The Finance Bill contains the legislative proposals to implement the tax changes which I announced in the budget last December. It also contains a range of other tax measures which will contribute significantly to underpinning growth in key sectors of the economy.
The measures in the Bill reflect the continued commitment of the Government to the effective and fair management of the taxation system to ensure that the benefits of our strong economic growth are enjoyed by all taxpayers, especially low and middle income earners. The Bill delivers significant improvements in the area of tax credits, allowances and bands and also cuts the top rate of income tax by 1%. We are now in the position where 846,000 people will be outside the tax net in 2007 compared with 677,000 in 2004 and just 380,000 in 1997. The tax burden for those on average incomes is less than half that of 1997 and we have one of the lowest tax takes in the world from those on low and middle incomes. It is important to appreciate these facts and to acknowledge this perspective when setting out the contents of the Bill, as I will now do.
This year's Finance Bill proposes to give effect to the announcements in the budget by increasing the personal and PAYE credits to ensure that those on the minimum wage will stay out of the tax net in 2007. It reduces the top rate of income tax to 41%. It increases the personal credits and bands to ensure that at least 80% of income earners will pay less than 20% of their income in income taxes in 2007. It doubles the ceiling on which first-time house buyers can claim mortgage interest relief. It introduces business-friendly measures aimed at small and medium-sized enterprises, including revised preliminary tax payment arrangements for corporation tax; increased VAT registration thresholds; enhancement of the tax credit scheme for research and development expenditure; and the renewal of the business expansion and seed capital schemes.
The Bill also proposes to give effect to the announcement in the budget abolishing VAT on conference related accommodation expenses to allow Irish hotels to compete more favourably on the global stage for conference business. It helps taxpayers claim certain key tax reliefs to which they are entitled by way of automatic repayments. It will also improve or extend various tax reliefs for farmers. In addition to the measures announced in budget 2007, this Bill proposes to introduce new tax arrangements for stallion stud fees with effect from 1 August 2008. It will establish a tax incentive scheme to develop tourism infrastructure in the mid-Shannon area, expand the patent income relief scheme, close a number of avoidance loopholes in different areas, abolish the minimum thresholds of €125 and €250 to allow tax relief to be claimed in respect of all qualifying health expenses, extend the scheme of capital allowances for the construction and refurbishment of qualifying residential units in registered nursing homes and exempt privately provided homecare services from VAT.
The Bill runs to 130 sections and four schedules. Today, I will outline some of the main provisions in the time available to me. I will listen carefully to the contributions of Senators and try to respond to the points they make when I come to reply to the debate.
The income tax measures and reliefs announced in the budget are dealt with in sections 2 to 4. These widen the tax bands and increase various credits, including the basic personal credit and employee tax credit, and reduce the top rate by 1%. When this Bill has been enacted, almost two out of every five income earners will have been removed from the tax net. The Bill delivers on our promise to middle income earners to ensure that 80% of all taxpayers in effect pay tax at no more than the standard rate.
Section 5 provides for a 9% increase in rent relief for individuals for rent paid for private rented accommodation which is their sole or main residence. Section 6 confirms the budget increases in the ceilings on mortgage interest relief. For first time buyers, the ceiling is doubled from €4,000 to €8,000 in the case of a single person and from €8,000 to €16,000 in the case of a married couple or a widowed person. Smaller increases for non-first time buyers are also provided for.
Section 9 will allow Revenue to credit and repay automatically reliefs to taxpayers such as age related tax credits, health expenses, tuition fees and trade union subscriptions. It also abolishes the existing minimum thresholds of €125 and €250 for claims in respect of health expenses.
Section 10 extends indefinitely the special tax exemption for unemployment benefit paid to systematic short-time workers. This previously had been renewed from year to year. Section 11 amends the provisions exempting from income tax income arising on the investment of certain compensation payments. This will exempt from tax returns from offshore funds in the same way as returns on domestic investments.
Section 12 exempts from tax the travel and subsistence expenses paid to certain members of non-commercial bodies in both the public and private sectors in respect of the attendance at meetings of such bodies. Section 14 closes off an abuse of the rent-a-room exemption scheme so that the exemption will not apply where an adult child pays the rent to a parent for staying in the parental home. Section 15 increases the childminding tax exemption limit of €10,000 per annum set in last year's budget to a new level of €15,000 per annum in order to encourage a greater uptake.
