Select Committee on Finance and General Affairs debate -
Wednesday, 24 Apr 1996

SECTION 35.

Mr. McCreevy

I move amendment No. 44:

In page 64, between lines 22 and 23, to insert the following subsection:

"(3) A grant paid out of a fund established by the former employee of the grantee shall be disregarded for all the purposes of the Tax Acts if the grantee is registered as self-employed and has a tax clearance certificate.".

Some of the amendments I submitted are in the names of other Deputies as well as mine. In the list of amendments these names have only appeared with some of the amendments. This amendment is in the names of Deputy O'Leary, Deputy O'Donoghue, Deputy Foley and I, but only Deputy O'Leary's name appears with mine. This amendment relates to a problem in Kerry. Some of these Deputies and I have been in contact with the Minister——

Chairman

Because this is a select committee, amendments may only be in the names of committee members but we note the interest of the other Deputies.

Mr. McCreevy

Thank you for informing me of this. I will be able to explain to them why their names have not appeared with the amendments. I am certain that last year the names of any Deputies, whether they were members, appeared.

This amendment relates to the Pretty Polly enterprise fund in Killarney. Negotiations on this fund have been ongoing for a considerable period of time between a number of people and the Department of Finance. I think some progress has been made because in the past few days I received a further letter from the Minister in this regard. The idea of the Pretty Polly fund was to help out former employees of the company to set up businesses, but the effect of the tax designation would be to hit out against them. Perhaps the Minister could inform me of the latest state of play regarding the negotiations to get over these difficulties.

Mr. Quinn

I am not up to date as to the latest state of play in regard to the negotiations. Perhaps some of my colleagues might assist me while I reply to the general thrust of comments. The amendment is not accepted because it would regrettably open the door to the possibility of collusion, although this in no way reflects on the bona fides of the Pretty Polly management whom I met 18 months ago. From the outset I was aware of their concern regarding the reduction of the number of people involved in Pretty Polly and their desire to facilitate alternative employment.

As regards the considered response to the request to get favourable tax treatment for enterprise funds of this kind, I will list the concerns we have as follows: exempted from income tax such employer finance grants are additional payments to their ex-employees, could lead to possible widespread collusion between firms and workers to have taxable redundancy payments substituted at least in part by non-tax enterprise fund grants with a consequent Exchequer loss; there is a risk that companies would divest themselves of services originally provided in-house and set up ex-employees to provide such services under the guide of redundancy with the Exchequer, in effect, part funding the operation; a lot of the funding will go to service type operations where the risk of displacement will already be fairly high; the Government already recognises the importance and value of local initiative and enterprise through the special tax position granted to the enterprise trust and first step organisations which already have special tax status as regards corporate donations made to them but grants paid by them are taxable in the hands of the recipients. Companies in a redundancy situation are free to contribute to those bodies and ex-employees could, in fact, seek assistance from them; company operated enterprise funds are by definition likely to be less rigorous in their assessment of potential projects and national funds like the enterprise trust and first step with the risk that both the companies contribution and that of the Exchequer could be wasted; and the seed capital scheme providing for tax refunds to former employees who start up bona fide new ventures is the appropriate vehicle for Exchequer support for such projects given its proper controls and rigorous vetting to ensure lack of displacement.

Mr. McCreevy

I do not disagree with anything the Minister has said but my purpose in putting down this amendment was to allow for changes to be made that would help the Pretty Polly enterprise fund. I take it from what the Minister said that it might open up loopholes which I would not have the expertise to visualise. I do not have an argument with that at all. However, the Killarney enterprise fund should be encouraged and if any of my Kerry colleagues were here they would cite chapter and verse as to the reasons. I also know that this issue is dear to the heart of a colleague of the Minister — his boss we could say. I am sure he has had the ear of the Minister in this regard. I hope the matter can be brought to a conclusion which is satisfactory to all.

Mr. Quinn

I thank the Deputy for his response and I can inform him that there have been informal discussions with representatives of the Pretty Polly enterprise trust with a view to seeing if a formulation can be arrived at that would minimise the tax take. Certain proposals have been put to them informally and the matter is now with them for consideration. We are awaiting their response.

Chairman

Is the amendment being pressed?

Mr. McCreevy

We will not press the amendment but this will not prevent us from tabling an amendment on Report Stage.

