Will the Minister of State indicate what section 13 achieves?
SECTION 13.
Question proposed: "That section 13 stand part of the Bill."
Section 13 amends section 11(1) of the Finance Act, 1984, by substituting a new definition of "certifying Minister". The only purpose is to bring the Minister for Arts, Culture and the Gaeltacht into the definition of "certifying Minister" to cover the musical recordings expansion scheme.
Question put and agreed to.
Sections 14 to 16, inclusive, agreed to.
SECTION 17.
Question proposed: "That section 17 stand part of the Bill."
This section changes the rules for BES. There will now have to be a new certification procedure in place whereby if the scheme comes within the manufacturing sector, Forbairt will have a role and in other sectors other bodies will have a role. Changes have been made to the amount of money that can be raised by any one individual. Will the Minister of State explain why it is considered necessary to make these changes?
Section 17 provides for the establishment of a new certification procedure for companies who on or after 23 January 1996 raise BES funds in excess of £250,000 on a cumulative basis. The main purpose of the certification procedure which will be undertaken by the main development agencies is to ensure there will be a reasonable return to the Exchequer in terms of sustainable employment created or maintained and also to ensure the funds will be used for the purpose for which they are raised.
Experience has shown that companies that raise smaller amounts here and in the UK give the best returns in terms of employment and the certification procedure for the larger amounts is being introduced to address this imbalance. There was extensive consultation on this process with professionals and people active in the BES field. The funds recently available to subscribers have been well subscribed.
Furthermore, the certification guidelines were not simply imposed without discussion. They were modified in discussions with the industry. There was widespread agreement that the Government's desire to better focus the BES scheme so as to produce as many sustainable jobs as possible or preserve existing employment was reasonable, given the cost to the Exchequer is estimated on 1995 evidence to be about £30 million to £40 million.
There may be anecdotal evidence to suggest smaller companies give a better return for the amount of BES funds raised. Is there empirical evidence or are there any studies being done to prove that contention? It may well be true. I can think of operations where it is the case, but I can also think of cases in which larger amounts were raised under BES for larger operations which were beneficial.
A detailed study was done. The evidence is not anecdotal, it is clear-cut.
Who did this study?
The Department of Enterprise and Employment did a study on the BES. Resulting from the evidence and the subsequent consultation with the industry, the system was focused towards job creation and necessary certification to ensure that this happened. The review of the BES was undertaken by an interdepartmental group consisting of the Department of Finance, the Department of Enterprise and Employment and the Revenue Commissioners. The object of the review was to evaluate the effectiveness of the scheme as it is currently constructed. It found that BES provides a valuable source of finance to firms in the qualifying business sectors. Submissions received from small industries, the major designated funds, the Dublin Business Innovation Centre and others involved in equity finance, all favoured the renewal of the scheme in 1996. They also agreed a refocusing of the scheme targeted at smaller companies.
However, the review identified a number of problems with the current operation of the BES. First, the designated funds, which now account for 40 per cent of BES funds being raised, tend to make large investments in projects, many of which generate little employment. Second, as has been felt for some years, the scheme now provides low cost dead finance rather than the permanent equity it was intended to provide. Third, as was the case in the corresponding UK scheme, smaller investments seem to provide the greater employment effect. Fourth, companies splitting to get around the corporate ceiling of £1 million in BES funds is still a problem, despite legislative attempts to deal with it in the early 1990s. Other tax planning devices, such as shared manufacturing facilities, reduce the level of net new activity from certain large investments.
I am not raising the contention that the people who carried out the study had anything else in mind, but the interdepartmental committee was made up of officials from the Department of Finance, the Department of Enterprise and Employment and the Revenue Commissioners.
It consulted widely.
I imagine the Department of Finance, being the guardian of the public purse, would not be anxious to have BES tax breaks. I thought an outside body would come up with the evidence. I am not disputing what the committee came up with but it came from a particular viewpoint and one has a fair idea where it would stand on these issues.
The Minister is right to say the BES has been a cheap form of finance. There is no cost to it, effectively, compared with going to the bank. The BES principle has been a good one. One phenomenon — I do not know whether it is good or bad — is that coming up to 5 April every year, thousands of people want to get into BES funds. I know people who invested in these funds some years ago who have not bothered to check and do not care whether they lost the money. They had a vague notion they would get it back but they were more interested in saving tax. We should be encouraging and tapping into that attitude. If people want to throw away their money in foolish ventures they should be free to do so. The Minister, no more than myself, has probably had good and bad ventures and the BES tax break has encouraged this.
The purpose behind BES has been good and the changes through the years have got over the more obvious tax avoidance measures. At this stage we have more certification and restriction at the lower level. Having lasted this long, the scheme will stay but it is not easy to operate. We should have an open BES, without limits on the size of company in which one can invest, etc. The scheme has been changed so much since it was first brought in that the original purpose has been lost.
The ingenuity of the tax advising profession is such that there is a continuous battle of wits between Revenue and the private sector in that regard. We must continue to return to the original purpose, which is to provide equity funding for high risk, small businesses and industries, rather than simply producing a system of tax breaks. It is a fine line to tread.
The major BES funds which account for most of the large BES investments supplied detailed information which showed poor job returns on many of the larger projects. We have substantial evidence to support the view that smaller investments tended to be more effective from a job creation viewpoint.
If our top rate of tax was the same as in New Zealand — 33 per cent — few of those who now invest in BES would avail of the liberty which Deputy McCreevy wishes to afford them. Most of them would have the good sense to invest in things of which they knew something.
