The Finance Bill 2003 implements the tax changes announced in the budget last December and includes a range of other measures, many of which are targeted at closing off tax loopholes and updating and modernising the tax system. This year's Bill has 171 sections and I propose to give an outline of the main provisions.
Part 1 of the Bill which covers sections 1 to 72 deals with income tax, corporation tax and capital gains tax. In my period in office the income tax burden has been reduced significantly. The average tax paid, including PRSI and levies, by a single person on the average industrial wage has fallen from 28% in 1997 to 17% today. In 1997 a single employed person on the equivalent of €98 per week was liable for tax. Following this year's budget the figure is €223 per week, an increase of 128%.
Some 380,000 persons or 25% of income earners were exempt from tax in 1997. Following this year's budget, the corresponding figures are 618,000 persons or 36% of income earners. This increase of over 40% in the numbers of exempt earners is even more impressive when one remembers that both the workforce and the numbers on the tax record have grown substantially over the last six years. Before the Government took office in 1997, a single person with an income above €17,270 became liable to tax at the top tax rate. Currently, the standard rate band for a single person stands at €28,000 per annum – higher than the average industrial wage.
This lowering of the income tax burden has rewarded both employees and employers alike and contributed to our strong employment growth. However, the circumstances we now face limit the scope for further major reductions in the direct tax burden. Instead we face a period of consolidation. The more limited resources available this year in respect of the budget income tax package are being targeted at those in the lower income brackets and the elderly. When the statutory minimum wage came into effect in April 2000, less than 64% of the minimum wage was exempt from tax in the case of a single person. On foot of the tax measures I took in budget 2002, 90% of the minimum wage became exempt from tax. I am pleased to confirm that section 3 provides for an increase in the employee tax credit which maintains the figure of 90%, even taking account of the increase in the minimum wage in October 2002 to €6.35 per hour. It also increases the entry point to the tax system for all employees from €209 to €223 per week.
My other priority this year in relation to the income tax package was to assist the elderly. This is in line with the goal I set myself when I took this job of removing large numbers of elderly taxpayers from the tax net. Section 2 increases the exemption limits from income tax for persons aged 65 years and over to €15,000 for a single person and €30,000 for a married couple – this represents an increase of over 15%. When combined with changes last year, the limits have increased in value by almost 40% over the last two years.
Section 6 provides for the direct application of PAYE to the currently taxable benefits-in-kind. This will facilitate the application of PRSI, including the training and health contribution levies, to such benefits. From next year, employers will deduct and pay over to the Revenue the appropriate PAYE income tax and PRSI and levies from wages paid to employees at the same time as the benefit is being provided. While income tax has always applied to these benefits, hitherto they have not been subject to PRSI and levies. Application of PRSI and levies to benefits-in-kind is the norm in most EU countries. Share options are not being included in this treatment because of practical issues that apply specifically in their case but revised procedures for their taxation are being introduced in section 8.
As part of this initiative, section 6 also provides for a major simplification of the calculation of the benefit-in-kind taxable charge in respect of cars and vans. Senators will be aware of my record of introducing simplification into the tax code wherever possible. From next January, a simple five rate structure will apply to cars, replacing the current system where up to 17 different percentages and categories can apply. Many thousands of those paying BIK on cars and vans will see their BIK income tax charge reduce as a result.
Sections 7 and 8 deal with the tax treatment of share options under unapproved share option schemes. I am making a number of changes to ensure that in future the income tax liability is settled at the time the share options are exercised, while providing some relieving measures for those persons currently in difficulty where the tax charge on their share options exceeds the value of the shares. The seven year deferral facility introduced in 2000 is being abolished in the case of options exercised after enactment of the Bill. From 30 June this year a person exercising share options must pay the tax due within 30 days. The tax payment will be taken into account in calculating the person's final liability to income tax for the tax year concerned.
By way of concession to taxpayers whose income tax liability may be higher than the value of the shares, such taxpayers will have the choice of making a payment on account capped at the value of the shares. The balance of income tax will become due for payment where the taxpayer makes a gain on the disposal of these or other shares. This provision applies where the options were exercised before or on 6 February 2003. If a taxpayer wishes to avail of this provision, he or she must notify the Revenue Commissioners by 1 June this year.
