The Finance Bill 2008 contains the legislative proposals required to implement the tax changes announced by the Tánaiste 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 principal aims of this Bill are to support enterprise, innovation and employment, to advance sustainable development and to ensure a fairer tax system. In so far as supporting enterprise, innovation and employment is concerned, the Bill seeks to build on measures to assist small business introduced in budget 2008, including a number of business-friendly measures such as revised preliminary tax payment arrangements for corporation tax aimed at small and start-up companies; an increase in VAT registration thresholds for small business to €37,500 in respect of services and €75,000 in respect of goods; and the extension of film relief for another four years to the end of 2012 with an increase in the cap on eligible expenditure from €35 million to €50 million per project.
The Bill further enhances the existing research and development tax credit scheme by extending the current base year of 2003 for a further four years to 2013, an increase on the current six years. The change will provide an additional incentive for increased expenditure on research and development in future years and help to achieve the targets set out in the Strategy for Science, Technology and Innovation 2006-2013.
In so far as advancing sustainable development is concerned, practical measures to help protect our environment are necessary and a number of new measures are being introduced in this area. The new tax initiative for energy efficient equipment will allow companies to claim the full cost, in the year of purchase, of specified energy efficient equipment against their taxable income. The purpose is to assist in improving cost competitiveness while helping to reduce overall energy demand and carbon emissions. The incentive is a pump-priming exercise for a period of three years. Companies should embrace the economic benefits of investing in energy-saving equipment.
The Finance Bill provides for the most fundamental reform of the Vehicle Registration System, VRT, since its inception in 1993. It will provide people with the opportunity to make choices to help the environment and with financial incentives to do so. The VRT system is being revised to take greater account of CO2 emissions with VRT exemption for electric cars and up to €2,500 VRT relief for certain hybrid and flexible fuel cars.
Our income tax system is now fairer, friendlier and more progressive. The protection of more vulnerable groups must remain a priority when reviewing the income tax code and the Bill includes various improvements for such groups. It provides for increasing the personal credits and bands to ensure low income earners remain outside the standard rate band and average earners remain outside the higher rate band. It also provides for a further increase in the ceilings up to which first-time buyers can claim mortgage interest relief and for increases in rent relief.
Tax credits relating to those in special circumstances, namely, lone parents, widowed persons and widowed parents, the elderly and those caring for persons with a disability have increased very significantly in recent budgets. This Finance Bill makes further improvements in this regard. Age exemption limits have increased by 85% in the past seven years compared with inflation over the same period of 27%.
It is estimated that approximately 1% of top income earners, those with income over €200,000, will account for approximately 25% of the income tax take in 2008 compared with less than 15% in 1997. The most recent data from the OECD for 2006 indicates that for a single worker on average earnings Ireland continues to have the lowest tax wedge in the EU and one of the lowest in the entire OECD. These are the hallmarks of a fair tax system.
The Bill contains 144 sections and eight Schedules and is structured by taxheads. I will outline some of its main provisions, listen carefully to Senators' contributions and try to respond to the points made when I come to reply to the debate.
The various income tax measures and reliefs announced in the budget are dealt with in sections 2 to 4. These measures widen the tax bands and increase various credits including, the basic personal credit, employee tax credit and the home carer credit. Significant increases in the value of other personal credits and the age exemption limits, which are targeted at more vulnerable groups, underline the Government's commitment to meet the needs and welfare of those most deserving in our society. When this Bill has been enacted, the increases in the value of the credits and bands will ensure that approximately four out of five income earners continue to pay tax at no more than the standard rate and almost two out of every five income earners will remain outside the tax net entirely.
Section 6 provides for an 11% increase in rent relief in an effort to address the cost pressures on those renting homes. Section 7 confirms the budget increases in the ceilings on mortgage interest relief for first-time buyers. The ceiling is increased from €8,000 to €10,000 for a single person and from €16,000 to €20,000 for a married couple or widowed person. This means that mortgage holders may receive extra relief of up to about €33 per month, if single, or about €66 per month, if married or widowed. This increase fulfils the commitment in this area as set out in the Government programme.
Section 11 deals with increases in the income tax exemption limit which applies to rent received under the rent-a-room scheme from €7,620 to €10,000. This increase takes account of the fact that the limit has not been increased since the scheme was introduced in 2001. The social partners have made a number of requests in respect of employee financial participation. In response to these requests, section 13 increases the aggregate maximum amount of monthly contributions that an employee can make under a certified contractual savings-related share option scheme from €320 to €500. The existing limit dates from the time the scheme was introduced in 1999. In addition, section 14 amends the rules relating to employee share ownership trusts. The change relates to instances where an ESOT takes out a loan over a period of ten years or more and lodges at least 50% of its shares as security for such loan for a minimum period of five years. In such circumstances, employees can gain access to triple the annual tax relief limit in the year the loan is paid off, in recognition of the fact that a large number of shares are not available for distribution to employees during the loan period and, thus, the employees would be unable to avail of the yearly tax free limit of €12,700 worth of shares on an annual basis. This amendment will permit the Revenue Commissioners to allow a loan period of less than ten years, on a case by case basis, where an ESOT has sufficient income, from dividends, for example, to pay off such loans earlier than expected. Section 15 is an amendment that ensures that farmers availing of tax averaging arrangements will not suffer a clawback of tax when they enter a milk production partnership.
