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Select Committee on Finance and General Affairs debate -
Tuesday, 25 May 1993

SECTION 18.

Amendment Nos. 69, 70 and 71 are related and may be discussed together.

I move amendment No. 69:

In page 54, paragraph (a), line 9, to delete "qualifying".

I am glad we have the opportunity to debate section 18 of the Bill. I am sure I will probably be in conflict with my socialist brother——

That is no change for the Deputy.

——particularly as the Labour Party has dropped any pretensions to interest in socialism, which I welcome. This seed capital scheme has been more interesting for its public relations than for its details. It would be easier to get six numbers on the Lotto than to qualify for this seed capital refund by tax rebate.

The first series of amendments I put forward relate to the type of company that would benefit. We must consider the entrepreneur who will leave well-paid, steady employment to mortgage his or her home, to risk everything in a venture when only three out of ten enterprises will succeed. Page 54 of the Bill sets out relevant trading operations. FÁS should be involved here. This scheme should be open to any business where there was a verifiable expansion of employment because that is where the political priorities should be. Growth in employment is taking place in the service sector as well as manufacturing and tourism.

I am trying to broaden the definition of relevant trading operations by deleting "qualifying" and saying "trading operations" means those undertaken by a relevant company issued with a certificate from either the IDA, Bord Fáilte Éireann or FÁS. FÁS already operates the employment incentive scheme and a number of employment subsidy schemes under which employers can prove they are taking on extra employees. The tax refund should apply to someone taking the risk of becoming self-employed if it is to make any impact, not just the BES companies, manufacturing or tourism. The Minister and his officials last week were asked how many people were likely to avail of this scheme and what the cost to the Exchequer would be. There were no estimates. They do not know. There may not even be 20 people interested in this scheme despite the publicity we have had about the commitment of the Minister to the entrepreneur as opposed to the position in last year's Finance Bill. The first step is to allow a wider group of companies and enterprises access to the scheme. FÁS could ensure a certificate would be granted only where the company had substantially increased employment. This amendment concurs with what entrepreneurs need and where the employment potential lies.

Tax break is an essential element for growth of an indigenous industry. This new section is different in principle from previous statements by official sources. It is a precedent for the future. Relevant tax breaks will be given to people who wish to invest and start off new businesses. The provision is too restrictive and the number of conditions could deter people with sound ideas. It could still be very helpful to people made redundant in places like Digital who would have large sums of tax deducted from their redundancy. It would give them an opportunity and an incentive to start up businesses. It is a step towards helping more indigenous industry to grow.

I do not know what I think about this provision. I am not sure anyone else knows either. It will be great if the scheme works. We must see how many will avail of the scheme. That is extremely hard to judge because there are conflicting views about the possible rate of takeup.

Whether one agrees with the scheme or not, it is designed to encourage people to start up small indigenous companies, as Deputy Michael Ahern has said. However, it seems to have been mangled by the Department of Finance. There are so many conditions one would need a tax advisor to avail of the scheme. It is said potential and merit of the scheme has been undermined by the conditions imposed on it. The Department of Finance probably believes it could not introduce such a scheme without qualifications because it would be open to all kinds of rip-offs and abuses. There are many precedents for that. That is why I am not sure.

The scheme is aimed ideally at a person in secure employment with a reasonably good salary. It invites him or her to leave that employment and take a risk. I do now know how it will work. I acknowledge the country badly needs small indigenous industries that one hopes will expand. If the scheme achieves that I am prepared to give it a chance. We must monitor it closely and see how many will avail of it. Deputy Yates represents a definite view on the scheme. Very few of the people we would like to see taking it will do so because it is so hedged with qualifications.

I take it from the remarks of some Members that the debate on section 18 has extended beyond the amendments to it. I might take advantage of this, apropos the very points made by Deputy Rabbitte, to pose one or two questions of my own to the Minister in relation to this section. I would like in particular to draw his attention——

On a point of order, it is only one section and I propose we take all of section 18 now because there are aspects to it to which I am sure Deputy Cox wants to refer.

That is agreeable.

Is that agreed? Agreed.

Are we taking all the amendments to Section 18 now?

Or the section itself?

This concerns two sets of targets, the people we wish to target and the activities we wish to target. Then, of course, there are limits introduced to prevent abuse. A great deal of engineering and targetting goes on in the process.