Section 9 gives effect to the increase in mortgage tax relief available to first-time buyers. The current annual ceiling on the amount of interest that can be allowed is being raised by over one quarter from €3,175 for a single person and €6,350 for a married couple to €4,000 and €8,000, respectively. In addition, the period for which the relief is available will be extended from the current five years to seven years in all. Some 45,000 first-time buyers will benefit from these changes.
Maintaining a broad tax base with low tax rates has contributed successfully to our economic development and strong employment growth. In order to protect the tax base it is essential that tax avoidance schemes and loopholes are tackled vigorously when they come to attention. By tax avoidance schemes, I mean the unintended use of certain tax provisions. These should not be confused with specific tax incentive schemes introduced to encourage certain investments or behaviour. I have a proven record in tackling tax avoidance schemes and closing loopholes. A range of provisions throughout the Bill are designed to put a stop to such schemes or tighten legislation to ensure reliefs are focused on the intended objectives.
Section 12 is designed to counter schemes whereby tax reliefs available to a trading company are transferred to individuals who, although nominally trading, are in practice passive investors. The effect of the section is to ring-fence the tax reliefs arising from certain specified trades carried on by an individual in a passive way to the actual income arising to the individual from that trade.
Section 13 closes a loophole in regard to the transfer of capital allowances on buildings from companies to individual investors. Where a building in respect of which a company has claimed capital allowances is sold to individual investors, those investors will only be entitled to set the capital allowances related to the building against their rental income from the building concerned, rather than against a wider range of income, as is currently the case. It has since come to my attention that the same effect can be achieved by using borrowings and an intermediary company. I issued a press release last week announcing that I would have a provision in next year's Finance Bill closing off this possibility from the date of the press release. I also intend to close off any other variant of this scheme that comes to my attention in the meantime.
Section 14 makes a number of changes to the tax regime governing various pension products. In summary, the main items provided for include the alignment of contribution limits for personal retirement savings accounts or PRSAs with those applicable to other personal pensions and occupational schemes; the abolition of the facility to obtain excessive tax relief by making last minute additional contributions just prior to retirement; and new rules that will prevent approved retirement funds being used for investment in assets or property for private or family business use, for example, the purchase of a holiday home by the fund for personal use.
Section 15 provides for a number of changes to ensure the BES and seed capital schemes continue to apply as intended. The schemes are due to expire at the end of this year and I will be reviewing them before next year's budget. Section 16, another anti-avoidance measure, counters contrived arrangements between spouses in relation to mortgage interest relief for investors.
The question of repayments of overpaid tax and the application of interest to such repayments has been the subject of considerable discussion in recent times arising from the Ombudsman's report entitled, Redress for Taxpayers, on this issue last November. The provisions in existing legislation have grown over time for different purposes and vary both within and across tax heads. At present there is no general right of repayment of tax or general entitlement to interest. In reviewing this issue I considered it essential that a new general provision be introduced which was coherent across different taxes and situations. It is also essential, as I indicated in my response to the Ombudsman's report, that whatever scheme is put in place should take account of the potential Exchequer costs of any new general scheme. I consider the proposals in the Bill represent a balanced approach to these objectives.
Section 17, with other sections of the Bill, provides for a general right of repayment of tax in relation to valid claims made within a four year period. These replace existing provisions on repayments where they are in place. This will apply across all tax heads, except customs duties which are a direct EU tax. The right of the Revenue to make assessments to tax and pursue inquires will also be limited to four years unless it has grounds to suspect fraud or negligence for earlier years.
These sections also provide for a new general entitlement to interest on overpaid taxes. This provision will apply from six months after the date on which the claim is made by the taxpayer. However, where the Revenue misconstrues the law, interest will be paid in general from the date the excess tax was paid, subject to the overall time limit on repayments of four years. This new scheme will replace all other existing arrangements, including those provisions dealing with interest paid on refunds of overpayments of preliminary tax. The rate of simple interest on repaid tax is being reduced from 0.0161% per day to 0.011% per day or from approximately 6% to 4% per annum. Such interest is tax free. These measures provide a fair and transparent scheme for the refund of overpaid taxes and interest on such refunds in the future. They also address the issue raised by the Ombudsman in relation to the need for a general scheme. All these provisions are subject to a ministerial order and will come into effect after the orders are signed.