Mr. Quinn

If we have anything to report on Report Stage we will do so.

Amendment, by leave, withdrawn.

Question proposed: "That section 35 stand part of the Bill."

Dr. O'Hanlon

As regards the various schemes and initiatives that are covered by this section, under subsection (2) (d) and (e) the European Union Leader Community initiatives will be covered by this section and the operational programme for local urban and rural renewal. Why is the peace initiative fund not included? Can the Minister move an amendment on Report Stage to cover the peace initiative money which was similar to what is in these two subsections in the Bill?

Mr. Quinn

I take the Deputy's point. If the peace fund programme contains an element which would be classified as employment grants, then they would, in principle, be exempt. However, the Deputy has brought to our attention the fact that we do not make specific reference to it; we will check that and refer to it on Report Stage.

Question put and agreed to.

NEW SECTIONS.

Mr. Quinn

I move amendment No. 45:

In page 64, before section 36, to insert the following new section:

36.—As respects relevant contracts (within the meaning of section 17 of the Finance Act, 1970) entered into on or after the passing of this Act, section 17 (inserted by the Finance Act, 1976) of the Finance Act, 1970, is hereby amended——

(a) in subsection (1), by the insertion of the following proviso to the definition of ‘relevant contract':

‘Provided that a separate relevant contract shall be deemed to exist between the principal and each individual member of a gang or group of persons, including a partnership in respect of which the principal has not received a relevant payments card, where relevant operations are performed collectively by the gang or group, notwithstanding that any payment or part of a payment in respect of such relevant operations is made by the principal to one or more of the gang or group or to some other person;',

(b) in subsection (2), by the insertion after ‘the principal makes a payment' of ‘or is deemed to make a payment pursuant to subsection (2A)',

(c) by the insertion of the following subsection after subsection (2):

‘(2A) Where relevant operations are performed by a gang or group of persons, including a partnership in respect of which the principal has not received a relevant payments card, and notwithstanding that any payment or part of a payment in respect of such relevant operations is made by the principal to one or more of the gang or group or to some other person, then such payment or part of a payment shall be deemed, for the purposes of this section and any regulations made thereunder, to have been made by the principal to the individual members of that gang or group in the proportions in which the payment or any amount in respect of the payment is to be divided amongst them.',

and

(d) in paragraph (d) of subsection (5), by the insertion after ‘certificates of tax deducted from payments made to subcontractors' of ‘and the entry thereon of such particulars as may be specified in the regulations'.".

This is a relatively substantial amendment regarding an abuse in the finance industry and others. It relates to section 17 of the 1970 Act which relates to C45 contracts and others concerning deductions for payments to subcontractors in the construction, forestry and meat processing industries. The purpose of section 17, which is an anti-avoidance measure, is to provide for a tax deduction system for subcontractors in the construction industry and, since 1992, the forestry and meat processing industries. It provides that a principal contractor must deduct tax at the rate of 35 per cent from payments made to a subcontractor on the construction contract unless the subcontractor produces to the principal contractor a certificate from the Revenue Commissioners authorising the payment to be made without deduction of tax.

Under the system of tax deduction from payments made by the principal contractor to a subcontractor there is recognition for a gang or group scheme of subcontracting. This is where one subcontractor acts as the leader of a group of subcontractors. The principal makes a single payment to the leader who then divides the payment among the group. Currently tax is deducted or not deducted from the payment on the basis of whether the leader is a certified or uncertified subcontractor. This has led to abuses in the tax system as only full details of the leader of the group is provided to the principal contractor and to the Revenue Commissioners.

The amendment proposes to treat each member of the group of subcontractors to be of equal standing in relation to the contract with the principal contractor. The principal will in future take into account the tax status of each individual member and the amount due to each member in determining whether and to what extent tax is to be deducted from the payment. I want to stress that the amendment arises out of, and is in line with, the recommendations of the black economy monitoring group which was set up under the CRC — the central review committee — of the Programme for Competitiveness and Workin its report on the C45 system that the special recognition for tax purposes of the gang system should be ended.

For additional background, Deputies may be aware that the whole question of black economy tax abuse, specifically in the construction industry, was brought to the attention of the CRC by the construction group of unions in congress. A group was set up to monitor it and this is derived from their recommendations.

