Yes. On the 10 per cent companies, in regard to the effective raise on adjusted profits, we are talking about their taxable income here, not their capital allowances or their losses or writeoffs. The taxable income before writeoffs or capital allowances for the 10 per cent companies would be 9.9 per cent; for 40 per cent companies it is 23.9 per cent. Deputy Yates asked about the reduced rate of capital gains tax which could depend on the length of time assets were held. A number of these were part of the capital gains tax avoidance schemes used in the early 1990's. The position was corrected a few years back when a single rate of capital gains was introduced which did not depend on the length of time the assets were held. In any event, indexation is available in respect of chargeable gains which ensures that any real gains are taxed.
On the three rate structure, excessively complicated rate structures are not consistent with good tax administration. They often only make work for tax planners who would devote their time to ensuring that their clients' profits come within the lower rates and this opens the gates for tax bands avoidance. I am trying to go in the other direction, with some difficulty.
Deputy Yates made two main points. In amendment No. 97 he proposes to introduce a reduced rate of corporation tax, either 27 per cent or 24 per cent, to be applied to a company whose profits do not exceed £80,000 where those profits would otherwise be taxable at 40 per cent. It additionally proposes that the reduced rate should apply where profits do not exceed £80,000. That compares with a figure of £35,000 in 1989. It is a very significant increase. If the amendment were to be accepted and the rate reduced to 27 per cent, the full year cost would be £26 million. If the 24 per cent rate were adopted the cost of the measure would amount to £32 million. It has not been possible to cost Deputy Yates' proposal to apply a reduced rate to the first £80,000 profits of all companies but Members can take it that the figure would be higher again.
I wish to remind the Committee of the position in regard to mushrooms. We are proposing a number of amendments which seek to alter the position and to remove the cultivation of mushrooms in the State from the scope of the 10 per cent rate. Deputies will be aware that this increase was imposed on us from the European Commission in Brussels. The European Commission, as part of the ongoing review of aid schemes under Article 93.1 of the Treaty, opened an investigation into the application of the 10 per cent rate of corporation tax to mushroom cultivation over three years ago at the beginning of 1991. The Commission concluded its investigations earlier this year. They were protracted and, needless to say, the Departments of Agriculture and Finance were involved in them throughout.
The Commission found the application of the 10 per cent rate to mushroom cultivation to be incompatible with the Common Market and as a consequence has called upon the Irish Government to remove mushroom cultivation from the 10 per cent scheme. The formal procedure in this matter has already commenced under Article 93.2 of the Treaty. I am hopeful that the measures we have taken in the Bill will satisfy the Commission's requirements and result in no furtherance by them of the procedure which they commenced. I wish to make it clear that as a member state of the European Union we are obliged to comply with the Commission's decision and the Government has no choice but to make the necessary changes in the Finance Bill. We have been through the procedure, all of the appeals and arguments and at this stage the Government either makes the decision or the procedure continues, and we will be forced to do so very shortly. I was asked previously how long this would take. At this stage it would only take a matter of months, so it is not a question of being able to delay it for an undue length of time.
As I have said before at Question Time, the Government is conscious of the difficulties which a sudden change in tax treatment would have on the mushroom sector. The concerns of the industry in this regard were made clear to me at a number of meetings which my officials and I have had with representatives of the sector over the last number of months. The Government couched the Finance legislation in such a way as to provide a considerable degree of breathing space for those affected to adjust to the new system, to adjust to the 40 per cent from the 10 per cent regime. Section 43, as drafted, applies the higher 40 per cent of tax to income earned in accounting periods beginning or after 1 June 1994. Effectively, this allows companies the flexibility to commence an accounting period on 31 May 1994 so that the higher rate of tax will not apply in practice until the accounting period beginning 31 May 1995. Because corporation tax is not paid until six months after the end of an accounting period, these arrangements will mean that a major mushroom company or an incorporated grower will not have to pay the tax due at the higher rate until November of 1996, which is two and a half years away.
These arrangements will clearly be of considerable benefit to those affected. I believe this arrangement would be acceptable to the European Commission. The Commission still has some difficulties but this will be an acceptable position. The major mushroom companies will also be sheltered from the worst effects of this change by the fact that production of compost will be eligible for the 10 per cent rate of corporation tax in its own right as a manufactured product. We are all aware that the mushrooms grow in compost. The product they are using, the raw material is still payable at 10 per cent and only the mushroom growing in the compost is at the 40 per cent and that is not until November 1996.
While no sector of the economy likes to be faced with a higher rate, the impact on the mushroom industry should not be exaggerated. To put this in perspective, it is estimated that some 13 per cent of mushroom producers are incorporated and this means that the vast bulk of mushroom producers will not be directly effected by the change in corporation tax treatment at all as they are taxed under income tax rather than corporation tax. While the Government regrets that it has become necessary on foot of our European Union obligations to remove mushroom cultivation from the scope of the 10 per cent scheme, I have met many of the people in the industry and I commend them for their initiative and innovations over the years in building up what was a very small industry. I am sure that the fact that they were cornering a large segment of the market was focused on. Needless to say, that is something we are glad they were able to do. Hopefully, the arrangements we have put in place will ease the transition to the high rate of tax. That should assist the industry in dealing with the challenge which the tax change represents.
I have been very clear today about the wording of the section in the Bill. I explained on Second Stage why it was written the way it was, but since there are amendments down asking me to clear it up I have no choice but to spell it out. That creates its own problems, but we have explained to the world at large what it means. It assists the industry greatly. Some of those who do not have the benefit of tax practitioners and accountants would perhaps have had some difficulty in deciphering exactly what is meant. This explains it clearly for them and will hopefully deal with the matter. That covers the mushroom elements of amendments Nos. 129 and 130.