While I am on the topic, I refer to section 166 which provides the Revenue Commissioners with statutory authority to make on a discretionary basis payments for loss of purchasing power to those widows affected by the High Court decision in the case of O'Coindealbhain v. O'Carroll. The Revenue Commissioners will make these payments by reference to the consumer price index, as recommended by the Ombudsman. To complement the statutory provision for widows made in this section and complete the implementation of the recommendations set out in the Ombudsman's report, the Revenue Commissioners will make payments in respect of loss of purchasing power to ten other taxpayers to whom the report refers. These payments will be made by the Revenue Commissioners wholly on an exceptional ex gratia basis to the ten taxpayers concerned and no others. The provisions in section 166 and these ex gratia payments are intended to deal with the cases raised by the Ombudsman only. The general scheme of interest and repayments provided for in the Bill is prospective.
Sections 18 and 19 provide for an extension until 31 December 2004 of the existing schemes of stock relief for farmers in general and for certain young trained farmers. A commencement order will apply to the young trained farmer scheme given potential EU state aid implications. Section 20 provides for a tightening of the type of capital expenditure covered by capital allowances for the purchase of transmission capacity rights.
Section 21 relates to tax relief on donations. It provides for a maximum limit on the amount of donations that can attract tax relief where the donation is made by an individual directly associated with the organisation, for example, an employee or certain members of the body. In these cases, where the aggregate of donations in a year of assessment is in excess of 10% of the individual's total income, the excess will not attract tax relief. Tax relief for donations in all other situations will continue as currently without any ceiling.
Section 23 gives effect to the increase from five years to eight in the write-off period for allowances for capital expenditure incurred since budget day on plant and machinery. As I indicated in my Budget Statement, I consider it appropriate in present circumstances to seek an equitable balance in raising revenue from all sectors of the community. This is one of the measures which will raise revenue from the business sector.
Section 24 extends the current scheme of capital allowances for buildings used as private hospitals to hospitals providing certain acute services on a day case basis. The main change made to the provision is that, in the case of a day case hospital, the minimum bed requirement is being reduced to 40 beds from the 70 bed requirement that applies generally. As this extension has been the subject of some public debate, I want to outline how it arose. In the Finance Act 2001 I introduced a scheme to encourage the development of private hospitals. This followed a similar relief to encourage the development of private nursing homes. The scheme had a range of conditions about the services to be provided, the number of beds, etc. to ensure only genuine hospitals qualified as well as providing for conditions such as discounts for public patients. The minimum bed requirement was reduced in last year's Finance Act from 100 to 70.
I was approached towards the end of last year by a constituent who indicated concern that the conditions as set out in the legislation militated against day case hospitals. I asked my officials to meet the persons concerned and examine the issue. In the event the meeting did not take place until towards the end of February and the change to the scheme was made by way of Report Stage amendment to the Bill, though signalled on Committee Stage. I made it clear in the Dáil that the issue came to my attention because of an approach from an individual constituent. I considered there was a very good case for making the change and I would have been of this view no matter who brought it to my attention. The relief was intended to apply to all private hospitals. There was no intention when introduced of excluding day-case hospitals. It is not unusual that the terms and conditions of reliefs are adjusted in the light of experience and of issues brought to my or my Department's attention by promoters of individual projects.
Section 25 provides for the reduction of the annual rate of write-off for capital expenditure incurred on hotel buildings to 4 % per annum, while the annual capital allowances for holiday cottages are being abolished. Subject to transitional arrangements, both these amendments apply to construction or refurbishment expenditure incurred on or after budget day. The transitional arrangements provide that these changes will not apply to such capital expenditure incurred by 31 December 2004 if a full and valid planning application is received by the relevant planning authority by the end of May 2003. These new dates should cater for the vast majority of cases that have been brought to my attention since the budget.
