Finance Bill, 2001: Committee Stage.

Section 1 agreed to.
NEW SECTION.

Before proceeding to amendment No. 1, which was tabled by Deputies Jim Mitchell and McGrath, I wish to advise the committee that I have reservations about the admissibility of the amendment having regard to the provisions of Standing Order 141(3), which provides that an amendment to a Bill which could have the effect of imposing or increasing a charge on the people may not be moved by any member save a member of the Government. I am prepared to allow Deputy Mitchell to move his amendment but if it emerges in the course of debate that the amendment involves a charge on the people, I will have no alternative but to disallow it. My decision on the amendment will in no way prejudice the position of the Chair in the event that this or a similar amendment is tabled to the Bill on Report Stage.

I move amendment No. 1:

In page 17, before section 2, but in Chapter 2, to insert the following new section:

"2.-The Principal Act is amended by the insertion of the following new section:

16A.-(1) The Minister for Finance may establish a National Investment Fund (NIF) to be managed by the National Treasury Management Agency.

(2) The Minister may direct that a proportion, not to exceed 75 per cent, of any increases in the tax credits arising under sections 461 and 472 to which a tax payer is entitled be given by way of shares in the NIF. The Revenue Commissioners shall act as agent for each taxpayer in the contribution of moneys to the Fund. Such shares may be redeemable as to capital and income not earlier than six years from the date of issue except in the case of the death of the taxpayer or the taxpayer's spouse or the taxpayer becoming entitled to any of the taxpayer reliefs mentioned in sections 464, 465, 466, 466A or 468.

(3) The proceeds on redemption shall not be chargeable to tax.'.".

We tabled this amendment, not as the last word on the issue but as a means of raising the principle and the idea. The Minister has been criticised by the European Union for his budgetary stance. I think the European Union is half right and the Minister is half right. The Minister wants to share the wealth which has been created with the people who have helped to create it, and I agree with him in that regard. However, we must find ways of sharing that wealth which does not add to inflationary pressures.

The idea in the amendment is that we would find a way of giving back to the taxpayers a share in the wealth which they have created without adding to immediate inflationary pressures. There are precedents for providing for a five year suspension period in which people would not be able to spend the money. For instance, there is the savings scheme which the Minister proposes to insert in this Bill and the business expansion scheme.

When I raised this issue with the Minister on Second Stage, his main objection to it was that it was compulsory. Since taxes are compulsory, why can the returning of taxes not also be compulsory? I have checked the detail of this with Revenue and the National Treasury Management Agency and with other people in Ireland and elsewhere who are better economic experts than me. These experts say this is a perfectly valid and workable scheme.

To avoid adding to inflationary pressures, the idea is that, if there is a continuing budget surplus each year and it is agreed there should be a tax rebate to individual income taxpayers, it will be done, at least to the extent of 75% of that rebate, in the form of shares which would be part of a national investment fund run by the National Treasury Management Agency. The fund would be set up by law and, as I envisage it, it would be run using the same criteria, safeguards and guidelines as our pension funds, most of which have been phenomenally successful. The dividends and added value arising from that investment after five years would be tax free. Therefore, the deferred benefits for the taxpayer would be considerable.

Another advantage of this is that it would quantifiably increase private savings, and this is where it distinguishes itself from the Minister's proposed savings scheme, although this is not our only proposal regarding savings. It also would be done at a quantifiable defined cost to the Exchequer, which is also a difference between it and the Minister's proposed savings scheme.

The third advantage is that we will not be taking on commitments for succeeding years when the economy may not be as buoyant. The Minister's tax cuts commit us to the same low level of taxes, even if there is a downturn in the economy in succeeding years. We have taken on huge commitments and the same is true of those applying to the savings scheme.

There is a way of deciding this matter on a year by year basis. I worked in Guinness for many years and that company was way ahead of itself because it had a bonus scheme of a type which would now be called a profit-sharing scheme. The profit share given to employees under this scheme depended on the company's profits in any given year, which gave everybody an incentive to ensure that it was profitable. It was a great joy for the employees of the company to receive their profit share each January.

The Minister's savings scheme is like a national profit-sharing scheme. It has the advantage that the profit share will be divided among people in the public as well as the private sector, whereas the share option scheme outlined in the Bill can only, by definition, be beneficial to those in the private sector. The scheme will increase private savings and share the wealth with the people in a correct way - the Minister has taken the proper route in this regard - but it will not have the inflationary downsides that mark many of the Minister's policies. The European Union is half correct, there are ways of sharing the wealth without adding to inflationary pressures.

It is not my intention to press the amendment to a vote. I tabled it to have the matter considered for future years and to allow for consideration to be given to refinements to the scheme.

I support the amendment. The points made by Deputy Mitchell are valid and should be considered by the Minister. Perhaps the Minister might consider further that the concept of members of the public becoming shareholders in the national treasury management fund is attractive. I know that people had to absorb a hit in the not too distant past on foot of the Government's promoting shares in a particular company and I accept that this may have left a sour taste. However, this will provide them with an opportunity to invest in gilt edged shares and it will allow the Minister to overcome a number of the difficulties he has experienced with his European colleagues in terms of the inflationary measures in the budget and their wanting him to withdraw certain moneys from circulation. This scheme provides an opportunity to deal with these problems and, as Deputy Mitchell stated, of knowing where we stand from year to year.

There will be an enormous take-up on the savings scheme the Minister intends to put in place. This will lead to a huge financial commitment on the part of the Exchequer. To a great extent, this scheme will benefit those with money rather than those who do not have it. Only the fairly well off will be able to invest the maximum amount of £200 per month. However, people on the average industrial wage, those in the lower income bracket or people with families will not be able to avail of the scheme. The mandatory savings scheme proposed in the amendment might, perhaps, prove to be a better option for these individuals. The six year term attaching to our scheme might be slightly long from the point of view of ordinary taxpayers, but modifications could be introduced. The concept behind the mandatory scheme is excellent and the Minister should give it full consideration for the future.

I will wait for the Minister's response before commenting.

This amendment in the name of Deputies Jim Mitchell and McGrath seeks to empower a Minister for Finance, in his or her budget, to announce increases in personal tax credits and to then withhold from taxpayers up to 75% of the benefits of those increases. The amounts withheld are to be lodged in a new fund to be called the "national investment fund" administered by the NTMA. Each taxpayer is to be given share certificates which he or she can redeem in five years at their then value and tax free. I understand that the objective of this scheme is to reduce inflationary pressures.

The committee will be aware that the Programme for Prosperity and Fairness was concluded on the basis of a net increase in take home pay of 25% over its duration. The increase is to be delivered by a combination of pay increases and tax reductions. Subsequently, the pay aspects of the PPF have been adjusted. It is difficult to see how the proposed scheme could be implemented without giving rise to a reduction in the increase in take home pay, which taxpayers expect to receive as a result of the budget. Such a reduction would be likely to re-open matters already settled in the context of the PPF and the recently agreed adjustment. I do not believe that the vast majority of taxpayers would be impressed by the scheme. Furthermore, the amendment is so short on detail that I doubt it could be accepted even if I thought it was a good idea.

In my Budget Statement last December, I pointed out that in the past three years I have removed 176,000 low earners from the tax net, cut the burden on the lower paid by half, reduced the tax rate applying to the lower paid - in many cases by 10% or more - and done far more than has been done in many other advanced economies in cutting taxes on single and married earners on low and middle incomes. If, instead of letting the benefits of our growing economy be shared by all taxpayers, I had issued them with share certificates telling them that they could have jam tomorrow or even in five years' time, I do not think they would have been overly impressed. I believe in allowing people to make their own choices as to what they do with their money.

There are some countries which have introduced compulsory savings schemes for citizens. General Pinochet introduced such a scheme in Chile in 1981 and the Singapore Government has had a central provident fund in place since 1955 which is funded by compulsory deductions from workers' salaries. I do not believe such schemes are suitable for this country. Irish people like to have a choice with regard to how they save their money and the Government is supplying and encouraging that choice through the new savings scheme, which we will be discussing in detail tomorrow, and through the major reforms in recent years in the taxation regime for pensions.

For the record, I have been considering introducing a new savings scheme for some time. If Members believe its introduction was as a result of external influences, they are incorrect. However, we will discuss the new scheme tomorrow. I regret I cannot accept the amendments.

I recognise the bona fide arguments put forward by Deputies who want to encourage people to save and I am not stating that there is only one way of achieving this. As Deputy McGrath stated, the new savings incentive scheme will prove extremely attractive. The higher the take-up, the more pleased I will be. Even though there will be a cost to the Exchequer the scheme will encourage people to save on a regular basis for five years, after which they will receive their bonus. We will discuss the scheme in greater detail tomorrow and I will comment further at that stage.

The proposal put forward by Deputy Mitchell is new. However, I do not believe it would fit easily into the partnership and pay determination agreements we have concluded in recent years. That is not to say that any new and innovative idea could not be discussed in detail during negotiations on a new agreement. We have concluded certain agreements and promised pay increases and taxation reductions which must be delivered. On the other hand, I am putting in place an incentive scheme which should encourage more people to save. We will identify the people who will be able to save in the scheme when we discuss it tomorrow. As already stated, I do not believe that the proposed national investment fund would easily fit into our current structures. However, perhaps it could be discussed with the social partners in the context of a new national agreement.

With regard to EU criticism of the recent budget, if one considers the recent recommendation, the broad economic policy guidelines and various documents and reports produced by the Commission, one will find that it has been quite complimentary about the changes in personal taxation. Its criticism centred on the overall thrust of the budget and was mostly concerned with what we have done on the spending side. A recent working document produced by Commissioner Bolkestein stated that the European Union must move forward by lowering the tax burden, including that for individuals, in all areas. Some parties and commentators in Ireland referred to one particular aspect of the criticism which focused on the top rate of tax. It is ironic, but the governing parties in Germany, with which parties in this country might be closely aligned, will try to reduce their top rate of tax to 42%.

The broad thrust throughout to Europe is to reduce the tax burden and the Commission is more or less recommending the overall thrust by the Ministers for taxation on spending. We will return to this issue again but I thank the Deputies for an innovative idea. I would not like to rule it out permanently similar to the proposal on different tax rates. I am on record over the years, when Deputy Noonan was Fine Gael spokesperson and raised this point, that I must get down to thebase game first before I start moving into other areas.

The easiest hypothesis on which to work over the next two or three days is that the Minister might be in a position to implement another budget and, therefore, I will on occasions ask what he proposes to do in the future but that should not be taken as an indication that I think he will or that he should.

He introduced two budgets last year.

I compliment Deputy Mitchell on his innovative thinking but I am fundamentally out of sympathy with such thinking because it is not needed for the same reason I am not sympathetic to the Minister's savings scheme. People should be paid well by their employers and are entitled to share in the profits. Capital has produced a much better return over the past number of years than it did ten years ago. Many employers are in a good position to pay their employees more. The business of the State is to decide how much tax is needed to run good services and to recoup that amount. We should not be examining measures, however innovative, to put money in the economy and take it back again, either compulsorily or by encouraging people to put it aside. That defers demand within the economy.

I believe the needs of the economy are to invest in services so that in five or ten years there will be a substantially and considerably improved social and economic infrastructure which can be passed on to our children and beyond. That is our priority, not fancy mechanisms to reduce demand and suck it back again. However, I acknowledge innovative thinking because we do not have enough of it.

It is a new idea which needs to be thought out and refined. I take what the Minister said to be a definite "maybe" rather than a rejection. The proposal is a way to share our wealth without compounding inflationary pressures and is a form of national profit sharing. I know from my experience at Guinness's, which is the only place I worked before becoming a Member, that every employee wanted to increase profits and it added greatly to productivity. This idea could be transposed nationally which could be positive. The economy runs in cycles. We have enjoyed an extraordinary prolonged period of growth which will hopefully continue for a good number of years but nobody thinks this will last forever. It would be good if private savings grew rapidly similar to public savings because of the 1% set aside. I will have more to say about that.