Mr. McCreevy

Every time I see this amendment to section 17 of the Finance Act, 1970, it brings back great memories to me. This is one section of the Finance Act that I have much experience of because I went through articles in October 1970 after being in UCD, which coincided with the passing of the Finance Act. This Act introduced the C35 deductions. It must be the most amended section of any ordinary income tax legislation in its lifetime. It has been amended more times than any other section of any Act in the last 25 years.

It was originally introduced in 1970 to get over the problem of people working on the lump system in gangs. Up to 1970 people were being paid on the lump and were supposed to account for the tax themselves, but nobody heard about them any more because they were self-employed. This new system came in and in order for people to get this subcontractors certificate of authorisation, as it was then called, you had to fill up a C5 form and promise that you would keep books.

Everyone, every carpenter, builder and so on got them. If they promised that they would employ an accountant, so much the better, but that was it. After three years the Revenue found that only about 5 or 10 per cent of them ever came back, so it was tightened again about 1973 or 1974. It has been tightened and extended over the years. It is nearly impossible now to get the subcontractor's certificate of authorisation unless one supplies labour, materials and everything else. I am trying to figure out what this amendment does to the Act because the original section from 1970 has been changed around so much that I do not know what section has been amended here.

I understand from the Minister's remarks that at the moment the onus is on the principal contractor. If anyone here went out to any of the building sites within a mile radius of where we sit today, where a couple of hundred people are on building sites, I doubt whether there would be more than ten direct employees of the principal contractor on any building site. There might only be two, because over the years the whole system has gone in that direction. That brings in other areas of public policy regarding employers' PRSI, employees' PRSI and everything else. You will find no direct employees of the principal contractor on the biggest site here in Dublin.

The effect of this section, as explained to me by the Minister, will be that when the principal makes his payment to the leader of the bricklayers' gang at the end of the week, all the gang are individual subcontractors according to what the Minister is proposing. What difference does that make? How is the principal contractor supposed to know who they are?

Mr. M. Ahern

Do they all have to have C45s?

Mr. McCreevy

Do they all have to have C45s as well? Yes?

Mr. Quinn

What happened was the front person, the leader, was put up. His tax status and his C45 contract was deemed to be acceptable. He was put in and the main contractor in his relationship to the Revenue Commissioners really only had to account for that gang leader, so to speak. He had no taxation responsibility for the other members of that group. The trail effectively ended. We had no idea what the others were being paid.

Mr. M. Ahern

Would he not have to give a C45? The C2 is where you have to have all your tax cleared. The C45 is where you do not have a C2. I am the leader. I get my pay at the end of the week and I have four or five men working with me and I divide the pay between them. So much has been deducted by the principal contractor. When I go in and tell the Revenue that I do not owe all that tax because other people were working with me, in order for me to get my tax sorted out I will have to name the other people working for me. I do not disagree with this provision being tightened up because it is very messy when you are trying to sort it out, but I do not know the exact implication of subsection (d) off the top of my head.

Mr. McCreevy

At the moment if the head of the gang is a registered subcontractor he is paid the full amount of money and he then produces his proper accounts to the Revenue. If he is paying his men by Cs, unregistered subcontractors' account for 25 per cent. He has the same status as a principal contractor. That has been tightened up so much over the years that subcontractors' certificates of authorisation, C2s, are so valuable that there was terrible messing. It is not done anymore, it is very kosher now. It took 20 years to get it to that stage.

We will take the case of the unregistered contractor. Will the effect of this section be that when the principal contractor pays me as head of the gang, deducts 35 per cent tax and gives me a C45 stating that £1,000 was paid less tax, total £650, that is usually as far as you ever hear about some of the unregistered fellows? Usually if everybody's income was added up they would all be paying 48 per cent rather than 35 per cent, so no one goes any further with it. That is the reason for it. Am I now to understand that the onus will be on the principal contractor for the unregistered contractors to find out the names of all his men and issue them all with C45s? What difference would that make? If they are unregistered they will not turn up with it.

Mr. Quinn

In essence what it does is it removes the possibility of a group gang formula where only one person comes forward and is officially on the records. The main contractor might not even know the name of the other nine people. Let us say that there was a group of ten people and the £1,000 became £10,000. Some £3,5000 would be remitted to the tax and there would be £6,500 out there. The Revenue have no idea who the recipients of that £6,500 are other than the name of the gang leader.