I would like to draw the Minister's attention to the end of page 54 and the beginning of page 55 of the Bill, where it is stated that:

‘specified individual' means an individual qualifying for relief who—

(a) exercises a relevant employment, and

(b) was not, in any of the three years or assessment immediately prior to the year of assessment in which such employment commences, in receipt of income chargeable under Case I, II or V of Schedule D which exceeded or, where he had income so chargeable under more than one such case, exceeded in the aggregate 10 per cent of his total income. . .

I want to take that particular section and tease it out for a moment. At last week's private session I asked — I presume the information is now publicly available — how many taxpayers earned the maximum income in order to qualify for this. Who paid £25,000 or more in tax in each of the recent years? I was given a figure of 63,000 cases. I will apply this figure to the extract I cited from the Bill.

Case I of Schedule D refers to all trades. Case II to all professionals and Case V to all rental income. I would estimate that if those eligible under Cases I, II and V of Schedule D were excluded, only a very small number of the original 63,000 people who were eligible would remain so. If the criterion of having to become a qualifying company with all this entails were applied, there would hardly be a citizen left who could qualify, with or without the advice of a tax consultant, which could certainly be needed.

Why should we exclude people who earn more than 10 per cent of their income from trades in which they are self-employed? Many tradespeople are the sort of people who would have the energy and incentive to undertake business ventures. The Minister's advisers obviously do not want to say this, but there are many people with brass plates outside their consultancy offices or professional practices today who will get new brass plates when this becomes law. They will transform themselves into entities to qualify for the maximum tax breaks but will do the same work as last week. This is legitimate. You have loaded this in such a way that you have almost scorched the earth in which you want to grow some of the incentives.

I do not know the number of people to which Case V refers, that is those receiving rental income. However, I do not understand why such persons are excluded if they come up with good ideas and are able to overcome the considerable obstacles which confront them. The purpose of the deletion proposed in amendment No. 77 is to seek an explanation for the exclusion of such persons. We should examine this on Report Stage because we are removing people whom we should target.

The second point is in relation to the activities we wish to encourage. The point was made by Deputy Yates and Deputy Rabbitte that most, if not all, of the incentive schemes and certainly all of the qualifying tax breaks for the 10 per cent are orientated towards people engaged in international trade. We can see why incentives have been provided in this area. If you are trading, either by way of a service that qualifies or by manufacturing, you are potentially eligible for these schemes.

I am interested in the explanation — it displays an economic perspective in keeping with the 19th century — for the exclusion of the non-manufacturing and non-internationally traded goods sector from these schemes. I know the argument has been made by the Minister that he does not want displacement, or wholesale displacement, as he terms it. There has been a willingness to examine the employment potential of services in general and not just financial services. The Minister has scorched the earth of potential incentives.

I wish to contribute again later on a specific tax matter.

Last year we implemented one of the recommendations of the Culliton report by removing concessionary taxes, exemptions and allowances and tried to tidy up a complicated system, but all hell broke loose in certain areas. We are trying both to identify and limit those areas. We explained the difficulties to the various sectors and by and large we have resolved those issues. I always feel sorry for complying taxpayers who use these exemptions and concessionary taxes properly. Unfortunately, we cannot have a case study of them all. You have to run the system in a meaningful way.

A major theme emerging from reports, including a report produced by Arthur Anderson for the Culliton industrial policy review group, is the need to provide seed capital to persons who wish to undertake business ventures, have preparatory work done but who have no equity. If they received this initial help from the State they could then avail of all other schemes such as the enterprise allowance scheme and the IDA small grant schemes. Providing such venture and seed capital does not involve helping those already in business to expand. We should possibly provide more help for such persons but this scheme is not designed to do that. The BES legislation covers many areas and it became a standard practice that the manufacturing sector, international traded services and some of the tourist related services that were knocked out in the system a few years ago. We are trying to help those areas, of which there are a huge number. The service industries which are eligible for employment grants under the Industrial Development Act, 1986, and which, therefore, qualify for the purposes of the relief are as follows: data processing services, software development services, technical and consulting services, commercial laboratory services, administrative headquarters services, research and development services, media recording services, training services, publishing services and healthcare services. The International Financial Services Centre is excluded from the new seed capital scheme.

Considering the scope of the imagination of Irish individuals to interpret and stretch these definitions, apart from the manufacturing services, I do not know if my colleagues will keep anyone out. It has been my experience over 16 years in dealing with schemes that as soon as a scheme is put in place that is not absolutely tight, people will find a way to qualify, be that by using an Irish name or otherwise. However, if that is of benefit, so much the better.