Section 16 introduces an additional threshold of relief of €20,000 per annum for qualifying long-term leases of farmland exceeding ten years duration. Section 17 amends the tax treatment of various pension products and approved retirement funds in a number of respects. The main changes are that Revenue will in future be able to approve, subject to conditions, generic pension products such as those under which single member retirement benefits are marketed without the need for individual Revenue approval for each case. An amendment to the legislation is being made to clarify that the operation of the pension fund limits is not affected as a consequence of pension adjustment orders made by the courts in circumstances of judicial separation or divorce.
Section 18 amends the provisions introduced in Finance Act 2006 to limit the use of certain tax reliefs, including certain exemptions, by some high-income individuals to ensure the restriction operates as intended. Section 19 confirms changes to the business expansion and seed capital schemes. Both schemes are being extended for a further seven years until 31 December 2013. The company limit is being increased from €1 million to €2 million, subject to a maximum of €1.5 million to be raised in a 12-month period. The investor limit is being increased from €31,750 to €150,000 in the case of the business expansion scheme and to €100,000 in the case of the seed capital scheme. These changes are subject to a commencement order being made on foot of approval by the European Commission.
Section 20 proposes a number of changes to income tax appeal provisions to provide that where a determination of the Appeal Commissioners is to be reheard by a Circuit Court judge or a case is to be stated for the opinion of the High Court, the inspector will not be obliged to amend the assessment under appeal until the appeal process has been fully completed. In such a case, a refund of tax paid or the collection of tax levied will not proceed until final judgment.
Section 21 increases from €23,000 to €24,000 the value threshold for business cars. The new threshold will apply to capital allowances and leasing charges for new and second-hand cars used in the course of a trade, profession or employment.
Sections 22 to 25 amend the tax code in respect of farmers. Certain farmers who were in receipt of FEOGA and single farm payments in the calendar year 2005 can qualify under the income averaging scheme. It also introduces a scheme for the taxation of EU restructuring aid for sugar beet growers, which will allow those in receipt of the restructuring payments to average them over a period of six years for the purposes of calculating taxable income. The 25% stock relief for farmers and the special incentive stock relief of 100% for certain young trained farmers is extended for a further two years, subject to clearance with the European Commission under state aid rules. The educational qualifications for the special 100% relief are being aligned with the rules governing the stamp duty relief for young trained farmers. The scheme of capital allowances for milk quota is being amended to ensure this relief is available for quota purchased under the new milk quota trading system.
Section 26 sets out new tax arrangements for stallion stud fees which will come into effect on 1 August 2008, with the present regime ending from 31 July 2008. The key measure in this new arrangement is the provision of a deduction for the purchase cost of the stallion which will allow the cost to be written off over a useful economic life of four years — the same broad principles as applies for other businesses. These tax arrangements are subject to clearance by the European Commission.
Section 27 amends the tax relief for donations to approved bodies to remove a number of references to the requirement that various educational bodies must be established in the State. Section 28 extends to 2010, subject to certain additional conditions, the scheme of capital allowances for the construction and refurbishment of qualifying residential units associated with registered nursing homes, which was introduced in 2002 and is due to expire on 31 July 2008.
Section 29 introduces a pilot scheme aimed at encouraging the development of tourism infrastructure in the mid-Shannon area, that is, 12 km either side of the river stretching from roughly the bottom of Lough Derg to Lough Ree. The tax relief will consist of accelerated capital allowances over seven years for qualifying construction and refurbishment expenditure incurred in the qualifying three-year period.
Section 30 relates to tax avoidance as regards unallocated partnership profits and clarifies the position that the tax-adjusted profits of a partnership, for tax purposes, must be fully apportioned between the individual partners each year. This will close off a potentially large tax loss in some major partnership firms.
Section 31 makes various amendments to relevant contract tax which applies to payments made by principal contractors to subcontractors under relevant contracts in the construction, meat processing and forestry industries aimed at reinforcing tax compliance in these areas. Sections 32 and 33 amend the current tax laws in relation to special savings incentive accounts and the pensions incentive tax credits scheme to empower Revenue to seek various information returns from SSIA managers and to require SSIA moneys invested in pension funds under the pensions incentive tax credits scheme to be held for at least one year in order to avoid a clawback of credits given under the scheme.
