I am glad to be able to introduce my third Finance Bill to the Seanad since taking office. The Bill as initiated was one of the largest Finance Bills ever published and it has increased in size by nearly 60 pages since then. The Bill contains a series of important initiatives which reform the tax system in favour of the lower paid, cut personal taxes for all taxpayers, introduce significant new tax reliefs, set a new agenda for tax relieved pension pro vision and strengthen considerably the powers of the Revenue to combat tax evasion.
Before I proceed I wish to express my regret that I will be unable to attend the debate this afternoon and tomorrow as I have to attend at the important meeting of the European Council. However, the Minister of State at the Department of Education and Science, Deputy O'Dea, will be standing in for me on this occasion.
I count myself fortunate to be the first Minister for Finance in over 50 years to bring in an overall budget surplus. However, the very mention of the phrase "budget surplus" brings with it the danger that the restraint which underpins the conditions that led to the budget surplus in the first place will dissolve under the pressure of raised expectations. Fairness demands that we use this opportunity to benefit those who have not done as well as most of us in recent years, particularly the old and the lower paid. However, in delivering fairness, we must not abandon prudence. Above all, there is the need to maintain social consensus – the co-operation between all sections of the community for the common good. What I have sought to accomplish in the budget and in this Finance Bill is both fair and prudent. The basic equity of the tax system has been improved; the use of the tax system to stimulate enterprise has been enhanced and tax administration is being modernised to deliver customer value.
As I have said before, I believe in making radical change when such change is desirable, not by short steps but by pushing out the frontier and challenging the accepted approach. I pursued this strategy in moving to tax credits – a move which was universally welcomed. I am also making major structural changes in the pension area which will be a challenge to the existing way of doing things and present new opportunities to providers of pension products. However, the changes are in the interest of those who count – the pensioner who has worked and saved to accumulate the pension fund.
In order to provide the fullest possible information on these pension changes and other elements of the Bill, I arranged for a detailed press release on publication of the Bill on 11 February. This document went into some depth in explaining the provisions of the Bill. It is important that the Houses and the public should be as well informed as possible on the development of taxation policy. To this end I have placed copies of the most recent set of taxation strategy group papers on the Department of Finance's website. A small amount of material has been held back either because it refers to tax avoidance schemes or relates to items still under decision by Government or subject to negotiation with other bodies. Nevertheless the voluminous material which has been made available will illuminate the policy making process in all areas of taxation. The papers set out the general principles underlying taxation strategy, describe the options that are discussed at official level and give a valuable insight into the dynamics of the formulation of policy.
There are 217 sections in the Bill, 21 of which have been added since publication. Much of the content of the Bill in volume terms is accounted for by a limited number of subjects – retirement benefits, the dividend withholding tax, profit-sharing schemes, stamp duty preconsolidation measures, rural renewal reliefs and Revenue powers, including measures in relation to offshore trusts on which I will concentrate. There are other provisions in the Bill which are also of significance and I will highlight these. I will also refer to the more important provisions added since publication.
The first part of the Bill deals with income tax, corporation tax and capital gains tax. The first six sections set out the basic elements of the personal tax package announced in the budget. This package of nearly £600 million in a full year will cut the tax bill of every taxpayer, particularly for the over 65s and those on lower pay. It removes 80,000 taxpayers from the tax net, 15,000 of whom are over 65.
It delivers on the promises made to reduce the tax burden and to improve the position of the less advantaged in the community. It does so by a radical equalising of the benefits of personal tax allowances by converting these into tax credits at the standard rate of income tax. I signalled in my first budget that such a move was on the cards but this prognosis seems to have gone unnoticed in the commentaries on my 1998 budget. I plan to deal with the programme for this move in my next budget.
Other income tax changes include an extension of the tax allowance for the employment of a carer to wider family members. Employment of a carer will now also extend to the hire of a carer through an agency.