There are five steps involved and we are trying to keep it simple. There will be a section in the Revenue Commissioners that will deal with them so it will not be complicated. First, prior to leaving employment or setting up a company, application should be made to the Revenue Commissioners or the secretary of taxes, Dublin Castle, for confirmaton of the proposal as a relevant trading operation. Confirmation will include a comprehensive description or other conditions of the scheme and an application form for a refund of tax. That is all they have to do. As soon as the Bill is passed the Revenue Commissioners, in conjunction with the IDA — so we get a business document rather than someone saying it is a Revenue document — will work out the simple explanatory document. Secondly, the applicants, consult with the certifying agencies and set up the company and apply for the certificate. Thirdly, they will submit the certificate with separate applications for relief in respect of the company and they will specify the individuals, up to a maximum of six who can have 15 per cent share each, to the Secretary of Taxes. Fourthly, the details of individuals should be sent to the appropriate inspector of taxes for the examination and authorisation of refund, which is an administrative matter. Fifthly, the inspector of taxes authorises the collector general to pay the specified refund, and a copy of the refund authorisation goes to the secretary of taxes. There are only three matters the applicants deal with.

Deputy Cox has made some points I want to reply to. There were fair points which he also made on Second Stage. He asked me not to kill the scheme by being over bureaucratic and I went back and looked at that. We have excluded Case 5 of Schedule D, and amendment No. 76 increases the percentage of total income to 25 per cent. That is 25 per cent of income earned above, say, PAYE income.

That is 10 per cent increased to 25 per cent.

There is a minimum of £5,000. The other case — we may come to it again — concerns an unemployed person. I think it is in as an amendment and the issue was also raised in the Dáil, it is about an unemployed person who may not have had the benefit of being able to draw his higher refunds over the last three years because he may have been out of work for two of those. That can now be taken over a period of five years.

We have endeavoured to take account of it all because it is a new scheme. Like Deputy Rabbitte, I have listened to everyone saying that this is what is required. I have read the Arthur Andersen paper and we have put together a fairly simple scheme. I know my colleagues in Government put a lot of work into this and Minister Quinn in the Department of Employment and Enterprise put in a great amount of work talking to people to try to get people from that side to bring forward this scheme.

We have endeavoured to keep it simple and whether it works or requires amendments, or next year it requires broader areas, let us try it. There are maybe 1,000 cases costing £25 million to £35 million, but it is hard to say. All I can say is that the interest in this is great. The one per cent levy is the issue resulting in the nasty letters and it is this scheme that is resulting in genuine inquiries, and we are seriously looking at them.

I was looking for one specific tax point. The Minister has partly touched on it. It relates to section 18 (b) (ii) which was the original arrangement where one could deduct income in any one of the three years immediately prior to the year of assessment. The Minister has said he has introduced an amendment. I have many amendments in front of me so I will look at it tonight, but if I understand correctly it relates to the unemployed. Does it relate only to the unemployed?

It relates to anybody.

The point I want to make to the Minister is this, the greatest amount one can get back from this scheme whether it is over three years or five years, is if one can get as great an amount of tax over the relevant period that had been paid at the 48 per cent rate and what one is left with at the lower rate. However the formula actually works, does it allow the individual receiving the incentive to get the maximum incentive from it? In other words, can the individual, at the individual's discretion, spread the deductible amounts over whatever the relevant tax years are, three or five years in the past, such that they can maximise the amount they get back where they had paid 48 per cent tax? Or are they obliged to pick year one, whenever it is, whatever tax rate applies for that year and find that some of this is at 27 per cent, some at 48 per cent and they get less than the maximum which might have been available if they had discretion?

The reason I ask the Minister is that if this is an incentive, if one has to go through the sieve we have described about the various qualifying regulations and rules, and if finally, like the grain of sand, one gets through and qualifies, should it not be the case that the maximum incentive is given, if incentive is what this scheme is meant to be about? Furthermore, should not the discretion be given to the recipient of the incentive to maximise the net worth of this scheme over the relevant number of years, if that is five years?