Section 34 provides for DIRT-free interest to be paid automatically by financial institutions to taxpayers of 65 years of age or over whose total income does not exceed the relevant income tax exemption limit. This will also apply to permanently incapacitated people in receipt of such interest in defined circumstances.
Section 35 changes the procedures that apply to give the force of Irish law to double taxation treaties. In future, such a treaty will have the force of law only after the Government has made an Order that has been approved by the Dáil and law has been enacted by the Oireachtas that inserts a reference to the Order into a new schedule that is being inserted into the Taxes Consolidation Act 1997. This section secures the position of existing double taxation agreements in Irish law by listing them in the new Schedule 24A.
In section 36, I am seeking to afford relief to persons who may suffer double taxation arising from capital gains in countries with which we have a double taxation treaty, but where the treaty itself predates the introduction of capital gains tax in Ireland. The section also removes an element of double taxation on the profits of a foreign branch or agency of an Irish company, where such a branch or agency is located in a country with which we do not have a double taxation treaty.
Section 37 removes an anomaly in the tax deductibility of share-based consideration given by a company to employees. Section 38 provides for a number of amendments to the scheme of dividend withholding tax, DWT, to deal with the introduction of electronic dividend vouchers, the
application of the general four-year time limit that applies to other tax repayments to refunds of DWT, and an extension of the existing exemption from DWT available to non-resident subsidiaries.
Section 39 amends the taxation rules on offshore funds that are created under the law of EU and EEA member states and certain OECD countries. These funds are covered by the gross roll-up taxation regime introduced in the Finance Act 2001.
Section 40 is an anti-avoidance provision which makes a number of changes to provide special rules for the taxation of personal portfolio investment undertakings concerning payments made to unit holders. This will prevent the exploitation by some wealthy individuals of the lower exit tax rate on certain investment funds.
Section 41 provides that the national pensions reserve fund and securitisation companies may receive payments from investment undertakings without the imposition of an exit tax under the gross roll-up regime. Sections 42 and 43 amend taxation procedures on life insurance policies so that the investment proceeds of all life insurance policies will become chargeable to income tax after an eight-year period.
Section 44 strengthens certain anti-avoidance provisions on the transfer of assets abroad. Section 45 amends the scheme of relief for patent income to provide an annual monetary cap of €5 million with effect from 1 January 2008. The restriction in the definition of "qualifying patent" relating to research and other activities only being carried out "in the State", is also being removed to allow for such qualifying activities to be carried out elsewhere in the European Economic Area.
Section 46 extends the application for a further three years, to 2009, of the base year 2003 expenditure on research and development against which incremental expenditure will be measured for the purpose of the R&D tax credit. In addition, expenditure by companies on sub-contracting R&D work to unconnected parties will qualify under the tax credit scheme up to a limit of 10% of qualifying R&D expenditure in any one year.
Section 47 confirms the budget day announcement that the preliminary corporation tax liability threshold for treatment as a small company is being increased from €50,000 to €150,000. New or start-up companies with a corporation tax liability of €150,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period. In addition, provisions are being introduced under which large companies in a group will be allowed to offset their preliminary tax payments between group members for the purpose of working out the adequacy of such payments for interest purposes. This will assist in minimising interest charges on the group.
Section 48 deals with group relief for companies, the provisions for which are being amended mainly to comply with a ruling of the European Court of Justice in the Marks & Spencer case on the use of foreign tax losses. Section 49 makes two technical amendments to a measure introduced in the Finance Act 2006 that allowed a company with a foreign currency asset to match that asset for tax purposes with redeemable share capital denominated in the same currency. These amendments will ensure that this legislation operates as intended.
Section 50 introduces a measure that provides an option to companies not to have interest payments made to associated companies, in countries with which we do not have a double taxation agreement, deemed as a distribution of their profits. This removes an element of double taxation in the tax code.
Section 51 extends the qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects from 31 December 2006 to 31 December 2011, subject to clearance by the European Commission from a State aid perspective.