There is food for thought in this proposal as a means of meeting in part the reasonable criticisms and concerns of our EU partners and at the same time achieving the objective which I share with the Minister of sharing wealth with the people.

Amendment, by leave, withdrawn.
SECTION 2.

Amendments Nos. 3 to 11, inclusive, are related to amendment No. 2 and all may be discussed together by agreement.

I move amendment No. 2:

In page 18, column (3), line 11, to delete "£1,628" and substitute "£2,104".

These amendments refer to the table on page 18 which sets out the tax credits that apply to single and married people and incapacitated children. The Fine Gael amendments refer to PAYE allowances. This table almost did my head in over the weekend. It summarises what is contained in the Bill and the difficulties which ordinary taxpayers will face in trying to understand the purpose of the legislation because it encapsulates the nine month tax year, the move to tax credits and the euro changeover in one table. If the Minister or the Taoiseach is thinking of calling an election in the first two or three months of next year following the currency changeover, given my experience over the weekend, they should forget about it. I am more familiar with the euro changeover than the ordinary taxpayer and I had difficulty.

When the Revenue sends out statements with tax free allowances in euros a serious effort must be made to explain the change to taxpayers because they will have difficulty assimilating the three changes to the nine month year, tax credits and the euro in one go. It will be difficult for people to comprehend.

They will be well accustomed to them by May or June.

When one is faced with unfamiliar figures for tax free allowances and bands, even if one knows what is happening, it throws one a little.

As a methodology, when formulating amendments, I worked on the euro amount for the full year and worked back to uneven pound credit figures for the nine month tax year. The first two amendments provide for an increase in the single person's tax credit from €1,397 to €1,800 and double that for a married person. I have argued at this committee for the past two or three years that the primary shift that should be sought in reducing income taxation is to use tax credits and the argument is well known.

The Minister introduced tax credits a number of years ago and that is clearly the way forward. It allows us to reduce income taxation in a way that benefits everybody rather than disproportionately benefiting those on higher incomes. I believe the primary thrust should have been in that direction this year. I am concerned at increasing PAYE allowances as a means of doing this. It is a form of individualisation in so far as a PAYE allowance is not transferable between spouses. It is cheaper and I assume that is the primary benefit from the Minister's point of view but legal concerns have been raised in the past. Is he satisfied it is possible to increase the standard rated employee's allowance without fear of a legal challenge from self-employed people or others who will not benefit? Tax credits should be increased to a level where the minimum wage is not subject to income tax rather than reducing income tax rates.

I will deal with amendments Nos. 2 to 9, inclusive, initially. The amendments propose to increase various tax credits proposed in the legislation as follows: to increase the basic personal tax credit for a single person from £814 to £1,052 in 2001 and from €1,397 to €1,800 in subsequent years; to increase the basic tax credit for married couples from £1,628 to £2,104 in 2001 and from €2,794 to €3,600 in 2002 and subsequent years; to increase the tax credits for aged persons from £238 to £438 married and from £119 to £219 single in 2001; and to raise the tax credit to £238 in respect of an incapacitated child from £168 in 2001 and from €108 to €800 in 2002 and later years.

In the budget I allocated £1.231 billion to fund cuts in personal income tax. This is almost £200 million more than in my previous budget which was assessed as being considerably above anything that had been given in a single year previously and as almost three times the amount promised under the Programme for Prosperity and Fairness for this year. It represents both a substantial cost and another highly significant step towards fulfilling the commitments set out in the Government's Action Programme for the Millennium. In keeping with that plan, this year's budget, as reflected in the provisions in the Bill, continues to concentrate on reform of the tax system which is designed to take as many people on low incomes as possible out of the tax net while, at the same time, reducing significantly the burden on those who remain within it.

Increasing personal tax relief by £800 for a single person and by £1,600 for married persons and doubling the PAYE allowance to £2,000, as announced in my December budget and shown as tax credits in the Bill, will result in standard rated personal allowances for single persons on PAYE of £7,500, which means they will pay no tax on income below £144 a week. Taken in conjunction with the changes in the tax rates and in the standard rate band, there will be a significant reduction in the tax bill of all taxpayers. I would like to do more and possibly meet the requests of the Deputies opposite. However, we are unfortunately subject to constraints. In the circumstances, I am not in a position to accept the amendments.

The Revenue Commissioners have sent a nice CD-ROM and video to my office in recent days which explain tax credits. I have not had the opportunity to play them yet. Deputy Fleming mentioned that some taxpayers received the new tax free allowance certificate. I have not received mine yet, but I have an example of one with me. It is changed completely from previous years and deals with tax credits. Deputy McDowell, more than most, has spoken about tax credits. In the lead up to the budget for 2000 and after it, he said that some commentators and activists and the social partners forgot that I had announced a fundamental change the previous year of changing to tax credits. They were still talking about allowances when there had been a fundamental change. I agree with the Deputy. It was as if the budget in December 1999 which announced tax credits had never occurred. Even in the negotiations on the PPF, people wanted to stick with standard tax language of allowances. There has been a fundamental change. What I announced two years ago has now come about. This is the final piece of the jigsaw.

The tax free allowance certificate for this year is in tax credits which are stated in pounds and will be stated in euros from 1 January 2002. The certificate is completely different from before but it will have the effect I announced. It will take some getting used to, especially for employers. It will be a much simpler system when it is up and running, but because people are accustomed to the complicated system of allowances, it will not be easily explained. In two years' time when it is up and running, people will wonder what all the confusion was about. I accept there will be a certain amount of confusion in the interim. The video and CD-ROM Revenue has produced is for employers to allow them become accustomed to it. Employees are more interested in what they get in their pay packets at the end of the week or month than in the mechanics of the deductions from them.

Deputy McDowell raised an interesting question about what was known as the PAYE allowance and now known as the employee credit. I heard him state recently that I defended the fact the allowance was not raised significantly. I explained in previous Finance Bills to the difficulty with it that it is not given to self-employed people and, given the difficulty in defending large increases in the PAYE allowances for them, it would not be given to self-employed people. The Deputy then asked had I forgotten the defences I used to make in that regard. The answer is no, to be open and blunt about it.

The PAYE allowance is jealously guarded by trade union representatives as a signal of the difference in their tax regime as against that which applies to self-employed people. I am conscious we agreed in the PPF to establish a working group to examine the expenses allowed to PAYE and self-employed people. It is not overstating the case that, in the negotiations and the lead up to the budget, trade union representatives looked upon the PAYE allowance as special to them and they would be upset if it were extended because, apart from the cost of giving the allowance across the board, they regard it as something unique to PAYE workers.

The Deputy is correct to state that it is a form of individualisation because the PAYE allowance is not transferable to spouses. It is only given to the person working. I am not against creativity in the tax code to solve certain problems and a way has been put forward by Fine Gael to get around this problem. We now refer to the widening of the standard rate band in that regard. While the concerns still exist, I have decided to increase the PAYE allowance to £2,000 which, standard rated at 20%, is a £400 tax credit.

I have received much criticism in my constituency because the PAYE allowance has been increased from £1,000 to £2,000 this year. That criticism has come especially from self-employed people and the farming community. The PAYE allowance was introduced because PAYE taxpayers paid their taxes on a monthly basis whereas self-employed and farming people were normally a year to two years in arrears. These days, self-employed and farming people must pay at least 90% of their tax in November of the tax year under review, often pay the full amount and can overpay if the amount they pay is calculated on the same basis as the previous year. The increase in the PAYE allowance has angered the farming community and self-employed. They now pay their tax on a current basis like everyone else in that they pay preliminary tax in November in the tax year under review and are not in arrears as was the case years ago. What they see as an inequitable situation has been exacerbated in the recent budget. I know the trade union movement guards the allowance jealously but we must at some stage consider those who are not represented by the trade union movement and who are also taxpayers. I make this point because the issue has been raised widely in my constituency by self-employed people and farmers.

This section will take a lot of education and we are slow enough learners. It will take a great deal of effort for taxpayers to understand the new tax allowances when their certificates are issued. There will be consternation when people see that their allowances have decreased from the previous year. We know the tax year will be 74% of the normal length tax year.

That is not exactly right. There will not be tax free allowances but tax credits, so the amounts will appear much smaller.

So it is going to make matters much worse. Those of us with offices in provincial towns will be snowed under with representations about this. It will be very difficult.

People will have to do a crash course.

The Minister will have to launch a comprehensive information campaign so that people will be aware and will be informed as to what is happening. Perhaps the beleaguered teachers, especially business teachers, could teach children about it who could, in turn, interpret it for their parents. That might be one way of doing it. It must be looked at.

The second issue is that of tax credits. Five or six years ago a person earning £20,000 per year and in receipt of the married person's allowance - approximately £7,500 - was in a position where the allowance was deducted from the £20,000. One paid tax on the remainder. Personal allowances have gone up and tax rates have come down. If one asked the man in the street what has happened to the taxation system, he would say that it is better. On Second Stage I quoted from the report of Mr. King of NCB Stockbrokers and though I understand the Minister responded I did not hear it. Mr. King reviewed taxation in the 1990s and his conclusions were startling in that he said that proportionately the tax people pay has changed very little. The amount of tax that they pay out of their income has changed for the top 10% by less than 1%.

I did not read that study, but I think the analysis goes as far as about 1998.

I think it is 1999. It was only published last November. The amount of tax paid by the next 30% has changed by 1% and for the next 60% it has also changed by approximately 1%. All the changes that have occurred have not had a dramatic effect on take-home pay. Wages and salaries have increased, but proportionately the tax benefits have not done much to change the situation. This is borne out when one looks at the mortgage allowance. Four or five years ago, before it was standard rated, the chairman will remember from his profession that a married couple received an interest allowance of approximately £5,000 per year. If they were paying tax at the top rate of 52%, the allowance was worth over £2,500 against their tax payments. When one looks at the £5,000 interest allowance today, it is actually a credit of £1,000 at the rate of 20%. It will be less this year. That brings home what has happened in taxation. While there have been increases, individualisation has changed the position. As Mr. King pointed out in his report, proportionately people's tax burden has not changed very much. This is an interesting commentary on what is happening.

Deputy Fleming's point about the PAYE allowance and how it relates to the self-employed is well made. There is disappointment and anger among the self-employed that this was given to PAYE workers and that the ordinary self-employed person has slipped back a little. The Minister needs to undertake a full review of how the self-employed are treated by the tax code. They are treated differently across a range of sectors, but it eventually comes back to the Minister for Finance.

The self-employed, despite their income, do not qualify for FIS payments from the Department of Social, Community and Family Affairs. If one takes two households, side by side in a rural setting, one person may have three children and earn £200 in a local factory on top of which the Department of Social, Community and Family Affairs will give him or her £42 per week to stay at work. His or her neighbours may be self-employed farmers. The farmer sends accounts to the Revenue to have them back stamped with a determination of his annual income for tax purposes as £10,000 or £200 per week. That is his official income, he does not qualify for FIS by virtue of being self-employed, even though his income is approved as legitimate.

If one takes the Department of Health and Children and higher education grants, one can take two families on the same income again. When a self-employed person sends in accounts for a higher education grant to the local authority, if leasing is built into them, which is allowable by the Minister——

Self-employed persons tend to do better than PAYE workers, though I agree with the Deputy so far.