I welcome some of the Minister's amendments. Amendment No. 79 referred to the same point made by Deputy Cox in relation to the 10 per cent of aggregated income. In amendment No. 84 I sought to change the three years to six years. The Minister is moving for five years. That was a direct discrimination against low paid workers because the lower one's tax was the less one could get back. It has been indicated to me that if one is in contract employment, as opposed to direct employment, one cannot benefit from this.

With regard to the procedure, if one wishes to set up in business, there is no guarantee that one could do so immediately. In other words, one may have to research the business. I know someone who set up on his own and the first thing that happened was that his former employer took out a High Court writ against him to try to stop him from setting up. Problems will arise and I would like some clarification from the Minister in relation to the procedure. The Minister said that prior approval must be obtained before leaving employment. Does this mean that someone could get caught, that they go to the Revenue Commissioners hoping to get started some time in the next year or 18 months? They are trying to get four or five others to put in some capital as well but it is impossible to have all the minute details completed in time. I welcome what the Minister has done in relation to the five year provison but he could have gone further on that.

The people who will avail of this are accountants and engineers. If one looks at the career pattern of people working with the top five accountancy firms, even managing partners, they go into business themselves and are in some of the top managerial positions. We must try to encourage them where possible. Publicans or the self-employed, for example, could be excluded. However, professionals and contract employees should be included. There should be no time limit between leaving employment and setting up the scheme to avail of this.

In relation to the seed capital scheme, how many people pay over £25,000 in income tax per annum? I welcome this scheme. Capital is badly needed for small industries. Those concerned must not tie it up in red tape, it must be made simple. There must be no confusion betweem the tax office, the Collector General's office, accountants, etc., otherwise people who wish to set up a business will become disillusioned. They will blame the Government and Deputies. We are always blamed when anything goes wrong.

Blame the Government.

It must be a simple transaction. I welcome the scheme.

Will the Revenue Commissioners and the IDA put together a booklet advertising the steps that are to be taken? What will be the disposition of the IDA, SFADCo, Údarás na Gaeltachta or the county enterprise boards when one goes to them with this cheque in one's back pocket? Are they likely to say, "you have done well. You have received £38,000 cash back"? Will we take that into account? What procedures will be in place for evaluating the merits of the project in terms of whether one qualifies for the optimum number of grants from bodies such as the IDA, county enterprise boards, etc.?

I understand the position of the Revenue Commissioner's and Department of Finance officials on this matter. A considerable amount of public money will be invested in this project. The person leading the project is requried to devote himself to it for 12 months. If one had a more understanding employer than I, one could get leave of absence for 12 months and achieve nothing.

The Deputy should take that up with his union.

One could return to one's previous employment. Deputy Connolly, a gentleman of means is having similar thoughts. I would like the Minister to reply to the point I have raised.

We welcome the innovation in relation to the seed capital ventures. In the past I expressed reservations in relation to the restrictive guidelines. I welcome the decision to loosen up some of the restraints because, as previous speakers have said we do not want to be caught up in layer of bureacuracy. As Deputy Yates said the type of activities must be broadened if we are to expand this scheme.

Will the Minister receive the massive response to this scheme which he expects? When the stipulations attached to this scheme are outlined, those writing to the Minister with ideas may lose interest when they realise what is involved.

I have already explained what we are trying to do. We are dealing with public money. We must have some criteria and set down arrangements. There is no point in setting up a scheme that individuals may misuse. However, I would be pleased if there were 1,000 takers in the first year. Traditionally we have been slow to set-up businesses; it is one of the difficulties we have in our economy.

Many people are interested in this scheme. The guidelines will be kept simple. I am anxious that the Department of Employment and Enterprise and the IDA put this scheme together. They are enthusiastic and co-operative in this regard. The scheme must be simple and easy to understand and operate. It must not be a burden on the individual or on the system. A group from the Revenue Commissioners is working on the scheme with a group from the IDA so it will be clear and marketed properly. The arrangements will be broadly similar to the procedures which have been worked out for BES companies.

Last year, and I am sure everyone will agree that it was a difficult year, over 200 small companies used the scheme. People are prepared, in a compliant way, to follow regulations that are not over burdensome. I appreciate what Deputies have said about keeping the system simple. I have tried to respond to the views and I am glad that the committee support them.

Deputy Cox asked a question in relation to tax relief. The maximum amount relievable in any one year is £25,000. If the entrepreneur has paid insufficient tax in any three years chosen by him out of the five years he may call the relief forward.

For any three of the five years?

Yes, for any three of the five years.

Must they be three consecutive years?