Section 12 introduces a new tax relief in respect of funds raised by public subscription for persons who are totally and permanently incapacitated. This relief recognises both the needs of such persons and the desire of those who responded to the public appeal that the entire funds raised should be applied, without deduction of tax, for the relief of the distress of the person concerned. Generally, for the trust to be a qualifying trust, no individual may contribute more than 30 per cent of the total subscription raised. However, this initiative does not apply to trusts where the amount raised does not exceed £300,000. I know the House will welcome this initiative.
Other changes in this part include the removal of BIK on child care facilities and travel passes provided by employers on a free or subsidised basis and a reduction in the BIK charge on preferential loans. The Government is very conscious of the growing wish for a recognition of the child care needs in the tax system. I took the opportunity in the budget to outline a number of the important and complex issues that the question of a possible child care tax relief raises. The Government has already discussed this area in some detail and proposes to examine these matters further. In the interim, certain measures were announced in the budget to facilitate and encourage the supply of child care places. These measures are included in sections 34 and 49 and will apply to child care services which meet the required standards for such facilities as provided for in the Child Care Act, 1991, and regulations under that Act.
Section 34 provides that certain child care facilities made available by employers on a free or subsidised basis will no longer be subject to a charter tax in the hands of employees as a benefit-in-kind. Section 49 introduces capital allowances for expenditure on child care facilities.
Three major reports relevant to this area were published over the last 12 months and these are now being considered by the interdepartmental committee established by the Minister for Justice, Equality and Law Reform. This committee has been given six months to evaluate, prioritise and cost the recommendations on child care proposals outlined in the Government's An Action Programme for the Millennium. On receipt of the committee's report, the Government will consider what further steps to take in this complex area.
Sections 22 to 25, inclusive, make a number of changes to tax law to facilitate the introduction on a phased basis of new Revenue computer systems for dealing with taxpayers, to implement over time a consolidated tax billing procedure and to tailor the penalties for late filing of the end of year returns by employers, the P35, to the length of the delay in meeting the due date for receipt of return by the Revenue.
Section 209 provides the legislative framework for the electronic filing of tax returns. This will permit returns filed over the Internet to be treated in the same manner as paper returns. This innovation, which it is intended will be rolled out in 2000, will place Irish tax administration at the cutting edge of electronic administration. The Revenue collection agencies of many larger countries would be happy to be in a similar position with regard to the use of such technology.
Section 19 increases substantially the annual allowances that may be claimed as a deduction for the funding of retirement provision and also sets out the new pension arrangements which were announced on the publication of the Bill on 11 February, but which were provided for in amendments. The new limits range from 15 per cent of net relevant earnings to a maximum of 30 per cent, depending on the age of the contributor. The 30 per cent maximum also applies to persons in certain occupations and professions, irrespective of age, where there is a definitive and limited earning span. The Bill lists a number of such occupations relating to professional athletes in the main but allows for the list to be extended by regulations to other specific occupations. These limits will be subject to an earnings cap of £200,000 per annum.
These pension measures give effect to the principles set out in my Budget Statement as my guiding aims in reforming the rules in this area. These principles were that the individual will not be restricted to only one pension option on retirement; the individual will have the option of retaining ownership of the capital sum invested on retirement and the individual will have a greater role in the investment of accumulating funds during the contribution period.
The new rules seek to give greater choice in how persons plan to fund their retirement, greater flexibility in how they use their accumulated funds and a greater say in how their pension scheme is run. At the same time, prudent requirements have been put in place to preserve pension assets via the approved minimum retirement fund. I have also preserved the taxation principle whereby pension contributions and the investment fund, as it accumulates, are tax exempt while the draw-down or realisation of the fund is subject to tax.
I have taken account of particularly sensitive areas in this tax treatment, namely, the position of the surviving spouse and minor children. I have also removed the rule which forces pensioners who wish to access their lump sums to take out an annuity at the same time. They will now be able to choose between the annuity and the new pension option for which I am making provision.