As with all Finance Bills there are a number of measures to address tax avoidance. Section 16 is one such provision relating to convertible securities. The provision will ensure that the full value of the securities received by an employee or director will be subject to income tax. Section 18 extends the same basis of assessment to certain UK source income, as applies to income from other EU and EEA states. Section 20 is concerned with the spreading over six years of tax arising from the receipt of moneys under the scheme of aid for the restructuring of the sugar beet industry.
An income tax exemption of up to €5,000 for each eligible employee, where an employer bears the cost of retraining workers as part of a redundancy package, is provided for in section 22. Section 23 introduces provisions that restrict the use of reliefs by high income individuals which took effect from 2007. It clarifies the correct sequence of the calculations to be made in applying the measure when certain other provisions in the tax Acts are involved. The section will ensure that restriction will work as intended in such cases.
The European Commission gave state aid approval to the business expansion scheme and seed capital scheme changes in the 2007 budget. As a result, section 24 brings into primary law the amendments made to the schemes by regulations on a temporary basis last year following approval of the schemes by the European Commission. The section will also make it easier for some recycling companies to participate in the schemes.
Section 25 is a preventative measure which broadens the meaning of a contribution to an employee benefit trust to ensure that as intended by existing legislation, the employer will get a deduction for the contribution at the same time as the employees receive the benefits and no earlier.
A scheme of capital allowances for capital expenditure incurred on the construction or refurbishment of qualifying specialist palliative care units is introduced in section 26. This incentive will operate in a similar way to the existing schemes, for example, nursing homes and provision of capital allowances will be subject to a number of requirements including pre-approval from the Health Service Executive and the consent of the Minister for Health and Children. Section 27 updates legislative references in the mid-Shannon corridor tourism infrastructure investment scheme to reflect the EU state aid requirements that must be met in relation to projects and the exclusions which apply in relation to persons who may claim capital allowances under the scheme.
In order to assist capital expenditure on buildings and structures used in caravan parks and camping sites, section 28 introduces a tourism initiative to allow caravan parks and camping sites registered with Fáilte Ireland avail of capital allowances at the rate of 4% per annum for 25 years. Section 30 deals with an income tax matter relating to payments for decommissioning fishing vessels. Where a balancing charge arises as a result of claiming excess capital allowances, the charge will be spread over five years instead of the normal one year.
As a counterpart to the proposed changes to vehicle registration tax that relate it more closely to CO2 emissions, section 31 sets out the changes to the capital allowances and leasing expenses regime for business cars announced in the budget by linking the availability of capital allowances and leasing expenses to the carbon emission levels of cars. The new provisions will come into effect in respect of cars purchased or leased on or after 1 July 2008. On foot of a recently completed independent review of the film relief, section 32 extends film relief for another four years until the end of 2012 with an increase in the cap on eligible expenditure from €35 million to €50 million per project.
To support the international financial services industry in Ireland sections 36 to 39, inclusive, along with sections 119 and 120 introduce a package of measures designed to provide a competitive boost to the securitisation, funds and insurance sectors by removing impediments to the development of these businesses here. Section 40 amends the provisions granting tax relief for certain expenditure on "know-how" that is bought by a person for use in a trade carried on by the person. This relief is not available where the "know-how" is bought as part of a trade that is being acquired, or where the buyer and the seller are connected. Section 41 is a response to the OECD recommendation to prohibit a deduction for tax purposes of illegal payments made to a foreign official.
Section 42 closes a tax avoidance loophole, under which tax deferral is available when assets are moved from a company subject to corporation tax into an investment company subject to tax under the gross-roll-up taxation regime. It was never intended that provisions designed to support commercially driven business decisions would be used as a tax avoidance measure. This section ensures that capital gains tax deferral rules can apply no longer in these cases.
The tax treatment of foreign dividends will be put on the same footing from the point of view of corporation tax as the taxation of income out of which Irish-sourced dividends are paid by section 43. Up to now, foreign sourced dividends have been subject to tax at the 25% rate. This change means, in broad terms, that the 12.5% rate will apply to foreign dividends received by Irish resident companies and which are paid out of trading income and the 25% rate will apply to foreign dividends paid out of non-trading income, where the foreign dividends arise from companies in EU member states or from countries with which Ireland has a double taxation treaty.