Sections 52 to 56 amend the tax code on capital gains tax in a number of ways. Retirement relief is being amended, first, by increasing the consideration threshold from €500,000 to €750,000; second, by allowing the relief in certain circumstances where land is leased prior to disposal; third, by extending the limitless relief to a child of a deceased child of the disponer; and fourth, by extending the relief to certain intra-family transfers of farmland. The site to child relief is being amended to limit the size of the site to one acre, exclusive of the house. A technical change is being made to the exemption for sports bodies to ensure that the full value of the existing asset must be applied for approved purposes. There is a technical amendment in the offshore income gains provisions to update a reference to resident individuals. Finally, where a capital gains tax clearance is not produced on the closing of a sale, an amendment will ensure that any consideration withheld must be paid to the Revenue Commissioners within 30 days.
Parts 2 and 3 deal with indirect taxes, that is, excise and VAT. These include sections 57 to 74, inclusive, which set out a range of changes in regard to excise duties, including confirming the budget day reduction to zero of excise duty on kerosene and LPG used for heating, the increase in excise on tobacco, and the introduction of a VRT relief of 50% for electric cars. Mineral oil tax offences are being strengthened, for example, in respect of selling laundered diesel. Existing provisions on substitute fuels are being amended so that such fuels, including biofuels, will in future be taxed at the rate applicable to the fuel for which they can be substituted. The definition of "mechanically propelled vehicle" is amended to exclude vehicles that do not meet EU type approval standards for entry into service on the State's roads. Arising from the Criminal Justice Act 2006, excise duties are being adjusted or imposed concerning firearms.
In response to rulings by the European Court of Justice relating to other member states, the Bill provides that company cars driven by Irish residents on behalf of firms based outside Ireland, will be exempt from VRT subject to certain conditions. Provision is also being made for the late opening of betting shops on days on which an evening race meeting is taking place in Ireland, regardless of the time of year. Currently, late opening is allowable when daylight hours facilitate evening race meetings, that is, April through to August. This change is in response to the advent of floodlit night-time horse racing in Ireland from the latter half of the year.
Sections 75 to 98, inclusive, contain a number of important revisions to the VAT code. They confirm budget increases to the VAT registration thresholds for small businesses from €27,500 to €35,000 in the case of services and from €55,000 to €70,000 in the case of goods with effect from 1 March 2007; the increase in the threshold for the cash basis of accounting for VAT from €635,000 to €1,000,000 effective from 1 March 2007; the increase in the farmers' flat-rate VAT addition from 4.8% to 5.2% with effect from 1 January 2007; and the reduction of the VAT rate on child car-seats from 21% to 13.5% with effect from 1 May 2007.
Section 78 provides for the removal of the option for landlords to waive their right to exemption from VAT on short-term letting of residential property to remove an anomaly whereby the landlord can claim VAT on the assets of the property in year one, but the equivalent VAT on rents from the property will only be received by the Exchequer over a prolonged period. This currently acts as an unintended Exchequer subsidy to private letting.
Sections 83 and 89 provide for the deducibility of VAT on conference-related accommodation expenses from 1 July 2007 to help Irish hotels to compete more favourably for international conference business. Section 93 provides for the exemption of privately provided homecare services from VAT. Other VAT changes relate to hire purchase transactions in cases where the customer defaults on repayments and where finance houses are involved in the transactions, the taxation of certain services received by public bodies — for example, consultancy services from abroad — and the application of the open market value to certain transactions between connected parties in determining the amount on which VAT is chargeable.
Sections 99 to 111 introduce changes to the stamp duty code in order to abolish the head of charge for mortgages and other minor heads of charge, thereby simplifying the stamp duty code; amend and update the educational criteria and repayment procedure of the young trained farmer relief; and introduce a new relief for farm consolidation which allows a farmer to claim relief from stamp duty where the farmer sells and purchases farmland within 18 months of each other, in order to consolidate his or her holding. The introduction of this relief is dependent of State aid approval.
These changes to the stamp duty code will also introduce a new exemption from stamp duty for sporting bodies, which are already entitled to relief from income tax and capital gains tax, where they purchase land for the purposes of promoting games or sports; limit the transfer of a site from a parent to a child to build a house to one acre, exclusive of the house; provide for an exemption from stamp duty on certain intra-family transfers of farmland; update and facilitate the provision whereby persons who have undergone a judicial separation/divorce/nullity can claim first-time buyer relief; introduce a new relief for stock market intermediaries to better reflect modern share dealing practices; and introduce a new provision whereby certain transactions involving land would become subject to stamp duty outside of conveyance. This amendment is the subject of a commencement order.