These proposals are radical and sensible. They are definitely pro-consumer. I have had a considerable input in forming my views from Members of the Oireachtas, pension commentators, the pension industry, the experts in the Revenue Commissioners and the advisers in my own Department. In the final analysis these proposals have my stamp on them and the approval of the Government. I look forward to the views of Senators on these proposals and to a constructive examination of these on Committee Stage.
As Senators will be aware, recent Governments have been very active in assisting people to attend third level colleges. As part of this process the 1995 budget announced the introduction of free fees and tax relief was provided for full-time undergraduate students in private colleges. The following year tax relief was also made available for part-time undergraduate students in publicly funded and private colleges. This year I am introducing a new relief for the fees of undergraduate students studying a wide range of courses in publicly funded colleges in other EU countries. The relief is provided for in section 26.
Section 27 inserts a series of new sections into the Taxes Consolidation Act, 1997, to implement the budget day announcement of the new withholding tax at the standard rate of 24 per cent in respect of dividends paid and other profit distributions made from 6 April 1999 by companies resident in the State. The explanatory memorandum to the Bill sets out in detail how the new tax will operate. The obligation to withhold tax is placed on the company paying the dividend or on an authorised withholding agent acting for the company.
Certain exemptions are provided for in the case of dividends paid to Irish resident companies, charities, pension funds, certain persons resident in EU or tax treaty countries and to publicly quoted companies in such territories. Entitlement to these exemptions will have to be supported by particular documentary evidence from the recipients of the dividends.
The rules for the application of the tax are thorough and detailed. They have been drawn up in consultation with company registrars and intermediaries who will have to apply the tax. The rules seek to ensure that the relevant tax will be deducted and returned to Revenue while at the same time applying a system that takes account of the commercial realities and practical issues involved in the payment of dividends and distributions by or on behalf of companies in the State.
The Bill provides that, in the case of Irish resident shareholders, dividend withholding tax deducted in a year of assessment can be set against the shareholder's tax liability for that year – the shareholder will be taxed on the gross dividend at his or her marginal rate and will get a credit for the tax withheld. Where the tax withheld exceeds that liability, the excess can be repaid to the taxpayer. A person who is not liable to tax and who has been charged withholding tax will thus be entitled to a full refund of the tax withheld.
Sections 42 to 46 extend the termination dates for a number of tax relief schemes aimed at developing particular areas or locations in the State. These are the urban renewal scheme, the Temple Bar area scheme, multi-storey carparks, the seaside resorts scheme and islands reliefs. In particular, following agreement with the EU Commission, section 42 will extend capital allowances in the Customs House Docks area from the scheduled termination date of 24 January 1999 up to 31 December 1999 and in certain cases, where work on a project is well advanced at that latter date, the extension will run until 30 June 2000. This will allow the remaining development of the area and the 12 acre extension to the area to be completed.
There has been considerable reporting of our recent exchanges with the European Commission in the matter of State aids. While the Commission has opened a procedure under State aids rules to investigate the application of double rent relief and rates reliefs since 1993 in the area concerned, I believe we can defend this successfully and get a favourable outcome. These matters have to be negotiated in the same way as the approval for the extension of the capital allowances was secured.
My Department has been active in pursuing these issues as constructively as possible with the Commission. We have held detailed discussions with the interested developers here to keep them fully in the picture. We have in the last few weeks sent a very comprehensive response to the Commission regarding the applicability of the double rent and rates reliefs in the Custom House Docks area. We also sent a detailed response to the Commission in connection with commercial tax reliefs under the new urban and rural renewal schemes yet to be brought into force.
Approval for State aids must be sought and secured from the Commission under Article 92 of the Treaty. These rules apply in the same manner to all member states, and Ireland is not being singled out. As Senators will appreciate, the Commission has complete discretion in the grant or refusal of State aid approval. It is not a matter for the Council of Ministers.
