company exemption to the own ownership exclusion under the BES, the access requirements for and benefit in kind in respect of works of art displayed in heritage buildings and the taxation of unemployment benefit. A number of other amendments of a technical nature are contained in the Bill. These changes are outlined in the explanatory memorandum to the Bill and do not warrant repetition at length today.
Since the introduction of the Bill, however, there have been two noteworthy changes in this area. First, the proposals in relation to access to heritage buildings have been revised. Initially I had proposed to increase the length that a heritage building would be required to be open to the public from 30 days to 90 days, 60 of which would have to be in the period May to September.
On reflection however I have decided to increase the period to 60 days rather than 90, and to require that 40 rather than 60 of these days be in the period May to September. The new limits will, I believe, ensure that this relief will provide real benefits in terms of public access to heritage buildings.
Second, a new section 13 has been included in the Bill which provides for the drawing up of guidelines in relation to works which can benefit from the artists' exemption. This section is necessary to ensure that the original focus and intention of the 1969 provision which is to assist artistic, creative and original works is maintained. The guidelines will ensure that only creative and original works of art are able to avail of the relief and the Revenue Commissioners and the Appeal Commissioner will be obliged to have regard to the guidelines when determining whether a work is entitled to be exempted or otherwise.
Unemployment benefit has been made reckonable for tax purposes from 6 April 1994. It has been decided however that, in recognition of their special circumstances, workers who on 5 April 1994 were engaged in systematic short-time working arrangements, recognised by the Department of Social Welfare, will be temporarily exempted from the new tax arrangements. This exemption will apply for the tax year 1994-95 or to the end of the individual's current unemployment claim or current period of short-time working, whichever is the shorter.
The Bill provides for the taxation elements of the recommendations in relation to expenses of members of the Judiciary contained in Report No. 35 of the Review Body on Higher Remuneration in the Public Sector.
The Bill improves the provisions for capital allowances in a number of important areas. In the case of cars used for business purposes, the capital value threshold for determining the capital allowances and the deduction for running expenses is being increased from £10,000 to £13,000 with effect from 27 January 1994. The higher threshold will apply to capital allowances for new cars only, but will apply to allowable running expenses for all cars.
In the case of capital expenditure on hotels and holiday camps, the Bill provides for the shortening of the writing down period from ten to seven years for expenditure incurred on or after 27 January 1994. This reduced writing down period will also apply to the capital allowances regime for farm buildings and structures.
An important change is also being introduced in relation to capital allowance for computer software. The Bill provides that where computer software is acquired as an asset of a business, either by outright purchase or under licence, the company will be able to treat the asset as plant and machinery for capital allowance purposes.
The Bill closes off a number of loopholes and unintended uses of certain provisions of the tax code. In the case of the tax exemption for patent royalty income the Bill refocuses the relief on genuine inventions researched and developed in the State. The exemption has been retained where the royalty is paid in respect of manufacturing activity and in the case of non-manufacturing activity where the royalty arises from third party payments. Dividends paid out of such exempt royalties will continue to be exempt from tax subject to existing requirements. Royalties derived from non manufacturing activity where the payments are made between connected persons will no longer be exempt from tax.
The Bill also closes off, from the date of publication of the Bill, certain unintended and unacceptable uses of the legislation dealing with capital allowances and loss relief in the case of general partnership schemes by confining them to the partnership income in such situations.
The Bill deals with two issues arising from the removal in the Finance Act, 1992, of the formal liability of non-residents to income in respect of Irish dividends. First, it deals with a problem that has arisen with a number of our double taxation treaty partners who have taken the view that dividends, if legally exempt from Irish tax, cannot be said to be subject to double taxation if fully taxed in the treaty partner country. This ignores that Irish corporation tax is paid on the profits of an Irish company paying dividends to non-residents — in other words, the non-resident shareholder effectively bears Irish tax.
Second, it closes a loophole inadvertently created whereby Irish dividend income received outside of the State for the ultimate benefit of an Irish resident falls outside the scope of certain anti-avoidance provisions of the Finance Act, 1974. Both of these problems are being solved by amending the 1992 legislation. While dividends paid to shareholders who are neither resident nor ordinarily resident will be liable to Irish tax, any tax due will be fully eliminated by means of relief which will produce a net nil liability to Irish tax.
The Bill also introduces restrictions in the tax rules for capital allowances for lessors of plant and machinery in order to deal with an unintended use of these provisions through a new type of lease arrangement with serious implications for the corporate tax revenue yield. Under these new arrangements known as "balloon leases", the bulk of the lease payments are not received by the lessor until the end of the primary leasing period which can be up to ten or 15 years after the commencement of the lease. The effect of this is that the lessor can use virtually all the capital allowances on the leased assets for offset against his other taxable income over the early years of the lease.
With certain exceptions, therefore, the Bill ringfences the capital allowances in the case of such leases to the lessor's receipts from that particular lease. The new rules will not apply to leasing companies in the Financial Services Centre or Shannon or to leases of buildings and the rules are relaxed to allow for seasonal factors in the case of leases of agricultural machinery. Special arrangements are provided in the case of leased machinery or plant which is provided for the purposes of certain new grant-aided projects.
Senators will be aware that, in order to comply with a direction from the European Commission, the Government has had to take steps to remove mushroom cultivation from the scope of the 10 per cent manufacturing rate of corporation tax. Section 48 of the Bill makes the necessary changes.
The Bill provides that a company entitled to a section 84 loan by virtue of it being included on an IDA list of allowable loans can only get one such loan of the full allowable amount. The Bill also imposes a seven year limit on the duration of section 84 loans taken out on or after the publication date of the Bill and provides that all loans taken out before that date should be terminated before 11 April 2001, that is, seven years after the publication date of the Bill.
The Bill extends to 31 December 1996 the relief from corporation tax for gifts to the Enterprise Trust. The Bill also provides for an exemption from corporation tax for certain payments by the Minister for Agriculture, Food and Forestry to National Co-operative Farm Relief Services Limited and to grants made by that body to its member cooperatives for the purpose of engaging contractors to provide farm relief services.
The Bill deals with a double taxation problem arising from foreign withholding taxes affecting certain computer software companies. It provides for the introduction of unilateral credit relief for foreign withholding taxes on payments in respect of software transactions.
The Bill addresses a number of the most pressing problems in the area of foreign exchange gains and losses facing Irish business engaged in international trade. In dealing with these issues, I have decided to take a minimalist approach targeted on the main current problems and based on accounting practice. I am encouraged by the welcome that these changes have received from the business community. The changes ensure that commercial strategies for reduction or elimination of currency risk are effective after the taxation liability on the transactions have been determined.
Briefly, the Bill provides that foreign exchange gains and losses on long term borrowings will now be deductible or chargeable, as appropriate, in the computation of taxable income. It also provides that the foreign exchange gain, or loss, on associated hedging instruments will be included in the computation of taxable income and excluded from the computation of capital gains. Moreover, companies with a non-Irish pound "functional" currency will now be allowed to compute their capital allowances in that functional currency. Finally, any trading loss in that functional currency will be valued at the exchange rate of the year the loss is offset against income.
The Bill provides for an exemption from tax for certain income of non-commercial State bodies. The exemption will not apply to deposit interest or to fee income, excepting statutory fees and incidental income of this kind. I would add that in settling the annual Exchequer allocation for such bodies, account is fully taken of own resources arising to them so that the interests of the Exchequer will be safeguarded even in the absence of a tax charge. The Bill extends the definition of "qualifying shipping activities" in section 39 of the 1980 Finance Act to include deep-sea tugs.