Section 26 sets out the expiry dates for a number of tax incentive schemes. Those affected are the urban renewal scheme, the town renewal scheme, the park and ride scheme and the student accommodation scheme. Sections 27 to 30 make various minor changes to these schemes. I have always held the view that targeted, well designed tax incentive schemes can be a useful instrument in achieving desirable public policy objectives. As I said earlier, these are very different from unintended uses of the tax system through tax loopholes and avoidance schemes. However the value of such incentive schemes must be balanced against the important objective of ensuring a wide tax base if we are to maintain low rates. It must be borne in mind that such schemes usually also mean that higher earners can reduce their tax bill substantially.
Given the current and prospective budget situation and the objective of broadening the tax base, I consider it necessary to finish the schemes mentioned, and some others, by the end of next year. I will be keeping all tax expenditures and incentive schemes under review. This is not to say that I will not consider introducing tax incentives where I see the potential benefits as outweighing the other factors I mentioned. The extension of capital allowances to the construction of hospitals providing acute hospital services on a day-case basis is one such example.
Section 32 closes off a loophole relating to tax avoidance schemes involving contrived financial arrangements in relation to a relief available to lessors in respect of capital expenditure incurred on the provision of student accommodation. This section requires, among other restrictions, that any loan involved for the lessor must be taken directly from a financial institution instead of from the third level college. Section 33 tightens up the arrangements for relevant contracts tax.
All tax incentives and reliefs are subject to ongoing review. In the case of some of these incentives, there are no legislative provisions regarding a return of the exempt income or gains. The relevant legislation is now being changed in section 35 to provide for the return to Revenue of the details of the exempt income or gains, as well as losses, arising in connection with three of these tax incentives, namely, the exemptions for stallion fees, profits from forestry and greyhound stud fees. This will enable a further assessment to be carried out of the actual costs and benefits involved in these three reliefs. The legislative change will come into effect at the commencement of the next tax year, 1 January 2004.
Section 36 closes a loophole, under which the sale by an individual to a company of a rent roll from a building can facilitate tax avoidance. This loophole has been used to seek a situation where, through the sale of the rent-roll to a financial institution, the rental income that should be charged at the 42% rate of income tax is charged instead to corporation tax at the 12.5% rate.
Section 38 permits the Government to enter into tax information exchange agreements with the governments of other jurisdictions. Double taxation treaties already provide for exchange of information but this section facilitates agreements with any jurisdiction specifically on exchange of information.
Section 42 provides for the introduction of a pay and file system for corporation tax. This will require a company to submit the balance of tax within nine months after the end of the accounting period in question. This will align the corporation tax return filing and final payment deadlines.
I recently established the National Development Finance Agency to assist in providing cost effective finance for public investment projects by advising State authorities on the optimal means of financing and, in some circumstances, providing finance or forming companies to secure finance. Sections 43, 72 and 139 confer exemptions from tax on the NDFA in the performance of its statutory functions.
Sections 44, 46 and 47 are further anti-avoidance provisions. Section 47 is designed to counter tax avoidance schemes involving a balancing charge, that is, a clawback of capital allowances, arising following the disposal of machinery or plant. These schemes seek to avoid the charge or to pass the balancing charge arising from an individual to a company, which would be taxable at a lower rate.
Our capital city has become a significant player in international securitisation transactions and it is important that we continue to compete successfully for this business. In order to achieve this, Irish tax law must keep pace with international developments. Securitisation involves the creation of tradable securities, traditionally from existing assets or future income streams. It is used to raise finance in a manner more efficient than traditional borrowing. By its nature the securitisation business is constantly evolving and producing more sophisticated transactions. Section 48 updates our tax regime in order to bring more of this high-value business to Ireland. Accordingly, the overall effect of these changes is to greatly increase the types of financial assets which can be securitised.
Section 31 on dealing in securities and section 37 on matching foreign exchange gains and losses on certain assets are also targeted at facilitating a strong international financial services industry. Ireland has also become a successful international centre for fund management. A feature of this sector in Ireland is that a high proportion of the business is fund administration. Our strategy is to build on this by encouraging more fund promoters to locate their investment management function here, in addition to their fund administration operations. In this regard, section 51 removes a technical obstacle to achieving this goal by providing that a tax liability on a foreign fund will not arise solely because of the activity of the Irish agent acting on its behalf.