It is the principle that is at stake. Anything being leased, though allowable for calculating tax purposes by the Department of Finance, is not allowed by the Department of Education and Science in determining higher education grants. A taxi driver in my area bought his own taxi and had a heavy leasing arrangement. He was in receipt of a pension because he had worked in RTE for some time and his income for revenue purposes was below what appeared to be sanctioned for higher education grants, but when one included the clawback in respect of his leasing he did not qualify for the grant. It is unfair that one should have different approaches by different Departments. The treatment of the self-employed should be straightened out. Perhaps the Minister will do so in his last budget.

The last budget of this Administration. It will not be my last budget.

Deputy McDowell is correct. Many of these allowances need to be increased as tax credits as they are much too low. We are dealing with amendments Nos. 9 and 10 and are strongly of the view that those on the minimum wage should not pay tax at all. The threshold should be increased to £175 for single people and £350 for married earners. A married couple on one income in the PAYE tax net have their threshold set at £230 per week or only £12,000 per year, which is very low.

The small income exemption limits are not included in the table. Perhaps the Minister will bear them in mind as they have not changed or changed very little in the last couple of years. They can be a great mechanism for removing those on low incomes from the tax net. When one looks at taxation figures, there are only about 5,000 people across the country who can avail of the small income exemption category.

In previous years many more people were able to benefit from the exemption, the increase in which has not kept pace with increases in income and other changes. The figure should be increased dramatically. A single income family with four children will join the tax net at £230 per week, which is too low. The exemption limits of £8,200 plus £2,100——

We are dealing with section 4.

We will come to them later. The amendments seek to increase the threshold in order that those on the minimum wage would be exempt from tax.

I have written to the Revenue concerning a nasty letter it sent to quite a number of people in my area working as home helps for the health board. The woman who brought it to my attention was a pensioner whose income was about £20 per week. She received a letter from her local tax inspector to the effect that she had to complete and return income tax forms immediately and that failure to do so would mean that her income would be taxed at the top rate.

This was a standard, but nasty letter and I wrote to the inspector concerned. It did not mention the PAYE allowance which, in effect, would mean that the woman in question would not have to pay any tax. The letter was badly put together and represented the big stick being brought down on people. It did not mention the small income exemption or age allowances. The matter could have been better handled and caused a number of people to consider whether they should continue working as home helps. We need these people as they are a vital link with the health service for many people who are disadvantaged, living alone and so on. We cannot tolerate this kind of approach from the Revenue. I will forward the letter to the Minister, if he wishes.

I do not wish my comments to be seen as me having a go at Fine Gael as that is not my intention. However, Fine Gael has a new spokesperson and there is some innovative thinking which behoves me to comment.

I have a difficulty with what Fine Gael seems to be trying to do with these amendments which would remove the minimum wage from the tax net by increasing PAYE allowances and individualising personal tax credits. That is not the way to approach the matter. Personal tax credits should continue to be transferable between spouses for the reasons we discussed at great length last year. The standard rate band should be transferable between spouses.

Deputy McGrath expressed concern about the use of PAYE allowances and the disadvantages for the self-employed. The only amendment Fine Gael has proposed to the table is to quadruple the PAYE allowance, whereas the Minister has doubled it. I know from where Fine Gael is coming and agree with its objective. However, this is not the way to do it, not for the reasons we discussed earlier, but because it amounts to individualisation of the personal tax credit which the Labour Party does not favour.

As I understood it, Fine Gael was not in favour of this either. It is a cheaper way of achieving the objective which takes into account the concerns of the trade union movement, but it is a step too far in terms of individualisation to which I am opposed. The way to remove the minimum wage from the income tax net is by increasing the personal tax credit and retaining transferability and the principle that the married person's personal tax credit should be double that of the single person.

That is what we suggested.

The Minister suggested this by way of the single PAYE allowance which is non-transferable. Amendment No. 10 would increase the personal tax credit, which the PAYE allowance expresses as a tax credit, from £296 to £533, which is effectively a quadrupling of the allowance. It is twice what the Minister has done, which is not the way to approach the issue. Does moving to tax credits mean we are moving away from the situation where the value of the tax credit reduces as the standard rate reduces?

It will now be stated purely as a tax credit, not as a standard rate of tax.

We tabled some of these amendments in a pro forma manner.

We have adopted this approach because it helps everyone. The explanatory leaflet shows the personal tax free allowances and so on. The right hand side shows the personal allowances and what they represent in tax credits on a full-year basis and in the short year. The sum of £296 is 74% of £400. In future budgets all I will be increasing are the tax credits. The tax credit for a single person will, I hope, always increase, but that may not always be the case. We will move away from speaking about allowances. People will receive tax credits for the following year.

This is a short tax year up to 31 December with an overlap. As the new tax year will start on 1 January, the issue is handled with allowances and tax credits. However, in future budgets I will speak only about tax credits. Next December I may speak about the equivalent in allowances, but future tax free allowance certificates will deal with tax credits. As a result, the level of the standard or other tax rates will not make any difference. Future Ministers for Finance will increase tax credits by, for example, £2 per week.

The analysis of tax files is a separate question as regards what percentage is paid at the standard rate and so on. That language is no longer appropriate. If one's income is £27,000, one will calculate 20% of £27,000, which is £5,400.

From 6 April. One will calculate 20% of £27,000 less one's tax credits, from which one subtracts £5,400 and divides the answer by 52. It will take a while for people to get used to this kind of thinking. However, in future I may refer to the tax allowance system for the sake of convenience, but the tax free allowance certificate will be laid out as I have explained. It is a fundamental change which I started three budgets ago.

Last year Deputy McDowell said that he thought he was living in a different world as the Minister, experts, commentators and the social partners were still talking about allowances. That was the only comment I read in that regard which summed up the situation pretty well.

The Minister and I occasionally agree. The table makes reference to the additional relief for a widowed parent following the death of a spouse. There seems to be a different methodology as regards the short tax year where it does not appear to have reduced.

I gave the full amount. I did not reduce the amount to 74% of the figure. That was a policy decision.

What was the thinking?

It was because of the circumstances of widows at a time of bereavement. I introduced the increased bereavement allowance to be spread over a period of time as I was of the view that its reduction to 74% in the year would have been somewhat small-minded.

I do not have a problem with it; it is a once-off gesture to those in difficult circumstances for the nine month year and will revert to the same value over 12 months next year.

It will not have any knock-on effect. How does the Minister envisage the incapacitated child credit developing in the future? He seems to have little inclination to increase it. The credit is related to carer's allowance and other matters, but it strikes me that an argument could be made for acknowledging the difficulties experienced by the parents of incapacitated children through the provision of additional tax allowances.

Rather than confuse people further, I decided to convert some allowances into credit as the amounts involved are minimal. For example, the dependent relative allowance converted to a tax credit amounts to £44 in a full year or £33 in the shortened tax year. I hope to streamline many of these allowances in time in an effort to bring some semblance of order to the tax code.

Is the Minister opposed to increasing this particular allowance?

No, I apologise if my failure to increase the credit gave that impression. I made other changes in this year's Bill such as extending the definition of "relative". I do not have any objection in principle to increasing the incapacitated child allowance; I am merely attempting to streamline these matters.

The Minister has not increased the allowance by very much.

I am trying to provide for tax reliefs in other areas which would have a similar effect. However, I will undertake to re-examine the matter.

I would appreciate that. We do not need to go over the complex background to the home carer's allowance, but this is an issue about which I remain concerned. While certain people benefit from the allowance - generally, the less well-off benefit disproportionately better, which is to be welcomed - the allowance is something of a quirk in the system, one which could cause real difficulty in terms of increases. Any increase in the allowance could act as a increased disincentive to work in that a spouse stands to lose £3,000 of a tax free allowance or similar credit if the carer, typically the woman, takes up employment. Does the Minister envisage the allowance being increased in the future as he has obviously chosen not to increase it this year?

The Deputy will recall the background to the introduction of this allowance.

I certainly do.

I cannot blame him for that. The allowance constituted part of Fianna Fáil's election manifesto, but I agree that it does act as a disincentive to work.

I disagree with Deputy McDowell that the allowance acts as a disincentive to work. It improves the options of those who may or may not wish to go out to work and slightly softens the blow of individualisation. However, there are some difficulties with the allowance. Will the Minister clarify when the home carer's allowance ceases to apply in terms of children's ages? Does it apply when they finish college or when they no longer qualify for child benefit? I looked up the taxation book and was informed by a tax inspector that children had to be under 21 years of age.

I will check the matter for the Deputy. A dependent person is a child in respect of whom either the qualifying claimant or his or her spouse is at any time during the year assessed as being in receipt of child benefit under Part 4 of the Social Welfare Act, 1993.

The Minister is creating a further anomaly in that child dependant allowances are payable under the social welfare code to long-term recipients while children attend higher education institutions which, in some cases, would be up to 22 or 23 years of age. However, this does not apply to those in receipt of short-term social welfare payments. That is another day's work. The Minister is saying that under the social welfare code a child is a dependent child while he or she is in higher education; yet, for the purpose of the home carer's allowance, he or she is not considered a dependant if he or she does not qualify for child benefit.

Many women in my age group traditionally stayed at home and when their children flee the nest, this allowance will cease. The working husbands of many married women in that category will pay additional tax at £660 per week this year and £440 next year. It is somewhat unfair of the Minister to cut off this allowance which principally affects women of a particular age who did not go out to work before the entire tax system changed.

Let me return to some of the earlier points before responding to Deputy McGrath. Deputy Fleming raised the issue of the PAYE allowance vis-à-vis the self-employed. It is correct that the tax system today is much different from that which pertained to PAYE taxpayers and the self-employed when PAYE was first introduced. I have outlined my reasons for retaining the PAYE allowance. Deputy Fleming is correct in saying that the basis of assessment for self-employed persons changed to a current year basis in 1988-89 and that methods of payment are more streamlined. I have outlined the difficulties, apart from the cost, associated with extending the PAYE allowance to other areas.

Deputy McGrath raised the NCB article which I and some of the Revenue officials have read. The NCB concludes that the increases in the tax bands-allowances over the ten year period from 1991 to 2001 have no more than matched corresponding income increases and that the tax burden has more or less remained constant. The NCB's calculations are, of necessity, confined to historical figures up to 1997-98 which pre-date the significant tax concessions introduced in the 1999 and 2000 budgets, in addition to the most recent budget.

The NCB appears to have used the growth in incomes over the period as the basis for measuring the tax burden compared with the traditional basis of using CPI growth as a benchmark by which to measure the necessary minimum increases in allowances and bands to keep the tax burden constant. CPI growth over the ten years to 2001 has been a cumulative 29% compared with income growth on constant numbers of approximately 70%. Clearly, tying the growth of tax bands and allowances to income increases instead of CPI increases would prove much more expensive.

It has been suggested that the increase in the total tax take automatically means that the burden of taxation is increasing. That is incorrect as the following example demonstrates. Let us assume that the expected inflation rate is 3%, the Government tax index is structured accordingly and that a taxpayer receives a pay rise of 3% maintaining the real value of his or her pay. What happens next? The taxpayer has a higher income and his or her tax bill has increased in money terms but, as a percentage of total income, the tax bill is constant. This means that there is no change in the overall burden of taxation. If the taxpayer receives an income increase which is greater than the CPI increase, it naturally follows that the nominal tax bill will increase accordingly. If taxation is indexed for inflation in proportion to the CPI increase, the proportion of tax income will not increase.