The Commission has become increasingly vigilant and proactive where State aids take the form of tax relief. It produced new State aids guidelines in this regard which it published last November, setting out its approach to and policy in regard to special tax reliefs and reductions. It has indicated that it will be monitoring from a State aids point of view those tax relief measures notified by all the member states under the EU code of conduct on harmful tax competition. However, I should stress that our proposed single rate of corporation tax and the phasing out of our 10 per cent regime for manufacturing, the IFSC and Shannon have State aid clearance under the agreement between the Commission and the Irish Government last July.
The Commission has not regarded tax reliefs for residential development as requiring State aid approval and, accordingly, I brought in these reliefs for rented accommodation in the case of rural renewal last June, and the various residential reliefs in the case of the new urban renewal scheme will be commenced shortly by way of ministerial orders.
Section 44 provides for a further extension of the scheme for the granting of capital allowances for the construction of multi-storey car parks. It is being extended to 31 December 2000, where 15 per cent of the cost of the car park is incurred by 30 June 1999, except in the case of car parks within the Cork Corporation and Dublin Corporation jurisdictions. The deadline for entering into qualifying leases for double rent relief in respect of multi-storey car parks is also being extended from 31 July 1998 to end June 1999, where 15 per cent of the total cost of the project was incurred before 1 July 1998. The capital allowances for car parks where the double rent allowance is no longer available is increased from the current maximum of 50 per cent to 100 per cent with effect from 1 August 1998. Where the double rent allowance is available on foot of qualifying leases entered into after 31 July 1998, the maximum capital allowances remain at 50 per cent.
In relation to the pilot rural renewal scheme, I am proposing a number of changes in section 47 to enhance the residential tax reliefs in particular. The main changes involve the granting of a relief in respect of expenditure, incurred by an individual in the period 6 April 1999 to 31 December 2001 on the construction or refurbishment of owner-occupied residential accommodation in a qualifying rural area. The relief consists of an annual deduction from total income for tax purposes of an amount equal to 5 per cent in the case of construction expenditure and, in the case of refurbishment expenditure, 10 per cent of the expenditure incurred. The individual incurring the expenditure must be the first owner and occupier of the dwelling after the expenditure has been incurred. The relief available under the section may be claimed in each of the first ten years of the life of the dwelling following construction or refurbishment provided that the dwelling is the sole or main residence of the individual. To qualify, a building must have a minimum area of 38 square metres and a maximum of 210 square metres.
In addition, I propose changes in relation to the "section 23" relief for rented residential accommodation in the area. At present, in order to qualify for the "section 23" allowances available under the rural renewal scheme, the lease of the property in question must be for a minimum period of one year. This minimum period is now being reduced to three months. In order to qualify for those allowances, the premises were restricted to a maximum floor area of 125 square metres. This limit is now being increased to 140 square metres for newly constructed premises while, in the case of converted and refurbished property, the maximum rises to 150 square metres.
I see these extensions as a major fillip to the scheme and a clear incentive to investors to invest in the development of the areas in Leitrim, Longford, Cavan, Sligo and Roscommon covered by the scheme. I know that other areas wish to benefit from such schemes, but let us see how this focused pilot scheme works out first.
Sections 48, 49 and 50 provide for the new capital allowances for expenditure on private convalescent facilities and on employer based child care facilities and the granting of "section 23" relief for third level student accommodation. I accept that these new tax reliefs may run counter to the general policy aim of reducing the range of reliefs and widening the tax base. Nonetheless, if there are clear and desirable social objectives to be secured – as is the case in health, child care and housing – we should be prepared to use tax reliefs in a targeted and prudent manner to achieve these aims.
Section 51 is a similar type relief under section 843 of the Taxes Consolidation Act, 1997, to encourage private investment in the provision of third level buildings by providing capital allowances to investors who put up 50 per cent of the funds. This relief was introduced in 1997 and is a forerunner of a broader public private partnership approach to infrastructural development which I plan to develop on a broad front.