Section 62 amends the scheme of tonnage tax for shipping companies introduced in the Finance Act 2002 to conform to EU requirements. Tonnage tax is a scheme whereby, as an alternative to charging corporation tax on certain profits of a qualifying shipping company, a tax charge is levied each year instead on the tonnage of the ships operated by the company. The amendments to the scheme include confining the tonnage tax regime to profits derived from shipping activities and a requirement for separate accounting where a company engages in tonnage tax activities and other activities.
Sections 65, 66 and 67 make significant changes to the capital gains tax regime to remove some relieving provisions which I feel are less necessary now that the tax rate is set at 20%. These changes will also spread the burden of the revenue-raising measures needed in the current budgetary situation. Section 65 gives effect to my budget announcement that indexation relief will not apply for years after 2002. Section 66 removes the facility to defer capital gains tax by the issue of debentures, loan stock or other similar securities.
Section 67 abolishes roll-over relief. This relief allowed for the indefinite deferral of a capital gains tax charge on gains accruing on the disposal of certain assets where the proceeds were reinvested in certain other assets. This change is effective for all disposals from 4 December 2002 onwards. In some cases, the tax has been rolled over on several occasions, and in some cases gains realised over 20 years ago remain untaxed. With a low CGT rate now firmly in place, it is an opportune time to widen the base to ensure all pay tax on their gains when they are realised.
Certain tax rules, which, at present, allow individuals to avoid a capital gains tax charge by selling assets during a period of temporary residence abroad, are being changed. Section 69 accordingly imposes a capital gains tax charge in such circumstances. Section 70 ensures that a person receiving a payment under a non-competition agreement is liable to tax.
Section 72 adds certain persons to the list of those who are entitled to exemption from capital gains tax. These additions are sports bodies and registered trade unions, subject to certain conditions being fulfilled. This is consistent with the income tax exemptions already available to such bodies.
Sections 73 to 86 relate to alcohol products tax and include provisions to consolidate and modernise excise legislation covering the various alcohol products in order to make it more accessible to users. The opportunity is also being taken to streamline existing provisions and to make some minor changes in the area of offences. Sections 87 to 90 are restatements of existing provisions on foot of the consolidation and modernisation of existing legislation.
Section 91 confirms the budget night increase in the rates of excise duty on auto diesel which, when VAT is included, amounts to 3 cent per litre. Section 92 confirms the budget night increase in the main rate of excise duty on spirits which, when VAT is included, amounts to 20 cent on a standard measure. The lower rate of duty which had applied to low strength spirit alcopop drinks is also abolished.
Section 93 provides for an updated offence of selling, delivering or keeping for sale any spirits on which excise duty has not been paid. It also provides for a presumption in any proceedings for an offence involving counterfeit spirits that excise duty has not been paid on those spirits.
Section 96 confirms the budget night increase in the rate of duty on cigarettes which, when VAT is included, amounts to 50 cent on a typical packet of 20 with pro rata increases in respect of other tobacco products.
Sections 101 and 106 make an amendment to the definition of crew cabs for VRT proposes. Such cabs have the capacity to act as domestic and commercial work vehicles. This will ensure smaller domestic type crew cabs, currently classified as category C vehicles and liable for flat VRT of €50, will be reclassified as category B vehicles liable for VRT of 13.3%. The Bill also includes an amendment to the definition of "pick-ups" to ensure certain genuine, small pick-up trucks will continue to be correctly classified as category C, not category B. Section 103 confirms the budget change whereby the 30% VRT rate will apply to vehicles exceeding 1900cc.
The electronic commerce directive provides for changes in the rules concerning business to business on-line supplies, new rules regarding on-line supplies of services for private customers in the European Union from outside the Union and a special scheme for such non-EU suppliers where supplies are made to private consumers. A series of sections in this part of the Bill transpose the directive.
The VAT invoicing directive aims to simplify, modernise and harmonise the conditions laid down for VAT invoicing and remove barriers to electronic storage and transmission of invoices across the European Union. The Revenue Commissioners have issued regulations which partially give effect to the directive. However, it is necessary to transpose the remainder in section 122 and follow-on regulations.