One available indicator of the tax burden is that, based on historical Revenue figures, aggregate tax, as a percentage of aggregate total income, fell from 22.5% in 1991 to 21.7% in 1997-98 and by a further 4.7% between 1997-98 and 2000-01. The figures for 2000-01 are provisional. This confirms that there was a relatively modest level of tax cuts in the first half of the 1990s and a much greater level of relief in later years. Budget 2001 will reduce that proportion by a further 2%. These changes will have post-dated the NCB commentary. If the 2000-01 tax changes had been replaced in budget 2001 by cumulative indexation of the 1991 exemption limits, allowances and rate bands and the increase of 29%, the cost to the Exchequer would have been £854 million, £309 million less than the cost of the corresponding elements of the 2001 budget scheme.

Deputy McGrath made a few interesting points. He stated that exemption limits should be increased. Apart from the age exemption limit which is a special category, I have not been trying to increase exemption limits. When there were exemption limits, we created a poverty trap. Up to an exemption limit one did not pay tax, but as soon as one went over it one was taxed at 40% on the balance. The social partners and social commentators agreed that this was a poverty trap. By increasing allowances in recent years I have moved more and more taxpayers away from the marginal rate. Consequently, there are now only 5,000 taxpayers paying at the marginal rate. By increasing allowances and now tax credits, I have eliminated the trap as recommended by all social commentators.

What about the age limit?

It does not affect it because I have been removing more and more taxpayers from the tax net by providing for substantial increases. A small number of taxpayers on substantial incomes are affected by the exemption limits.

This can have a worthwhile effect on those with families.

Yes, when one multiplies it. By increasing allowances and now tax credits, I have removed most taxpayers from this particular poverty trap.

Officials in the Office of the Revenue Commissioners bore this in mind in dealing with home helps. The way in which Revenue treats its customers is much more enlightened than it was 20 or 30 years ago. There is now much emphasis on customer satisfaction and having a good public image. I will bear in mind what the Deputy said in relation to his constituent. My officials will follow up the matter.

Deputy McDowell mentioned tax credits while Deputy McGrath raised interesting points about the different assessment methods used by different State organisations. While some would like to forget this period of my career, when Minister for Social Welfare, I endeavoured to introduce a single means test across the public service, rather than have different assessment schemes. There were different social welfare schemes while the local authorities operated different schemes for rent assessment and higher education grants. We endeavoured to introduce a uniform system across the public service on which the Department of Social, Community and Family Affairs and other Departments have been working during the years. It is frustrating dealing with local authorities on tax assessment if they use a different assessment method. There are very good reasons for this, which have been discussed by the Cabinet in recent years. Deputy Fleming indicated that the method of assessment is more restrictive than that for PAYE taxpayers. As a general principle, I favour a uniform system in dealing with the State. I would have no problem with people using one card in all their dealings with State agencies. They could use their RSI or PPSN number as it is now known. If a liberal society such as the United States uses this method, there is no reason we cannot do likewise. I am on record as saying that this is how we should proceed.

A PPF working group is considering refundable tax credits on which it will report next year. In 1996-97, there were 146,000 marginal relief cases. There will be 4,500 in 2001. Deputy McDowell can refer to this matter in his newsletter.

That could be interpreted differently.

On mortgage interest relief, very few obtain the maximum £5,000 interest relief. The average interest relief claimed——

First-time buyers.

——is much lower. The tax value is approximately £300 on average, which is not as high as one would imagine.

In 1996-97, there were 146,000 taxpayers paying tax at the marginal rate. They were just above the 40% level. All the social partners recognised that this was a real disincentive to work. By increasing allowances the problem has been resolved.

Now there are only 6,000.

From this year the figure will be 4,500.

Again, that could be interpreted differently in the sense that many pay tax at a low rate. If exemption limits were increased, a couple with four children and earning £230 a week could be kept out of the tax netr a little longer. All of us would agree that where a person qualifies for family income supplement, they should not be paying tax. That might be a good criterion to use.

The newsletter was very good and gives me much space. It is a pity that I am not running in that constituency. The next newsletter should indicate that when I took office there were 1,490,000 income earners, of whom 380,000 were exempt from tax. There are 1,769,000 income earners today, of whom 668,000 will be exempt from tax in the new tax year. This is information which Labour Party activists in Dublin should distribute on my behalf on who has done more for the low-paid. I will save Labour Deputies the embarrassment of giving the number of low paid employees when their leader was Minister for Finance.

The Minister should compare like with like.

I am taking 668,000 people out of the tax net. This is equivalent to 38% of income tax payers.

In his last budget the then Minister, Deputy Quinn, reduced income tax by £400 million. He was condemned from a considerable height by the now Minister for having pushed so much money into the economy in a fashion which was undoubtedly reckless and inflationary. The Minister, who did three times that much in this year's budget and about the same last year, appears to have completely lost track of those arguments.

The bottom line is that economic growth started in a serious way in 1994. The rate of growth between 1994 and 1997 averaged 8% and it has been 8.5% to 9% for the two or three years since then. The Minister will acknowledge that most of the time we were in Government we were working our way out of deficits, while there has been a surplus for most of the time he has been in Government and he has had extra money to spend in whatever way he chooses. In those circumstances nobody could get it completely wrong. I am not alleging that the Minister has got it completely wrong or that he does not deserve some credit for the fact that the economy has sustained decent rates of growth in the meantime. What we are arguing about is how that growth has been used and distributed. I have serious disagreements with the Minister on those grounds and will continue to have serious disagreements with him for as long as either or both of us is involved in politics.

I accept that but before the budget, I published in The Examiner and other newspapers an EU Commission document which signalled that Ireland had done more over three budgets to take out the lower paid from the tax net than any other country in the world. When one of the union leaders was asked for his comments he said this was the case. It is the case as can be seen from the fact that 38% of all income earners are outside the tax net.

Regardless of other issues, I will not bear criticism for the steps I have taken for the lower paid. No other Minister for Finance in the history of the State has done as much for the lower paid. In recent years spurious arguments have been made about people on low pay, although not so much since the figures for Europe were published. Up until recently it was suggested that we were not dealing with the lower paid. However, the facts prove otherwise.

I have some figures which I am sure the Minister would not care to dispute. If one looks at the effect over the four years of the McCreevy budgets, so to speak, a single person earning £9,100 has benefited to the extent of £1,100, which is a considerable amount, while a person earning £34,000 has benefited by approximately £5,000 by way of reduced tax liability and a person earning £60,000 has benefited by approximately £6,000. Two measures introduced over the past four years have taken many low paid people out of the tax net. The first was the introduction of tax credits——

I did that.

The Minister was not particularly loud in arguing for them beforehand, although he has been quick to claim credit for them.

We will let the files tell the story.

The second was the exemption from PRSI, which he did not want to give until he was obliged by the trade union movement to give it last year.

Proposals on tax credits have been around for a several years but they were not taken into account by previous Ministers for Finance. With respect to them, my officials did not push them on me either.

Are we going back in history or dealing with the amendment?

The figures quoted by the Minister make the case for his proposal. However, I will also quote some figures which were given by the Minister in reply to Parliamentary Questions Nos. 187 and 188 on 15 November 2000. These figures are somewhat different from those given by the Minister today.

They are not different.

Let me finish. If one takes the percentage of people paying the standard and higher rates, excluding those paying the marginal rate and those who are exempt, the figure is approximately 70%. The figure has only changed marginally during the Minister's tenure of office.

Deputy McGrath is a fair minded person, but I want to give an analysis of what he is saying. If we reach the stage where only 2,000 people pay tax, the other 1,769,000 being exempt, and 1,000 of them pay tax at 20% while the other half pay at 42%, the Deputy would say that 50% of taxpayers pay tax at the standard rate and the other 50% pay tax at the higher rate, rather than saying that 99.8% of them do not pay tax.

That is not what we are saying.

One cannot use that logic.

That is not what we are saying, and one can draw many conclusions from what we are saying. My point is that the percentage of people paying tax has not changed dramatically during the Minister's period in office. It is still approximately 70%. The number of people who are exempt has increased, but this is mainly because the huge increase in employment over the past three or four years has been among those on low income rates. Many people enter the work force on the minimum wage.

That is not correct. The number of people outside the tax net has increased from 380,000 to 668,000. Even though the base has increased——

What year is that for?

In 1997-98 there were 380,000 people outside the tax net, while the figure now is 668,000 on a higher denominator. In percentage terms, the figure has increased from 25% to 38%.

The figure the Minister gave me was 540,000.

The figure of 534,000 was the pre-budget estimate. The figure is 668,000. The figures are available, there is no secret about them.

The Deputy keeps referring to taxpayers. I gave him the ultimate example that if there were only 2,000 people left in the tax net and 1,000 were paying at the standard rate while the other 1,000 were paying at the top rate, one would say that 50% of taxpayers were paying at the top rate, even though 99.8% would not pay anything. One cannot calculate it on that basis.

This is more appropriate to section 3 but we have been drifting into this area. Is it the Government's target to reduce to20%——

That comes under section 3.

This only requires a "yes" or "no" answer. What is the Government's target? Is it 20% of income earners or 20% of taxpayers paying at the higher rate?

It is 20% of income earners. As the Deputy knows, when one moves to the tax credit system one cannot use that method of calculation. It is a different system.

Is the amendment withdrawn?

On a question of principle, I wish the question to be put.

Amendment put.
A division being demanded, the taking of the division was postponed until 1 p.m. in accordance with paragraph (1) of an order of the Dáil of 1 March.

Amendment No. 3 in the name of Deputy McDowell has already been discussed with amendment No. 2.

I understand that if I withdraw the amendment I can re-enter it later.

In that case I will withdraw the remaining amendments in my name, noting that the Minister will agree to look again at the advice.

Amendments Nos. 3 to 9, inclusive, not moved.

Amendments Nos. 10 and 11 can be discussed together.

I move amendment No. 10:

In page 18, column (3), line 44, to delete "£296" and substitute "£533".

Amendment No. 11 is the euro form of amendment No. 10. The main objective here is to try to exempt people on the minimum income or below from taxes.

This amendment proposes an increase in the employee tax credit, formerly known as the PAYE allowance. The amount of the PAYE allowance was doubled in the budget from £1,000 to £2,000. This amount converts to a full year tax credit for £400 - £2,000 at 20% - and amounts to £296 in the "short" tax year 2,000, the figure shown in the Bill. The effect of the amendment would be to increase the credit of £296 to £533 which would correspond to full year credit of £720. It is understood that the aim of the increase is to achieve exemption from income tax for persons earning the minimum wage.

I have some sympathy with the aim of this amendment. However, I should put on the record that in the three budgets prior to that of last December, I removed 176,000 low earners from the tax net, cut the burden on the lower paid in half, reduced the tax rate on the low paid, in many cases by up to 10 percentage points or more, and I did more than was done in many other advanced economies in cutting taxes on single and married earners on low and middle earnings.

Last December's budget, which is given effect to in the Finance Bill, increased the entry point to the tax system to £144 per week - it was at £77 per week when we came into office. In addition, a further 133,000 taxpayers will be taken out of the tax net when this Bill comes into effect from 6 April next - this is over 75% of the total who were exempted in the previous three years. There can be no denying that this is progress on a massive scale. I previously announced, and I repeat it here, that it is the Government's intention in the next budget to raise the entry point towards the level of the minimum wage which will result in the removal of a further 150,000 taxpayers from the net.

The allocation of £1,231 million to fund cuts in personal income tax which I am making this year is nearly three times the amount we promised under the PPF for this year and is generous by any standards.

I cannot accept proposals for further relief on top of the amounts of the scale I have just mentioned and I must, therefore, oppose the amendment. The full year cost of the amendment put forward by Deputy Mitchell would be £319 million.