Why are the New Zealanders having second thoughts?
On section 16 (1)(b)——
Chairman
We are on section 17.
I signalled that I wanted to speak, but you were reading a book and did not see me. I am sitting a long way from you.
Chairman
I will allow you to speak briefly to section 16.
Section 16 (1) (b) inserts a new section (1B) into the Finance Act, 1991, which states:
a company is associated with another company where it could be reasonable considered that. . .any person or any group of persons or groups or persons having a reasonable commonality of identity have or had the means or power. . .to determine the trading operations. . .
I am concerned about the phrase "or had" because it would seem to indicate that if the same family or family members were in a company previously, they may be disqualified from the BES tax relief. What is the purpose of "or had"? I agree with "have" but I cannot see any purpose for "or had". It seems to be legislating retrospectively to get people into the section and that is not right because they would not have been debarred when there were members of the company. The phrase "or had" puts them into that category. I take "reasonable commonality of identity" to mean same directors or same family.
We are trying to address a situation where extensive tax avoidance arose as a result of companies splitting. In other words, to get within the £1 million limit they were creating a number of separate companies although it was essentially the same business. We are trying to end that abuse, which we failed in the past to end completely. This is an effective way of doing that and it has an element of retrospection. However, it was never intended that that splitting would be permitted.
That is what I mean. I support the Minister's attempts to do what he says he is doing. However, it can penalise innocent parties who had companies which ceased to exist long ago and have nothing to do with tax avoidance. They are now debarred because there was a commonality among the directors of that company and the company which now exists.
It is certainly not the intention to——
How do we get over that? I would be satisfied if the Minister said he would consider tabling an amendment on Report Stage to get over the technicality of debarring genuine people who are not involved in tax evasion or avoidance.
I am not using the word "evasion".
Avoidance.
The problem is that if I take it out that would allow a number of companies to engage in splitting as a tax avoidance mechanism.
The difficulty with committees such as this and the Dáil is that when legislation is on the Statute Book it applies to everybody and, as the people who put it on the Statute Book, we are responsible for it. Could a case be looked at on its merits where it is obvious they are only being penalised because there was commonality among previous directors?
I am informed that the Revenue Commissioners would under no circumstances invoke a clause of this kind to catch a genuine taxpayer.
I would be satisfied with that if a person who genuinely believes they are caught by this can have recourse to the commissioners.
We will also have a look at it between now and Report Stage as the Deputy raised it specifically.
I am happy with that. Will the Minister report back on Report Stage?
Yes.
Chairman
We have reverted briefly to section 16 but we are on section 17. Does anyone else wish to speak on section 17?
The certification will mean a greater workload for Forbairt. Has a decision been taken to employ extra staff so that this work can be carried out reasonably quickly? As the Minister is aware, many projects need to get going quickly. I understand there was some disquiet within Forbairt when this was announced.
With regard to BES and section 35, some people are worried that with a pay back period of a year under section 35 as against a five year pay-back period under the BES — if there is ever going to be a pay back — the differential will have a detrimental effect on investment in BES. BES was developed to create long-term sustainable employment whereas the maximum employment in the film industry is a year.
Forbairt received 23 applications under the certification guidelines introduced in February. All applications were examined and processed before 1 April and 20 were approved. This measure was not brought in without extensive consultation with the Department of Enterprise and Employment, which proposed the idea. There is no evidence of which I am aware of hold-ups in the system as a result of that process. The certification procedure, according to the most recent figures available, will only affect 16 per cent of all investments in BES.
It appears from the figures available to date that there has been no shift of emphasis from BES to film investment. Investment in film is new to many people and they are not rushing into it in large numbers. While the one year pay back will encourage investment in the indigenous film industry, according to the evidence to date, it does not appear to have any adverse effect on BES.
Chairman
What is the total amount invested in BES at the moment?
The cost to the Exchequer was about £30 million to £40 million in the past year. In order to extrapolate that back to the actual amount——
Chairman
The Minister can give that figure in a moment.
Deputy McCormack might have already raised the point I wish to make, and perhaps the Minister has already dealt with it. I am seeking clarification of section 16, lines 39 to 44. There is some concern about certain words in that section which states "any person or any group of persons or any groups of persons having a reasonable commonality of identity have or had the means or power. . .". The words "or had" will create problems for——
It is the same point.
Has it been dealt with?
What I said to Deputy McCormack——
I would like to tell Deputy McGinley that we got a very positive response from the Minister on that point which I raised on his behalf.
Chairman
Before I lose control of the meeting completely, we have dealt with that section.
On a point of order, when I hear two Fine Gael Deputies asking about the same point——
Chairman
It is a conspiracy.
——I take out my map and work out who is half way between their constituencies. The betting on this side is on Myles Staunton.
Chairman
That is a point of disorder.
I said I would raise the point for Deputy McGinley.
Chairman
We have dealt with this point. Does the Minister have anything to add?
The answer is the same. We said we would look at it before Report Stage but I gave an undertaking that the Revenue Commissioners have stated it is not their intention to use this as a means of penalising genuine taxpayers.
In reply to your question, Chairman, to date about £400 million has been subscribed to BES funds.
Chairman
Do we know the annual figures? Four hundred million pounds was invested since it was created in 1985.
It was 1984. The figures are higher at the back end of the period than they were at the beginning.
Chairman
What is the last full year for which we have figures?
It was £52 million in 1994-95. The incomplete estimate for 1995-96 is £64 million.
Question put and agreed to.