Three changes are proposed to the VAT treatment of property. Last year's Finance Act introduced the concept of economic value into VAT law. Economic value means the cost of acquisition and development of a property and identifies the full amount on which the developer claims input VAT in respect of the development of a property. This concept was introduced to prevent avoidance schemes. Section 114 ensures the meaning of "development" in the definition of economic value includes expenditure such as architects' and other professional fees.
Short-term letting of property is usually exempt from VAT. It is possible, however, to waive the exemption on short-term letting and charge VAT at the standard rate. In some cases, prior to short-term letting, individuals will have claimed input VAT on the development of the property with the intention of entering into long-term leases which did not materialise. The change in section 117 allows the Revenue to take this into account when calculating what the taxpayer needs to pay if he or she then cancels the waiver. Section 121 creates a requirement to maintain records as long as the property is in the VAT net and for six years thereafter.
Sections 140 and 143 confirm various increases to stamp duty on credit and other cards, cheques and non-residential property. Section 141 gives effect to the announcement on budget day that a specific contribution to the Exchequer is to be obtained from the financial sector for the three year period 2003 to 2005. The targeted contribution is €100 million per annum for each of the three years. The required amount for 2003 is to be obtained from each relevant financial institution or group by way of a special stamp duty of 50% of the amount of the tax payable on deposit interest by it to the Revenue in the calendar year 2001, excluding any arrears relating to earlier years. This charge is subject to an upper limit of 0.15% of the institution's or group's average deposits from Irish residents in 2001.
Part 5 of the Bill deals with a number of changes to the capital acquisitions tax code. Section 146 makes changes to the general administration of CAT and will facilitate swifter processing of gift and inheritance tax returns. The new measures already apply to other taxes and the changes mean that in the future the system of self-assessment for CAT will be more like the system that currently operates for the other self-assessed taxes. In addition, the changes are an essential element in the Revenue's soon-to-be launched on-line filing facility for CAT returns.
Section 149 provides that with effect from 1 January 2003 the annual small gifts exemption is increased from €1,270 to €3,000. Sections 157 to 162 deal with Revenue powers and administration. Section 160 increases the maximum fine for summary offences from €1,900 to €3,000. Section 161 contains a number of provisions to facilitate the investigation and successful prosecution of revenue offences. It is proposed to allow for the creation of certain evidential presumptions in relation to proof of books, records etc in court proceedings for tax evasion cases. A provision is also included creating an offence of falsifying, concealing or destroying documents relating to a Revenue investigation. A judge hearing a trial on indictment will now be able to make information available to the jury to assist it in its deliberations. Such information would include charts, transcripts, summary information etc. Section 162 allows unpaid penalties to be pursued in the District and Circuit Courts as well as the High Court.
Revenue powers have been significantly enhanced in recent years. There is a need to take regular stock of the remit of such powers to assure the Government and the public at large that these powers are meeting the needs of the taxation system and being used as the Oireachtas intended. The opportunity now presents itself to perform a stock-taking exercise to ensure the current balance and strategic direction are correct. Accordingly, I have recently established a high level group chaired by former Supreme Court judge, Mr. Justice Frank Murphy, to examine the current provisions and make recommendations for any changes considered necessary.
Section 164 is an enabling provision that will allow the Revenue Commissioners to oblige certain categories of taxpayer to file returns and pay tax electronically. There are considerable benefits from electronic interaction with the Revenue but I consider it desirable that the move to electronic filing and payment be achieved to the greatest extent possible on a voluntary basis. Save in exceptional circumstances, I do not envisage bringing the new provisions which are subject to a commencement order into effect until further consultation has taken place with practitioners and there is a fuller understanding of the reasons more voluntary use is not being made of electronic filing for certain taxes or categories of taxpayers.
As Minister for Finance, I have managed in successive budgets and Finance Bills to create a low tax rate environment across all taxheads. It is a position from which the economy has thrived. Despite the need to increase revenue yield this year, I have stuck to my core belief that the best direct tax rates are low tax rates. However, if we want low rates, we must also secure a wide tax base to fund this policy. This Finance Bill is designed to consolidate our position going forward. I commend it to the Seanad.