It is very unsatisfactory that people earning less than the minimum wage have to pay income tax when we have made enormous concessions to people at the other end of the scale. We have reduced capital gains tax to 20%. We have reduced the top rate of income tax, giving enormous concessions to very wealthy people. We have proposals in this Bill in relation to share options where the benefits will be taxed at 20%. It is simply unjust. It is one of the clearest indictments of this Government that it has given so many concessions to the really well off while at the same time it cannot find a mechanism to exclude those on the minimum wage from paying tax. This is one of the most blatant failures of the Government in relation to the less well off. It is one of the most unjust elements of its economic policy. Would the Minister not even accept the principle that those on the minimum wage should not be taxed and that he should find a way of achieving that? There may be a more cost effective way of doing it, by way of extra marginal relief which would not benefit others who earn way above the minimum income. I would ask the Minister to consider for Report Stage some amendment for which social justice cries out.

In last year's budget I accepted the principle of taking all of the lower paid out of the tax net. In the Programme for Prosperity and Fairness there is a commitment that this would be done over time. There is not a specific commitment in the PPF, but I announced in the budget of 6 December last that over this year's and next year's budget I will take the lower paid out of the tax net. This year I went half way - to £144. The minimum wage is about £183. In next year's budget I will complete the process. I have committed myself in principle to removing the lower paid from the tax net. We made significant strides this year. The entry point for a single person will now be £144 per week. I hope that in the budget later this year we will achieve the rest of that objective.

Is the amendment being pressed?

I am pressing the amendment.

A division being demanded, the taking of the division was postponed until 1 p.m. in accordance with paragraph (1) of an order of the Dáil of 1 March.

Amendment No. 11 not moved.
Section 2 agreed to.
SECTION 3.

Amendments Nos. 12 to 20, inclusive, are related and may be discussed together.

I move amendment No. 12:

In page 19, between lines 16 and 17, to insert the following:

"

The next £11,100 / 30 per cent / the middle rate

".

The purpose of this amendment is to raise the principle that we should not contemplate a reduction of the 42% rate. If it is reduced it should not be reduced by much because it is a fair rate for people on substantial incomes. However, it is not a fair rate for those on moderate, middle incomes and yet many of those people, especially single people, end up paying at the higher rate. We acknowledge that bringing down all taxable incomes to 20% would be very expensive and possibly unjust. We want to reintroduce a new middle rate or band. We can argue about whether it should be 30%, 32% or 33%, but in this amendment we favour 30%. The cost of this would depend on the number of people to whom it was applied and when. It is unjust that people on the minimum wage are paying tax. However, it is also an unjust feature of our system that people on moderate incomes, very often with high outgoings such as mortgages, are paying the same rate of tax as people earning £100,000, £200,000 and £300,000 and more.

In addition to that, many of those on very big incomes have the benefit of changes in capital gains tax over recent years. They also have the benefit of the fact that unearned income is taxed at only 25%. They may have the benefit of provisions in relation to share options in the future, although the share options might also affect the category we are addressing here.

These amendments, which I do not intend to press today, were put down to raise for discussion the merit of a middle rate of income tax to address this issue. I would be interested in hearing the Minister's comments.

I support this amendment. The point made by Deputy Jim Mitchell is valid. In this tax year a single person earning more than £17,000 kicks in to the 42% rate at that level of £340 a week. Who are the people in that category who are earning that amount of money? In my area they are young people on the production line in MEC in Ballivor. A girl who came to me last week had a P60 for £19,500. She is not a big earner, she is a single parent paying the top rate of tax on the balance of her income. The Minister will tell me she will be taken out for a couple of years because the income level will be raised to £20,000. Wages will change. It is not right that ordinary people should kick in to the top rate at that level. If they work overtime, and in some companies overtime is mandatory, they pay the 42% rate plus PRSI. It is not worth their while working the overtime whereas from the company's production point of view overtime might be very important. Another company in my area in the motor sector has 830 employees. A lady who had just started work there came home with a gross pay of £596 for the week. She was a married woman who had returned to work and had worked a good number of hours that week. There is the potential to earn big money but unfortunately the overtime is taxed at the top rate. Rather than jumping from 20% to 42% a middle tax category is worthy of consideration and I ask the Minister to bear it in mind.

The amendments concern the income tax rate and band structure that is to apply for the years 2001, 2002 and subsequent years of assessment.

The amendments proposed by Deputy Mitchell envisage a structure which would contain a standard rate band of £14,800 for single persons, £17,131 for widowed parents and £29,600 for all married couples. It would introduce a new third intermediate rate of 30% which would apply to a tranche of taxable income of £11,100 for single persons, £8,769 for widowed parents and £22,200 for married couples above the standard rate band, retain the standard and higher rates as proposed in the Bill, with the higher rate applying to taxable income £25,900 in the case of single taxpayers and widowed parents and £51,800 in the case of married couples.

The overall effect of these amendments would be to set aside a move to widening the standard rate band I introduced last year and am continuing this year. As I explained previously, one of the main difficulties with the present band structure - a structure which these amendments envisage should be retained - is that the single person's standard rate band is doubled for all married couples, whether there is one or two incomes involved.

The Government is committed in An Action Programme for the Millennium to work towards having 80% of income earners taxed at the standard rate. The Government believes the introduction of a single standard rate band for each taxpayer is essential to meet that requirement. As a result of the band widening, which is provided for in the Bill, the percentage of income earners on the higher rate will fall to 23% so that we are well on the way to achieving the programme target. With allowances converted into tax credits, the only way to get the numbers on the top tax rate down is to widen the standard rate tax band. The most effective way to widen that tax band is to put it on an individual basis and tax persons on what they earn as individuals whether single or married. The first step in this direction was taken last year and we are continuing on this road in this year's Bill.

As I explained when we debated a proposal for a third intermediate tax rate previously, the approach to tax reform comes down to one's judgment. I have said often I will be happy to be judged on the combined effect of the five budgets which I will have brought forward by the time of the next General Election. My guiding principle is to give the electorate what they voted for at the last General Election. Each of my budgets must be taken as part of a sequence. The tax strategy I have pursued is bearing fruit in terms of higher take home pay and an increased incentive to work, and I am confident the considered judgment of the electorate on this record will be favourable at the next election.

In the four budgets for which I have been responsible since 1997, I radically reformed the whole tax system. It is now inherently fairer as a result of the introduction of tax credits. Tax rates have been cut to improve the incentive to work and to contribute to the development of the economy. Furthermore, substantial numbers of taxpayers have been taken off the top tax rate.

I remind the committee that in An Action Programme for the Millennium the Government highlighted the need to reduce the burden of personal taxation and to reward effort. The Government's answer to those needs is to retain the two rate income tax system coupled with substantially reduced rates over the life of the Government. This is the programme in which we are engaged and whose targets are being achieved.

As regards the introduction of a third - intermediate - rate of income tax, I have said in the past that, in principle, I have no great objection to it and I agree that a move from a tax rate of 20% to 42% is probably too much in one go. However, I would be prepared to consider a third rate when the radical overhaul of the tax code, to which I referred earlier, is complete. The introduction at this stage of a 30% rate as proposed would mean an effective cut of 10 percentage points for higher rate taxpayers at a time when the Government is trying to assist lower income taxpayers and is endeavouring to remove as many of them as possible from the tax net. In the circumstances I must reject these amendments.

The full year cost of the amendment would be £699 million. I shall go back over what I said previously on Committee Stage debates and in the Dáil regarding an intermediate rate. I do not have an objection in principle but I have decided that to put the taxation system on a sound foundation I would not go down the road of making any changes at this stage other than those signalled in the last election campaign. With respect to previous Ministers for Finance of all parties, the difficulty always has been in the coming year's budget they have all tinkered with the system because of pressures from various quarters and for good reasons. I do not ascribe bad faith to any of them but with a little done here and there the result was a convoluted system which was not founded on sound foundations.

At the end of the five budgets I am endeavouring to have a taxation system that will be fair and equitable based on easy to understand principles, where it will be easy to make adjustments and to focus particular groups. I do not rule out many intricacies within the tax system combined with the social welfare system and many other things but I have set my goal at getting it down to the solid foundations. If I was to start playing around with the four budgets I would never achieve that goal. I predict with some trepidation for Deputy McDowell and others that in future years, the Minister for Finance of whatever political party, will be able to target the tax system so well that he will be able to target the relief to just bald men, it will be so effective and so focused a system.

It is not possible to get to the end game without taking fairly big leaps, doing things that may be considered unfair, but that is the type of system we have grown up with over the years and have made it so complicated. To get it to what I believe will be a fair system I suggest that some of my vociferous critics in one particular media organ might be able to praise Ministers for Finance in the future because it will be so easy to do things if we get to the end game. I do not have a principled objection to an intermediary third rate but if I was to start diverting my energies and resources and keeping my eye off the ball to do that I would end up with a crazy system. When I get to the end game what we can do in the future can be considered.

Even though I have reduced the top rate and the bottom rate, 77% of income earners are paying at the standard rate. People would not have believed that was possible some years ago. After the next budget a very small number will pay tax at the top rate. The top rate will be much lower than when we came into office. I set out my stall quite clearly in Opposition. It was put before the electorate and I have stuck to it because the system we have grown up with over the years is ridiculous, with all its disincentives and other stupid aspects. I hope the new system will be based on a solid foundation and that the new Minister for Finance can do many interesting things when we get there.

As a general rule I do not believe one can justify significant tax breaks for the better off simply on the grounds that it simplifies the system. There are two amendments in my name in this batch. Amendment No. 18 looks to increase the standard rate band for single earner married couples from approximately €36,000 to €38,000 and the second is amendment No. 21 which we are discussing now, is that right?

We are on amendments Nos. 12 to 20.

The only amendment, therefore, in my name in this batch basically deals with the issue of individualisation. I put it down as a signal that my party continues to be opposed to the individualisation of the standard rate band and that, over time, we will have to equalise it by allowing the standard rate band to be transferable at a higher rate. That is not my absolute priority but it is still my view.

The Minister rightly pointed out that in a time when we can afford to reduce taxes and where there is general consensus that taxes were too high, it is very much a matter of priorities. My priority, as I have stated a number of times over the past few years, is that we should use the tax credit system principally, on occasions sometimes exclusively, as the fairest way to reform the taxation system in a way that gives disproportionate benefit to people who are less well off and gives benefit to everybody. That remains my view.

I do not have an ideological problem in principle with the idea of a middle rate of tax but in terms of priorities, if we were looking at a third rate of tax, and I am not sure we should, my priority would be to look at an entry rate rather than a middle rate of tax because that is where we need to make more progress in terms of the lower rates. I am not sure that we can continue to exempt an additional hundred thousand people from the tax system. On this one myself and the Minister are at one in that we believe some contribution is appropriate even at relatively low levels of income, albeit not very much, because most income earners should have a stake in our society and should contribute, however small, to the maintenance of services and the provision of public services. We need to examine a lower rate of tax, therefore, to establish that principle and if there were to be a third rate of tax, that is what I would be looking at.

The Minister talks about targeting but why has he not targeted the less well off?

He has not. There are people on less than the minimum wage paying tax. The concessions to them have been minor compared to the concessions to the mega rich. To take the reduction in the top rate and the changes in capital taxes, for example, the very well off have done very well under this Government. The reduction in capital gains tax from 40% to 20% has been more than justified by the result in that the yield is much better at 20% than it was at 40%, and that vindicates the Minister's move, but if we are taxing income from capital gains at 20% and unearned income at 25%, how can we justify taxing people on very moderate incomes at 42%, to take the figures Deputy McGrath has produced, or those who are earning below the minimum wage? If the Minister has targeted anybody for benefit he has targeted the very rich, and that is the fundamental difference between us. There is no difference between us on wanting to reduce taxes generally or in sharing the wealth that has been created with the people. It is the methodology and the priorities that are in dispute.