No. Regarding Deputy Connolly's question in relation to the number of people who pay over £25,000 in income tax per annum, I do not have the figure. People may still claim tax relief even if the figure does not exceed £25,000. It is only Members who earn over £25,000.

What about contract employment?

Contract employment is excluded because it is included in the PAYE category. Deputy Yates mentioned one other aspect of contract employment——

The length of time between leaving a business and having the "i"s dotted.

There would be a clearance procedure between the IDA and the Revenue Commissioners whereby an individual would be told the position in relation to the scheme. Therefore, they would not be leaving their job unnecessarily. That would be essential. A person cannot find themselves leaving because the paperwork is still being dealt with. It is our intention to streamline that by arranging a scheme. As Deputy Rabbitte said at the outset, this is a new scheme and it is in our interests to ensure it works. It meets many points that many Deputies have raised on previous occasions.

My apologies for interrupting Chairman, but it seems a little complicated. Could the Minister prepare a document on it for the ordinary individual?

As soon as the Bill is passed we will prepare a document, which will be circulated. On Report Stage I will be introducing two technical amendments on section 18.

In its first full working day since its establishment this committee has put much time and effort into this. It is worth noting for the record — and it is a pity that this is the case — that of the 31 sections due to be dealt with today, we only had the opportunity, because of the time constraint, to deal with 14 and 17 items have been passed without discussion.

The loss of time in the other House was not helpful.

As it is now 6 p.m., I am required to put the following question in accordance with the Order of the Dáil of 20 May:

That the amendments set down by the Minister for Finance to Chapters III, IV and V of Part I of the Bill, and not disposed of, are hereby made to the Bill, and in respect of each of the sections undisposed of in the said chapters, that the section, or as appropriate the section as amended, is hereby agreed to.

Question put and agreed to.

The Minister said a few times that he intends to introduce more amenmdents on Report Stage. Deputy Cox pointed out that there are a number of sections and amendments we have not reached. May I ask Deputy Ferris, or whoever is in charge of these matters, how many days will be given to Report Stage? There should be at least two or three. It would not be possible to do it in any less time.

That is a matter for the Whips. I understood it was to be one day.

That is totally unacceptable.

It might not be any harm if we expressed a view on it, because the view of the Whips was that one day would apply for Report Stage and I am not sure from the Minister whether that has to be next week. One day will be tight. For example, I feel aggrieved that the amendments I have tabled in respect of our experience during the speculation against the Punt cannot be debated and I am sure every other Deputy feels the same way.

I take it that the Whips will communicate that.

There was over 30 amendments——

I do not wish to hold up the Bill, but, since we have a committee system, the scrutiny process should be as great as possible. There are many amendments today that I regret we did not discuss, because I would have liked to have heard the defence for them, especially concerning the bureaucracy and form filling required. We skipped them today and we will have more over the next few days. I would urge that the Whips would give the maximum flexibility in allowing time for Report Stage.

It is a matter for the Whips. Having been a Whip for a long time and a person involved in the Finance Bill for many years, I recall that we never got beyond the taxation measures on a number of them. I remember one year when we debated on section 2 for two and a half days and eventually reached only section 7 of the entire Bill. In one day we have already exceeded that level, and every other level, with the exception of last year.

Deputy Rabbitte is correct in saying that we have to finish the debate next week. I arrived home from Denmark yesterday thinking we were to take the Finance Bill. There is no point in giving the same amount of time — 25 per cent — as we did last year for Committee Stage and then delay Report Stage. We either have a committee system or go back to the old system. We should decide which system we want. I was prepared to be here yesterday and we would have been further into the Bill if we had done this.

Last year — and it is correct for the Minister to say the Bill was larger — far more of the Bill was ignored from the point of view of review, than is the case this year. The point of having a committee is to give more time to go through the Bill.

We were offered only three days; we were never offered four days.

The Whips can discuss this again. We had a timetable set that Report Stage would be back in the other House in plenary session by 1 June, would finish on 2 June and then would proceed to the Seanad. We lost time, through no fault of the committee but because of the behaviour of people in another place. I am prepared to support the idea. We could have sat on Monday, but Fine Gael would not agree to that.

What is agreed here is that we will make our views known to the Whips.

Progress reported; Committee to sit again.
The select committee adjourned at 6.10 p.m. until 10.45 a.m. on Wednesday, 26 May 1993.
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