Following detailed discussion with the CIF and the construction group of unions in ICTU and the Revenue Commissioners under the black economy monitoring group, it was agreed that this was the biggest area of current abuse. However, we will no sooner close this particular gate than the innovative construction industry will open up a new one. However, for the time being the group in question have identified that this clearly is the area of growth.

Mr. McCreevy

I cannot figure out how we will curb it.

Mr. Quinn

The main contractor now will have to account for everybody who is on his site.

Mr. McCreevy

What difference will that make? It will make no difference to the team. They will not be registered in any event.

Mr. Quinn

It will to the extent that the main contractor, in saying whether there is a gang of ten bricklayers where previously they would only have the details of the leader of it, includes his RSI number, which in turn leads you to his social welfare record. We would now have the RSI numbers of all the other nine members of the gang.

Mr. McCreevy

They do not give the RSI number on the C45s.

Mr. Quinn

They will have to now.

Mr. McCreevy

Where is that provided for?

Mr. Quinn

I am informed it is in the body of the text. Let me find out where it is.

Particulars of tax reduction from payments made to subcontractors and of entry thereon of such particulars as may be provided in the regulations.

Mr. McCreevy

It is not there. The regulations are still to be made for that. I will say that the way the regulations have been drawn before now were such that they nearly killed the whole business in any event, so we must be careful. There are abuses, I accept that, but I am trying to figure out how this will change the legislation. The new regulations will be that the RSI number will have to be given?

Mr. Quinn

Yes, that will be in the regulations. The biggest area of black economy abuse of a structured kind between employer and employee, as distinct from some bit of freelance work being done by a person on social welfare trying to get some extra money, but collusion as distinct from freelance activity, if I can make that distinction, is in the construction area. There is no doubt about it. You talked about walking onto a building site and finding very few people employed by a single contractor. Social welfare officials walked onto a building site recently, locked the gates and caused mayhem. Fellows were throwing themselves off scaffolds in all directions.

Mr. McCreevy

When I was in the Department of Social Welfare I got a task force together and sent them out to south Dublin and fellows ran in all directions. I know the problems involved.

Chairman

This provision does not deal with the catering industry or the driving industry.

Mr. Quinn

It will apply to all C45 contracts. However, the black economy monitoring group is driven largely by the construction industry.

Mr. McCreevy

I am interested to see that it would work. I am just trying to figure out how it would work with regulations.

Mr. Quinn

It is much easier to put the provisions in regulation because you can finetune regulations much more easily than legislation.

Chairman

If that section was in the main body of the Bill, I suspect we would have the same sort of protest we had last year.

Amendment put and agreed to.

Chairman

Amendment No. 46 in the name of Deputy McCreevy is out of order because it involves a potential charge on the people.

Amendment No. 46 not moved.

Mr. Quinn

Before we move from section 36, I wish to inform the committee that I will be tabling an additional amendment to that section on Report Stage.

Section 36, as amended, agreed to.

NEW SECTION.

Mr. Quinn

I move amendment No. 47:

In page 65, before section 37, but in Chapter III, to insert the following new section:

37.—(1) Section 51 (as amended by the Finance Act, 1995) of the Finance Act, 1988, is hereby amended in paragraph (a) in subsection (1) by the substitution for 'provided for use for the purposes of trading operations' of ‘provided by a company for use for the purposes of trading operations carried on by it'.

(2) This section shall apply and have effect as respects machinery or plant or an industrial building provided on or after the 23rd day of April, 1996.".

Section 51 of the Finance Act, 1988, sets out the situations where accelerated capital allowances are available. Paragraph (a) of subsection (1) sets out one of the situations being machinery or plant of an industrial building provided for use for the purposes of certified trading operations in Shannon and the IFSC. The intention of the legislation is that the machinery or plant or the industrial building is provided by the Shannon or IFSC company for the purposes of its trading operations. These can include the leasing of machinery or plant.

This amendment ensures that the intention of the legislation is more clearly expressed and that the persons carrying on trading operations outside Shannon or the IFSC cannot benefit from accelerated allowances.

Amendment agreed to.

Sitting suspended at 6.32 p.m. and resumed at 7.20 p.m.