We do not believe that in order to get people on middle incomes out of paying an excessive proportion of their salary in taxes we must also give concessions to the very rich. There are two ways to achieve that - either continue to increase the numbers who are paying tax at the standard rate or introduce a middle third rate. There are still 509,000 people paying tax at 42p in the pound. That is a significant proportion of our workforce and there is a strong case to be made, on equity grounds, for introducing this 30%, or a figure close to that.

Introducing a new middle rate of 30%, the band widening change that the Deputy put forward and abolishing my proposal to widen the standard rate band would cost £699 million in a full year but the 481,870 people who would gain from would be higher rate taxpayers, nearly half a million people. So the effect of the changes the Deputy's party is putting forward would be that those who gain from it would be the higher rate taxpayers. Deputy McDowell alluded to that previously. A person earning £10,000 has seen his or her tax decrease by nearly three-quarters since 1997 whereas a person earning £30,000 has seen his or her tax decrease by about one-third in that period. To be blunt about this, and I have been fairly blunt about my taxation changes over the years, the way the taxation system has developed in Ireland - hitting the top rates so quickly and before we brought in the tax credits - was very unfair. We cannot change the system unless we make fairly radical and major moves. It will be simple to go in a particular direction in future budgets if that is what the people want. The whole purpose of the tax credits system introduced by me is to allow that to occur if that is the will of the people as enunciated through their elected representatives in Dáil Éireann and in the Government of the day.

I pointed out earlier that 668,000 persons, or 38% of all income earners, will be outside the tax net as a result of the changes I have made over my four budgets. That is where the benefit of the major tax changes has gone but in our progressive tax system, the more money one earns the more tax one pays. Therefore the changes made will benefit some people at the higher end also but is there anyone inside Leinster House or outside it saying that we should remain on very high rates of tax?

I was a Member of this House between 1973 and 1977 when we had a tax rate as high as 77% and since I have been an elected representative I have seen tax rates well into 60%. When the rate was reduced from approximately 60% to, say, 50% I heard the same cries from the same people to reduce the top rate but nobody is advocating that we should go back to those ridiculous rates.

The changes I made in recent years benefited the lower paid more than anybody else. The figures prove that. A total of 668,000 persons will be outside the tax net. That is a significant achievement. To get to the end game, one must make significant and bold moves. I imagine very few people would suggest that people on modest incomes who pay tax at 48% should continue to pay that rate of tax plus PRSI. When I became Minister for Finance the upper rate was 48%, plus 7.25% PRSI and the health levy. Now the upper tax rate is 42%, plus 4% PRSI and the 2% health levy, making a total of 46%, which is a significant achievement. People were hitting that rate of tax on a small income. Many people do not listen to what is said in this House or to what politicians say any more. One would not need to be very ingenious to work out over the last number of years what one would end up with following the introduction of five budgets and the particular rates that would apply. The only matter about which people are amazed is that we said we would reduce the rates and we did so. That is the only surprise.

It is not that many years ago since employees, particularly in the public service - I am thinking of Dublin Corporation - would not take promotions because they would be worse off because they would have to pay more tax. We could not get good people to come over here because of our tax regime. Now we have a good tax regime and people at the upper end are doing very well. Deputy Mitchell does not define what is considered "very rich". How many people are we talking about who are very rich? People who earn £65,000, £70,000 or £80,000 a year cannot be described as being very rich. We want good people to come into our economy and help it to grow and be creators of wealth. If we want to get the best people, we must pay them well and have a favourable tax regime. I commend the Minister on this. I favour widening the tax bands. People resent too many tax bands. We are far better off having two and widening them as we continue to prosper.

Much progress has been made on the tax front in the past six or seven years by successive Governments, which I welcome. Notwithstanding that, the reality is that in totality the changes have enormously favoured the well off. I mentioned capital gains tax; there is also the share options proposal in this Bill, unearned income and the change in the domicile rules over the past six or seven years, which effectively means that some very rich people do not pay any tax. The totality of the changes have preponderantly favoured the very rich. Those on a minimum income still pay tax and those on fairly modest incomes still pay tax at the upper rate. That is unsatisfactory. There is a point of difference between our party and the Government parties on this issue.

With regard to the widening of the standard rate band and the other changes, Fine Gael's stated position on this issue for some time and the Labour Party's position, as stated by its spokesperson, Deputy McDowell, has been against a widening of the standard rate band, which is contrary to all the trade union activists who support what I am doing. Deputy Mitchell's amendment would mean that a married couple would not pay the top rate of tax until they earn an income of £70,000 per annum. That is still a very substantial income and about four times the average industrial wage. We debated this matter last year in the ruaille buile there was post-budget. With regard to what were seen as the dark ages in Ireland in equality terms, up to the 1980-81 tax year, that was the system in place. We did not have double bands but many bands, For all years since tax was introduced in Ireland, we had different rates but single bands. In that year's budget we decided to double the bands for everybody. That was the system in place in what are regarded as the unenlightened ages. All I am returning to, effectively, is to what was in place then. I do not remember anybody in the 1960s or 1970s kicking up a row about it. I heard nobody on the radio programmes protesting that women were being forced to go out to work because of the taxation system. Apart from myself, does anyone else remember that period?

The then Government wanted to create jobs.

We doubled the band and following the introduction of last year's budget there was an unbelievable outcry concerning these issues. That was the system in place since taxation was introduced in Ireland. It was in place every year until the change introduced in the year I mentioned and I heard nothing about that in those days. What I am trying to do in widening the bands would be fair to everybody. As pointed out on Committee Stage of various Finance Bills and during budget debates from the mid-1980s onwards, the ferocity of the tax system that applied hit single people who jumped into the top rate tax band at a very modest income. I have been trying to correct that position. I think the majority of the people are on my side on that matter.

I take it from what the Minister is saying that he remains committed to completing the individualisation project, as he set out last year, that there would be a standard rate band of £28,000 for each individual, irrespective of his or her status. He will clearly not achieve that next year, as he has slowed down the rate of progress, if I can use that word, towards it. I assume this will be part of the Fianna Fáil manifesto come the next election.

One must wait until the next budget and the subsequent election campaign to see what will be in either document.

Is the Minister seriously telling me that he will be able to increase the standard rate band from £40,000 to £56,000 next year if he has another bite at the cherry?

Notwithstanding circumstances, we intend to produce a budget later this year. I announced last week it will be introduced on Wednesday, 5 December. Each budget must be set against the background that exists at the time it is being prepared, but I signal that the overall aim is to widen the standard rate band, as I announced a year ago.

I am not talking about that. I am talking about the individualisation project, which the Minister announced it last year, two bands, £28,000 individual bands. Is that still Fianna Fáil policy or does the Minister expect to introduce it in the next budget?

In the first instance, the band has increased from £28,000 to £29,000 as a result of this year's budget.

The commitment is to raise it the £20,000 band to £28,000.

My commitment is to widen the standard rate band in time.

To have an individual standard rate band for everybody. That is the commitment. That is what it was until 1980-81.

I was in school in 1970s, so I do not remember any of that.

Nobody protested. That was the system we had. In the dark ages to which those years were referred to in terms of equality, that is what we had. Did anyone kick up a row about it? All I am doing is going back to the future.

It is a different set up. It is a totally different era.

In an earlier discourse with the Minister, the penultimate one, he seemed to take exception to the idea that a couple on £70,000 a year should not pay the higher rate of tax.

I do not take that exception. I am just saying that is a substantial income.

I will highlight the contradiction in what the Minister is saying. The yield from capital gains tax has increased enormously. If he divides it by 20% he will note that millions of pounds have been made by individuals, and they are paying tax at 20%. He seems to take exception to the suggestion that a married couple on £70,000 should pay tax at only 20%. What he is doing is unjust. The sum of £70,000 is not a huge income today, especially in the Dublin region where accommodation costs are so enormous. Likewise for a single person, £35,000 is not an enormous income. Why should people earning £36,000 or £37,000 pay tax at 42% while millionaires and multimillionaires pay capital gains tax at 20%? It is unjust and the sooner the Minister realises that the better.

I am trying to cater for the majority. After 6 April, 70% of all income earners will pay tax at 20%. After next year's budget, about 87% of all income earners——

We have the figures.

——will pay tax at 20%. Only 13% or less of income earners will pay tax at the top rate. The Deputy's party and the other parties in the rainbow coalition stated, in the run-up to the 1997 general election, that this was pie in the sky and could not be done while reducing the rates at the same time, but we did it. Most of the focus of my budgets has been on removing the lower paid from the tax net. The Deputy would discover this if he adds up the amounts of money that went to higher and lower taxpayers.

The argument surrounding my first budget was ridiculous. It was claimed that those on salaries under £12,500 were poor while those on salaries above £12,500 were rich. These were the individuals my first budget was supposed to target. That was the ridiculous argument I heard from Deputy McDowell, that the top rate affected the rich and that the rich were paying tax at 48%.

I did not say that. Taking those figures, somebody on £15,000 scarcely benefited from a reduction in the top rate of tax because he or she only paid at that rate on a little of their income. The reduction in the top rate affects those who are taxed at that level on a substantial tranche of their income. That is the reason it is of greatest benefit to the better-off. The Minister knows this. It does not affect those just into employment; only a tiny percentage of their income is taxed at the top rate.

However, the widening of the standard rate band and the other changes effectively mean that 38% of all income earners will not pay tax.

I support that, but it came about because of the tax credit system. It is a good thing.

Under the changes in taxes in recent years there are people, mainly the mega rich, who are not paying any tax; yet, people on minimum income are. That is the reality. There are people, the mega rich, who are paying no tax because of the domicile law and the changes thereto. They are only paying tax at the rate of 20% on their capital gains. They are paying nothing on much of their income. However, those on minimum income are paying tax under the Minister's unfair regime. We want that changed.

Under the commitments I gave in last year's budget, all those on the minimum wage will be outside the tax net after next year's budget.

I certainly hope so. It will be several years too late, but we will welcome it if it happens. If we are in power, it will happen.

As we will be in power, it will happen. We can outbid each other.

The Minister scoffed at Deputy Mitchell when he suggested that two people with incomes of up to £70,000 would only pay tax at the standard rate.

No, that would be a married couple. They would not pay tax at the higher rate up to £70,000. I made the point that it was a substantial income——

——compared with the average industrial wage.

The commitment the Minister gave last year was that a couple with an income of £56,000 would pay tax at the standard rate.

If both were working.

It is much higher than that if one takes account of the allowances.

That is not much different from what Deputy Mitchell said; yet, the Minister——

My goal is to have the majority of taxpayers, over 80%, paying tax at the standard rate. The top rate should be reserved for those with substantial incomes. We have almost achieved it, but it will definitely be achieved after the next budget. Some 77% of income earners will be paying tax at the standard rate.

It is about 74%. They are the projections.

There are some revised figures. The commitment was to have over 80% pay tax at the standard rate after the next budget. I have one budget in which to do that. Under our commitment, the top rate will be 42% or lower and the standard rate will be 20%.

Amendment put and declared lost.
Amendments Nos. 13 to 17, inclusive, not moved.

I move amendment No. 18:

In page 20, column (1), line 11, to delete "€36,823" and substitute €38,000".

Amendment put and declared lost.
Amendments Nos. 19 and 20 not moved.

Amendment No. 21 is out of order as it involves a potential charge on the people.

Amendment No. 21 not moved.

I move amendment No. 22:

In page 20, between lines 13 and 14, to insert the following:

"(d) for the purposes of this section a married couple, both of whom have attained 65 years of age, shall be treated in like manner as a married couple where both spouses are in employment irrespective of whether one or both spouses are in fact in employment.".

This amendment which deals with individualisation effectively seeks to exempt those who have reached 65 years of age from the individualisation process in order that they will retain full transferability of the standard rate band. One of the major motivations for the Minister's individualisation policy was to increase the workforce. This, clearly, does not apply when people reach retirement age.