Section 44 amends the close company surcharge rules by also providing for parity of treatment for Irish holding companies that are closed companies in respect of dividends received from their foreign and domestic subsidiaries. A new profit resource rent tax is introduced in section 45 which may apply to profits arising from a new petroleum lease which follows an exploration licence granted by the Minister for Communications, Energy and Natural Resources after 1 January 2007. Additional taxes of between 5% and 15% will apply depending on the profitability of petroleum fields. These taxes will be in addition to the 25% corporation tax rate which currently applies to profits from such activities.
To increase the incentive for companies to purchase certain energy efficient equipment, section 46 allows companies to claim the full cost, in the year of purchase, of new energy efficient equipment against their taxable income. The equipment must be included on a specified list to be drawn up by the Department of Communications, Energy and Natural Resources in consultation with the Department of Finance. The incentive is subject to clearance by the European Commission from a state aid perspective.
Section 47 confirms, among other things, the budget day announcement that the preliminary corporation tax liability threshold for treatment as a small company is being increased from €150,000 to €200,000. New or start-up companies with a corporation tax liability of €200,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period.
Section 48 amends the provisions associated with taxation issues relating to the acquisition by a company of its own shares, that is, share buy-backs. This amendment provides that costs incurred by a company in buying back its own shares are not allowed as a deduction for tax purposes.
In order to provide an additional incentive for increased expenditure on research and development in future years and more certainty to industry in relation to the tax credit scheme, section 50 enhances the existing research and development tax credit scheme with an extension of the use of the base year 2003 for a further four years to 2013. The period over which any rolled-forward base year will apply on a "look back" basis is also being extended to ten years. For example, the relevant year for 2014 will be 2004.
Section 51 provides that where an abnormal dividend is paid to a company in connection with the disposal of shares in that company, the amount of the dividend is to be treated for capital gains tax purposes as proceeds for the disposal of the shares rather than a dividend. That will mean they will be subject to capital gains tax. This is an anti-avoidance provision.
Section 53 makes technical changes to section 448 of the Taxes Consolidation Act 1997, which deals with the calculation of manufacturing relief by reducing the tax charged at the standard rate of corporation tax, which is 12.5%, on income from manufacturing by a fraction that results in an effective 10% rate of tax.
In regard to capital gains tax, section 54 makes a number of changes to the capital gains tax retirement relief provisions. It introduces a preferential scheme where an individual receives a decommissioning payment in respect of a fishing vessel. Under the existing retirement provisions, an individual must be aged at least 55 and have been in business for at least ten years. These requirements are being amended and individuals aged 45 or more who have been in business for at least six years will be able to avail of the retirement relief in respect of the decommissioning payments that will be paid under a new scheme.
A further change provides a relief to farming partnerships on the dissolution of such partnerships prior to 31 December 2013. The relief provides that a gain will not be treated as accruing in respect of a relevant partnership asset and that the asset will be treated as having been acquired at the same time and for the same consideration as when it was originally acquired by the partner subsequently disposing of the asset.
Section 55 increases the capital gains tax exemption threshold that applies on a gain arising on the disposal of a site by a parent to a child to build a house. The new threshold is €500,000. The section also clarifies that the threshold applies where both parents make a simultaneous disposal of a site to their child.
As required under the EU energy tax directive, sections 57 to 68, inclusive, provide for an excise duty on electricity. The tax will be charged to the operator who supplies the electricity to the consumer and will apply to supplies of electricity made on or after 1 October 2008. The rates of tax are set at the minimum rates specified in the directive while electricity used by households will be exempt from the new charge, as will electricity produced from renewables and combined heat and power generation. The overall cost and impact on electricity prices for business will be marginal.
Sections 69 to 81, inclusive, set out a range of changes in regard to excise duties, including a confirmation of the budget day increases in excise on tobacco and duty payable in respect of an off-licence for the sale of alcohol. The necessary legislative changes are being made to revise the vehicle registration tax, VRT, system to take greater account of carbon dioxide emissions, exempt series production electrical cars from VRT, extend the existing relief for series production hybrid and flexible fuel cars until 30 June 2008 and replace it with a VRT relief of up to €2,500 for such cars from 1 July 2008.
Arising from European Commission decisions, section 72 includes the legislative changes to withdraw the excise reliefs in respect of fuel used for public passenger transport vehicles, private pleasure flying and private pleasure navigation, and for recycled waste oil. The reliefs will be withdrawn with effect from 1 November 2008. In the case of public passenger transport vehicles, alternative mechanisms to direct Exchequer resources towards such services, subject to state aid rules, continue to be explored by the Department of Transport in conjunction with the Department of Finance.