Regarding capital acquisitions tax, sections 113 and 114 are technical amendments which arise as a result of a High Court case decided last year relating to when a discretionary trust created will come into existence. The tax will now apply from the date of appointment to the trust instead of the date of death as before.
Section 115 alters the date from which interest becomes payable in the context of a clawback of agricultural or business relief where the assets are sold within the specified period. The interest will now apply from the date the clawback arises.
Section 116 amends the dwelling house relief to provide that any period during which a beneficiary of a gift occupied a house that was during that period the disponer's only or main residence will not be treated as a period of occupation prior to the date of the gift unless the disponer is compelled, by reason of old age or infirmity, to depend on the services of the beneficiary for that period. It also ensures that the house, or any house which has replaced that house, must be owned by the disponer for the relevant three year period prior to the date of the gift. Section 117 deals with CAT agricultural relief and amends existing provisions so that an individual may off-set borrowings on an off-farm principal private residence against the property's value, for the purpose of the 80% farmer test. Section 118 provides that a clearance certificate will no longer be required for contracts dated on or after 1 February 2007 or for contracts dated before 1 February 2007 where the sale is to be completed on or after 1 February 2007.
Regarding tax administration, section 121 provides for a reduction from 6 months or 183 days to 93 days in the period which must elapse, after the receipt of a valid claim, before Revenue is required to pay interest on overpayments. Section 122 provides for a once-off increase in 2007 in the ceiling for donations to the Irish Heritage Trust from €6 million to €10 million to allow for the donation of a collection of fine Irish paintings and furniture for display in Fota House.
Section 123 amends the existing return requirements for Departments, the Health Service Executive, local authorities and similar statutory bodies regarding rent or rent subsidy so that these bodies are required to obtain the personal public service number, PPSN, of the landlord concerned. Section 124 amends the tax law to clarify and confirm the search powers of Revenue to assist in investigations with a view to prosecutions. Section 125 provides for the Crawford Art Gallery Cork Limited to be included in the list of approved bodies eligible to receive donations and Section 126 creates a new offence of impersonating a Revenue officer.
This Finance Bill, in conjunction with changes announced in the budget, demonstrates the continued commitment of the Government to pursue modern tax policies in a way that promotes economic growth, rewards work and alleviates the burden on taxpayers, especially those on lower pay. The reform of the tax structure over the last ten years has been a major driver of our economic success. The approach of keeping personal and business taxes low has served to strengthen and maintain the competitive position of the Irish economy.
The Central Statistics Office is publishing the fourth quarter and full year national accounts for 2006. These are preliminary figures but today's data shows that gross domestic product rose by 6% last year with a corresponding increase of 7.4% in gross national product. This is the strongest rate of growth since 2000, before the information technology related slowdown. These figures confirm that the economy is continuing to perform well and they exceed those expected by most commentators, including the Department of Finance.
There was an improvement in our export performance last year, mainly due to higher services exports. The performance of manufacturing exports remains more modest and highlights the need for ongoing improvements in our cost competitiveness. In terms of this year, my Department is forecasting a continuation of strong economic growth, with GDP and GNP both expected to rise by 5.3%. While the outlook is favourable we must, as a small, open economy, be cognisant of the risks to the global economic environment, such as the potential for sharp movements in the euro-dollar exchange rate. These risks highlight the need to remain competitive as well as the need for prudent management of public finances to provide room for manoeuvre in the event of difficulties arising.
Ireland's overall economic and budgetary position is now the envy of Europe. Our national debt is among the lowest in Europe, we are running a healthy budget surplus which we intend to continue if re-elected, our economy is strong and unemployment is low. Everything must be predicated on keeping our economy strong. As Minister for Finance, I have a responsibility to secure and build on the progress which has been made.
This Bill is solidly grounded on the financial and economic policies which have delivered unprecedented prosperity for our people. I hope this outline of its provisions will facilitate an informed and constructive debate in this House. I commend the Bill to the Seanad and I look forward to the debate.