I ask the Deputy to include in his letter the previous amendment in which he states that he will increase the top rate to 44% again.

I will let the Minister have an early copy.

I am sure it will go down well at the next general election.

The Minister might be surprised at what it might do.

The Deputy will not mind if I remind the people at that time. The aim of amendment No. 22, which is intended to benefit married couples where both spouses are aged 65 years or over, appears to be to confer the benefit of the extended standard rate tax band, which applies in the case of two income married couples, in cases where only one spouse is in employment or has an income. The standard rate tax band in the case of one income couples will be £29,000 in a full tax year. In the case of two income married couples, the band may be extended by up to £11,000 to £40,000. However, if the income of the second spouse is less than £11,000, for example, £7,000, the standard rate band will be extended to just £36,000. There is, therefore, no set band for two income couples. It depends on the income of the individual spouses which can vary from case to case.

Where only one spouse is in employment, the maximum standard rate band that can apply is £29,000. To attempt to extend this to equate with the position that might obtain if both spouses were in employment is not realistic in that there is no fixed measure of the amount by which it should be extended. Even if the proposal were workable, it could lead to inequitable results. A one income couple, for example, with an income of £36,000 would, under the amendment, enjoy a standard rate band covering the entire amount. On the other hand, a two income couple comprising incomes of £32,000 and £4,000 would benefit from the standard rate to a maximum of just £33,000 - £29,000 plus £4,000 - with the top rate of tax applying to the balance of £3,000.

The amendment does not sit comfortably with the scheme of widening the standard rate band in the case of two income couples. I appreciate that the Deputy is anxious to direct an easing of the tax burden towards those over 65 years of age. My own preference, if assistance was to be given to that segment of the tax paying population, would be to do so via the age exemption and age tax credit avenues rather than by way of altering the rate structure. I have gone as far as I can reasonably be expected to go with this year's tax cutting package and in the circumstances I cannot accept the amendment.

There is one minute left.

I will withdraw the amendment and the following two amendments in my name. I am anxious to hear the Minister's response to my amendment to section 6 regarding the Irish Shipping employees.

Amendment, by leave, withdrawn.
Section 3 agreed to.
Amendments Nos. 23 and 24 not moved.
Sections 4 and 5 agreed to.
NEW SECTION.

I move amendment No. 25:

In page 22, before section 6, to insert the following new section:

"6.-Section 123 of the Taxes Consolidation Act, 1997 (which relates to the general tax treatment of payments on retirement or removal from office or employment), is hereby amended by the insertion of the following subsection after subsection (6):

'(7) This section shall not apply, and it and section 114 of the Income Tax Act, 1967, shall be deemed never to have applied, to any payment made or to be made under the Irish Shipping Limited (Payments to Former Employees) Act, 1994.'.".

The amendment proposes specifically to exempt in full from tax compensation payments made to former employees of Irish Shipping Limited. Under normal rules, these payments are chargeable for tax, subject to the exemptions due in respect of redundancy payments. From 1993 the exemption was £6,000 plus £500 for each year of service. In 1999 the exemption was increased to £8,000 plus £600 for each year of service. This is a generous exemption. While I have sympathy for those affected when Irish Shipping collapsed, I also have sympathy for any employee who loses his job. It would be inappropriate to make an exception in this case without applying it across the board to payments in all circumstances. As this is something I am not prepared to do, I cannot accept the amendment.

As it is now 1 p.m., before putting the question as provided for by the order of the Dáil of 1 March, I am required to take the vote on amendment No. 2 to section 2, which was postponed earlier this session.

Amendment put.
The Committee divided: Tá, 6; Níl 8.

  • Belton, Louis.
  • Deenihan, Jimmy.
  • McDowell, Derek.
  • McGrath, Paul.
  • Mitchell, Jim.
  • Ryan, Seán.

Níl

  • Ahern, Michael.
  • Briscoe, Ben.
  • Browne, John (Wexford).
  • Dennehy, John.
  • Fleming, Seán.
  • Foley, Denis.
  • McCreevy, Charlie.
  • O’Flynn, Noel.

Before putting the question as provided for in the order of the Dáil of 1 March, I am required to take the vote on amendment No. 10 to section 2, which was postponed earlier this session.

Amendment put.
The Committee divided: Tá, 5; Níl 8.

  • Belton, Louis.
  • Deenihan, Jimmy.
  • McGrath, Paul.
  • Mitchell, Jim.
  • Neville, Dan.

Níl

  • Ahern, Michael.
  • Briscoe, Ben.
  • Browne, John (Wexford).
  • Dennehy, John.
  • Fleming, Seán.
  • Foley, Denis.
  • McCreevy, Charlie.
  • O’Flynn, Noel.

I am now required to put the following question in accordance with an order of the Dáil of 1 March: "That the amendment set down by the Minister for Finance to sections 1 to 11, inclusive, and not disposed of is hereby made to the Bill and, in respect of each of the said sections undisposed of, other than section 8, that the section or, as appropriate, the section, as amended, is hereby agreed to".

The Committee divided: Tá, 8; Níl, 7.

  • Ahern, Michael.
  • Briscoe, Ben.
  • Browne, John (Wexford).
  • Dennehy, John.
  • Fleming, Seán.
  • Foley, Denis.
  • McCreevy, Charlie.
  • O’Flynn, Noel.

Níl

  • Belton, Louis.
  • Deenihan, Jimmy.
  • McDowell, Derek.
  • McGrath, Paul.
  • Mitchell, Jim.
  • Neville, Dan.
  • Ryan, Seán.
Question declared carried.
Sitting suspended at 1.20 p.m. and resumed at 2.30 p.m.

If votes are called during the course of the debate on sections 12 to 21, the division, in accordance with an order of the Dáil of 1 March, will be postponed until 4.30 p.m.

SECTION 12.

Question proposed: "That section 12 stand part of the Bill."

Will the Minister explain this section?

In my budget speech last December, I announced that I intended to renew the business expansion scheme and seed capital scheme up to the end of 2001. This was to enable a detailed review of the BES to be carried out by the Department of Enterprise, Trade and Employment on their continued effectiveness. The schemes had been due to lapse on 5 April 2001. I also announced that I proposed to recognise county enterprise boards for the purpose of certifying suitable projects under the schemes. Section 12 gives effect to these proposals.

The BES was originally introduced in 1984 for a three-year period and has been renewed, in one form or another, on a number of occasions since then. There have been a variety of well documented abuses of the scheme during its period of operation, and these have been countered by amendments to legislation as and when these abuses have come to light. Following an early review of the scheme in 1997, the most significant change in the BES to be introduced was a reduction, from 1998 onwards, in the amount any company could raise, from £1 million to £250,000. This has been a successful change and it has reduced the Exchequer cost of the scheme while maintaining its effectiveness, particularly for smaller companies.

The seed capital scheme was introduced in the Finance Act, 1993, to encourage individuals currently or formerly in employment to establish new business ventures. This scheme operates very much in parallel with the BES, though the BES company limit of £250,000 is £500,000 for seed capital scheme purposes. In most situations, therefore, the conditions applying to a company under both schemes are identical, which means that such a company may be eligible to be in receipt of both BES and seed capital investment. The view taken by the Department of Enterprise, Trade and Employment during this year will be debated with a view to determining what form the schemes will take in the future.

The other change I mentioned relates to county enterprise boards, internationally traded service companies, and the BES. Currently to be considered as qualifying for BES purposes, such a company must receive at least an offer of an employment grant or equity invested from an industrial and development agency. This currently means Forbairt, the IDA, SFADCo and Údarás na Gaeltachta, but not county enterprise boards. Since the 1997 Finance Act, county enterprise boards can certify manufacturing, internationally traded services and research and development operations for seed capital scheme purposes. This has worked effectively and I now feel it is appropriate that county enterprise boards should be included as an industrial development agency for the purposes of the BES.

Is the report on BES companies available for inspection?

The review will only be undertaken this year by the Department of Enterprise, Trade and Employment.

How successful have the county enterprise boards been? They were introduced a number of years ago and there was great talk about them. In fact, I invested in one myself.

Did the Deputy get his money back?

I will tell the Minister next year. That is the crucial time. I am in a conglomerate - there are a lot of companies involved. How successful has this been? When one reads the reports of these companies, one sometimes wonders why they do not just photocopy the report from the previous year. Did they achieve what they set out to do?

My own experience is that they were very successful in achieving what they set out to do. I will give the Deputy some figures. Since the commencement of the BES, there have been 47,719 investors. They have invested £746 million in the BES at a cost of approximately £364 million to the Exchequer. It is pretty substantial. I agree with Deputy McGrath in that I knew of people years ago who were anxious to invest in the BES as long as they got the tax break. Some of them did not know what they were investing in.

The review being undertaken by the Department of Enterprise, Trade and Employment will take all those things into account and we will get a fuller picture. It served its purpose at the time. I remember when the BES was introduced. I think it was Deputy Bruton's idea originally and he had had the idea for some time. There are lots of equity venturists out there at present and plenty of people to give money for investment. The financial institutions are competing with each other. There are a number of venture capital companies operating and the climate forinvestment is a lot better. However, when the BES was introduced, the situation was not like that. My view is that it served its purpose at the time.

I do not want to pre-empt what the review might say but it might come to the conclusion that in this climate, it has outlived some of its usefulness. I remember when I reduced it from £1 million to £250,000, I was inundated with requests to keep it at the higher figure. I think reducing it to £250,000 has focused it even more. I am told that the tax strategy group paper on the Department of Finance's website gives further information.

Having seen how it works, the BES has been very beneficial to some communities. It has provided advance factories around the country which would not otherwise have been provided. It has given communities an opportunity to provide an advance factory to encourage an industrialist to come in and to set up very rapidly. It has been beneficial. Maybe the Minister could look at targeting the BES at certain parts of the country which lack investment, if that is possible. I mention seaside resorts, although I know they come under the resort scheme. There are, however, certain areas in the country which are deficient in tourism provision and maybe the Minister would target the BES at those areas as with the rural tax incentive. Would that be possible?

When we get the review by the Department of Enterprise, Trade and Employment we will assess what it has to say. We will probably do an analysis from the start of the scheme. We will possibly make some recommendations and we will then see how we will proceed from there.

Maybe part of the review involves looking at the number of jobs; the emphasis might be on the number of jobs involved and how that has worked.

That, I am sure, will be one of the main assessments done by the Department of Enterprise, Trade and Employment and is part of the reason the assessment is being done by it, that is, to see what effect it has had on economic activity and employment, to assess the benefits and how we should go forward with it.

Question put and agreed to.
NEW SECTION.

Amendment No. 138 is related to amendment No. 32. Amendments Nos. 32 and 138 may be taken together by agreement.

I move amendment No. 32:

In page 27, before section 13, to insert the following new section:

"13.-The Principal Act is amended in section 481(1) by the substitution of the following for the definition of 'relevant deduction':

' "relevant deduction" means a deduction of an amount equal to 100 per cent of the relevant investment in respect of a film where the total cost of production does not exceed £4,000,000 and 85 per cent where the total cost of production of a film is in excess of £4,000,000;'.".

Last year the film industry was worth approximately £100 million to the economy. The Minister for Arts, Heritage, Gaeltacht and the Islands, Deputy de Valera, said in Los Angeles that it should be worth approximately £106 million this year. I have heard the Minister in the Dáil question this section 481 incentive. However, the film industry has been driven by this incentive. It has given us that competitive edge over competing destinations. Investors, directors and film companies looking at Ireland as a place in which to shoot films look at this country as opposed to alternative locations. We have very good locations and good technical back-up which is growing all the time because each year when films are shot here, more people are trained.