Sections 82 to 109, inclusive, deal with VAT. Following a review and extensive consultations, sections 85, 86, 88, 91, 97, 98 and 100 contain new rules regarding the application of VAT on property transactions. The purpose of the new system is to rationalise and simplify the VAT treatment of property which has become very complicated. There is also a strong anti-avoidance dimension to the new rules to deal with increasingly aggressive avoidance schemes in regard to VAT on property. The supply of new residential property, building land and undeveloped land will remain unchanged. The new system comes into effect on 1 July 2008.
The main changes include ceasing to charge VAT on the capitalised value of leases in excess of ten years, removing old properties from the VAT net by confining the period during which VAT will apply to the supply of new properties to a maximum of five years, and making some changes to the treatment of leases. In addition, a capital goods scheme is being introduced for property transactions. This will ensure the amount of VAT deductible will be proportionate to the business use of a property over a 20-year period. The legislation also includes necessary transitional measures.
To ease the administrative burden on small businesses, sections 92, 94 and 101 confirm budget day announcements increasing the VAT registration thresholds for small businesses to €37,500 in the case of services and to €75,000 in the case of goods. These increases will take effect from 1 May 2008. A reverse charge measure is also introduced in respect of VAT on supplies made by a subcontractor to a principal contractor in the construction sector with effect from 1 September 2008. This is a simplification measure.
Section 107 provides for a reduction in the VAT rate for inputs used for the agricultural production of bio-fuels from 21% to 13.5% with effect from 1 March 2008. This section also provides for a rate reduction for non-oral contraceptive products from 21% to 13.5%.
The Revenue Commissioners intend to introduce a computer-based facility in the second quarter of 2009 which will allow a full self-service on-line process where the user can file, pay stamp duty and receive an instant stamp without Revenue requiring to see the deed in up to 90% of cases. Section 111 introduces enabling legislation to allow for the e-stamping of instruments for stamp duty purposes.
Section 115 is an anti-avoidance measure to ensure transfers of shares to a connected company, which would benefit from a stamp duty exemption, will not be exempt from stamp duty where the company buying the shares claimed intermediary relief on the transaction.
Section 117 increases the stamp duty exemption threshold that applies on the transfer of a site by a parent to a child to build a house. The new threshold is €500,000. The provisions relating to the exemption from stamp duty in respect of the transfer of loan stock are amended by section 118. The existing provision that the loan stock is redeemable within 30 years is abolished and the requirement that it is not linked to stock exchange or inflation indices is amended so that relief will not apply if it is linked in any way to an equity index.
Section 122 amends the stamp duty regime for owner-occupiers who benefit from preferential stamp duty rates so that they are liable to a claw-back of relief if they let the house in the five years after purchase. This is being reduced to two years. In addition, in respect of first-time buyers, an anti-avoidance provision is being introduced to address certain abuses that have come to light.
To support increased use of electronically based financial transactions, section 123 reduces the charges on financial cards, as announced in the budget. In addition, financial institutions will be required to make a preliminary payment of 80% of the duty payable for that year by 15 December. However, the dates on which the institutions recover the stamp duty from their customers will not change.
Section 125 amends the first Schedule to the Stamp Duties Consolidation Act, provides for the stamp duty on cheques to increase from 15 cent to 30 cent and increases to €30,000 the rent threshold below which the annual rent on a house is not chargeable to duty. This section also gives effect to the substantial reform of stamp duty announced in the budget regarding residential property. The first €125,000 of the purchase price is charged at 0%, with the balance on properties up to €1 million charged at 7%. For properties valued at more than €1 million, the excess is liable to duty at 9%. However, to ensure no one loses out on this reform, stamp duty will not be charged on houses costing no more than €127,000. This will result in a much fairer system for house buyers.
Section 131 will facilitate the donation of collections of heritage manuscripts and archival material to bodies such as the National Library, while section 132 is intended to enable the Irish Heritage Trust to complete its acquisition this year of an outstanding collection of paintings and furniture for display at Fota House. The trust already has acquired some one third of the collection in question.
It is important our tax administration is modern and efficient and that the Revenue Commissioners have the power to enforce the law. Sections 134 to 140, inclusive, introduce several measures in this area. These include allowing Revenue officers to question suspects in Garda custody for indictable revenue offences; enabling any Revenue officer to determine residency of an individual for tax purposes; obliging agents in the State in receipt of rental income on behalf of another person to report rental income from foreign properties; and increasing in the maximum fines on summary conviction for certain tax offences to €5,000. This section also includes an amendment aimed at increasing the incentive for taxpayers to use the protective notification regime by increasing the existing surcharge of 10% to 20% and reducing to two years the time in which Revenue must form an opinion that a transaction is a tax avoidance transaction where a protective notification is made.
This Bill is grounded on the financial and economic policies which continue to deliver prosperity for our people and have been responsible for the overall sound position of our economy. I hope this outline of its provisions will facilitate an informed and constructive debate.
I commend the Bill to the Seanad and I look forward to the debate.