One thing about which these people are worried is our financial incentives. Other destinations and countries are now providing similar, if not better, incentives. The UK is one such example. Some years ago, it began to provide a very attractive package. When it lost out on the film "Braveheart", people asked questions and the new Labour Government provided far better incentives than its predecessors. That is from where I am coming on this. In order to retain our competitiveness, we need incentives. The tax incentives in place at the moment will be somewhat diluted because tax rates are being reduced and there is less incentive.

This amendment seeks to do two things. It seeks to increase the level of tax relief at the marginal rate of tax permitted for personal investors to 100% for films with budgets below £4 million. I emphasise that £4 million is the average budget for most Irish originated feature films. The 80% relief should be reviewed upwards to 85% in light of changes, such as the lowering of the marginal rates of personal taxation. I remind the Minister that these two changes were recommended in the Kilkenny report which the Government adopted in full in August 1998. The problem is that the Government has not implemented these proposals.

As he was last year when I proposed a similar amendment, I ask the Minister to be as receptive this year given the thriving film industry we have which is driven by section 481 relief. The Minister for Arts, Heritage, Gaeltacht and the Islands has emphasised several times that it is the driving force behind our film industry. If we are to create a self-sustaining indigenous film industry, we have to continue progress and make this a multi-million pound industry, which we can do. I look forward to the Minister's response and I hope he will be as receptive as last year.

I support the amendment. My party has always supported this relief, although I am conscious it is quite a generous relief in the hands of the person who is making the investment. It behoves us to keep a careful eye on whether we are getting the necessary spin-off benefits from the use of the relief. I would like the Minister to say whether he is satisfied that the level of Irish employment meets the targets we set for ourselves - indeed, the requirements of the scheme - and whether the level of spin-off benefits in terms of the use of ancillary services is such as to justify the continuation and improvement of the scheme.

Amendment No. 32 tabled in the names of Deputies Deenihan and Mitchell seeks to have 100% of a personal investment in a film allowed to be deducted for tax purposes where the film has a budget of £4 million or less and 85% of such investment where the film's budget is over £4 million. At present the deduction for 80% is allowed no matter what the film budget is. The tax deduction in 1996 from 100% to 80% was one of the key changes in the parameters of this relief and followed a cost benefit study which showed that the relief at that time gave rise to net Exchequer costs of between £5.5 million and £8 million per annum. It should be pointed out that the individual investor usually invests only approximately £7,500 of his or her cash and borrows the remaining £17,500 to utilise the full tax break from a £25,000 investment. Frequently, the return on his investment, when the tax break is included, can be as high as 15% and often there is little or no risk involved. This is much more favourable than a BES investment.

Tax relief for the film industry was first introduced in 1987 and has continued in various forms since then. This makes it one of the longest running tax reliefs in the economy. Reviewing it against the backdrop of the closing off of tax loopholes, the widening of the tax base and the reduction in rates generally, I have no difficulty in describing it as generous. While I am aware that the film sector, in common with a number of other sectors, is experiencing problems as a result of our continuing record economic growth, in a recent survey a number of producers identified rising labour costs and labour inflexibility as a cause for concern. In a highly mobile international industry such as film making, the question of costs is more significant in attracting film makers than the level of realistic State support a potential project can receive. Therefore, I cannot accept the amendment.

Members will be aware that we discussed this matter on a number of occasions in recent years. A number of reports were made and last year I finally agreed to maintain the relief for a period and give it new parameters. On a number of occasions in the Dáil I described it as the most attractive tax relief available. It is even better than the new savings investment scheme. A headline in one of last Sunday's newspapers advised people to act now to make money from films. It is still a very attractive tax relief.

It has been said that I received representations in recent weeks about the 85% provision in respect of the relevant deduction aspect, more or less on the basis that as tax rates have reduced this would improve the relief available. I have not applied that principle in increasing the incentive through the BES relief or anything else. I do not accept that logic.

Deputy McDowell might favour this scheme because a colleague of his was instrumental in introducing it in 1993, despite the fact that on Second Stage he railed against tax breaks for wealthy people and he included in this film tax reliefs.

It was not me.

It was a very articulate colleague of the Deputy. Without breaching Cabinet confidentiality I understand he very much favoured this relief some years ago. It is a very generous relief that provides a more or less guaranteed return. I cannot accept the amendment. I gave this issue much time, thought and debate in the previous two Finance Bills, as Deputy Deenihan will recognise, but I have not closed the book on it. Last year I said what I would do and that will remain the position for the remainder of my term as Minister.

For the sake of the industry I hope it will be short. The industry will not be over enthusiastic about the Minister's response. What does the scheme cost the Exchequer? Concern has been expressed that the BBC was the main beneficiary in terms of television programmes. Does the Minister have details of the beneficiaries?

I can indicate some of the figures involved. Reports or speculation that the film sector has experienced a significant downturn in recent years are not justified. In 1999, 35 films with a total budget of £90.2 million and an Irish spend of £66.7 million were approved under section 481. In 2000, 28 films were approved with a total budget of £136.6 million and an Irish spend of £72.9 million. This year, three productions have been approved with a combined budget of £89.7 million and an Irish spend of £33.6 million. Since 1997, section 481 film productions to the value of at least £300 million have been undertaken in the State, with an Exchequer cost of more than £75 million. The latest figures, supplied by the Revenue Commissioners and subject to revision, show the tax cost of the relief in various years.

Deputy Deenihan suggested that the relief should be confined to Irish beneficiaries I do not have figures for the BBC or other producers. In common with many other reliefs, this relief had to be approved by the EU Commission under state aid rules. This limits the scope for maximising Irish employment and Irish input.

I did not say that. I said the typical Irish film costs under £4 million to produce. That does not mean that other film makers who make films for less, such as Hallmark, should not be included. This provision would suit Irish film makers, but I do not want it confined to them. It would benefit a greater number, because that is the typical kind of investment to which they would contribute.

Could the Minister indicate the position on employment?

I do not have figures on the numbers employed.

As I recall, the raison d'être for the scheme was to encourage Irish employment and that the training element would give Irish people an expertise in film making they would not otherwise have had. However, I understand concern has been expressed because the Irish people involved tend to do the more menial work while the benefit in terms of inculcating expertise has not been as widespread as was expected or hoped.

I would be afraid to sell this relief on that basis because it would go against the state aid rules laid down by the EU Commission.

Is there not a requirement that a percentage of the work force involved must be Irish?

That had to be dropped, presumably because of EU regulations.

I understand the figure used was approximately 3,500 people. It was also anticipated that many part-time jobs would be generated.

I understand that when we last debated this issue we referred to a report which I understand included figures on employment and we can look again at that. This matter has been extensively dealt with in previous Finance Bills and parliamentary questions have been tabled. In the debates on the Finance Bill Deputy Deenihan pushed for change. We agreed on measures last year and I regard what was agreed to then as the basis for how I would handle this relief in the following years. My successor can address the issue again.

I may revisit this issue on Report Stage. The SIPTU 40 mile rule targets film making at Ardmore. It does not provide an incentive to locate film making outside that limit. Perhaps the Minister will consider tax incentives to encourage film making in peripheral areas, which sometimes may provide better locations.

Is that because of outside resources?

No. The 40 mile rule means that film making is concentrated in the Dublin area and County Wicklow because there is no incentive for people to locate outside Dublin. When the Department considers this matter in the future it might consider giving additional incentives to film producers who use locations outside Dublin.

I doubt if anything can be done.

Amendment, by leave, withdrawn.
SECTION 13.

I move amendment No. 33:

In page 29, to delete lines 1 to 5 and substitute the following:

"(a) would have been eligible to have shares appropriated to him or her, had such shares been available for appropriation, under a scheme approved of by the Revenue Commissioners under Schedule 11 and for which approval has not been withdrawn, and”.

This is a minor technical amendment to section 33 which provides that the trustees of an employee share ownership trust may transfer - free of income tax - shares or cash to the personal representatives of a deceased beneficiary of the trust. The amendment is designed to remove a possible ambiguity of "deceased beneficiary" from the definition. I commend this amendment to the committee.

Amendment agreed to.
Section 13, as amended, agreed to.
Section 14 agreed to.
SECTION 15.

With your permission, Chairman, I wish to take amendments Nos. 34 to 37, inclusive, and amendment No. 40 together.

Is that agreed? Agreed.

I move amendment No. 34:

In page 30, to delete lines 46 and 47, and substitute the following:

"right and ending with his or her disposal of any of-

(a) the shares acquired by the exercise of the right, or

(b) in a case where section 584, 586 or 587 applies, the shares received in exchange for the shares so acquired, is less than 3 years.”.

These amendments propose to make a number of changes to section 15, which provide for a new taxation system for share options granted to employees under schemes approved by the Revenue Commissions.

The appropriate treatment of share options has been the subject of significant discussion over the past few years, with arguments made for and against whether options should be taxed as income or capital. Current legislation imposes an income tax charge at the time of the exercise of the option, at a person's marginal rate of tax, on the difference between the price paid for the shares and the market value at the date of exercise of the option. A charge to capital gains tax arises on any subsequent disposal of the shares on the difference between the market value as at the date of the exercise of the option and the proceeds of the disposal of the shares.

Proponents of a more favourable tax regime argue that it is an inappropriate treatment in that the profit to employees on shares should be treated the same as to non-employees and be liable to capital gains tax only. It has also been argued that the current treatment does not facilitate companies which wish to reward and retain employees by giving them a stake in the company. On the other hand, of course, the argument has been made that favourable tax treatment of share options is merely a way of giving investors and higher favoured employees tax efficient remuneration.

I have weighed the issues carefully and I consider the arrangements put forward in section 15 provide a good balance between the objectives of facilitating the participation by all employees in the fortunes of the company for which they work and of helping companies retain staff vital to their success in a difficult international and national labour market.

Under an approved share option scheme, the charge of income tax on the date of exercise of the option will not apply and, instead, the employee will be chargeable to capital gains tax on the full gain, that is, the difference between the amount paid for the shares and the amount received, on disposal of the shares. To qualify for this favourable treatment, there will be a requirement that the period between the date of the grant of the option and the date of any subsequent sale of the shares must be at least three years.

To qualify for approval by the Revenue Commissioners, schemes must be open to all employees and must provide that employees be eligible to participate in the scheme under similar terms. Under the similar terms rule, the options may be granted by reference to remuneration, length of service or other similar factors.

To assist companies in the retention of those employees who are vital to the companies' success but who, because of their skills and experience are highly mobile, the scheme may, however, contain a "key employee" element where options can be granted which do not meet the similar terms and conditions, provided that at least 70% of the total number of shares over which rights are granted under the scheme in any year are made available to all employees on similar terms. Employees cannot participate in both elements of the scheme in the same year. There will be no limits on the number or value of shares which can be covered by tax efficient options.

Shares used in the scheme must form part of the ordinary share capital of the company and, in general, must not be subject to restrictions which do not apply to other shares of the same class.

Where options are granted before the scheme is approved by the Revenue Commissioners, these will also qualify for the new relief provided the scheme is approved before 31 December 2001, and that at the same time of the grant and exercise, if prior to approval, the scheme would have been capable of being approved had the legislation been in force at those dates.

The changes I am now proposing to the scheme, as construed in the Finance Bill as initiated, are as follows. Amendment No. 34 is designed to deal with the position where a right has been exercised, and before the three-year holding period for the capital gains tax treatment to apply, there is a take-over of the company resulting in a share for share exchange as part of the reorganisation, amalgamation or reconstruction of the company. Under the Bill, as initiated, this exchange would deny the employee the CGT relief. I am now providing that where such an exchange is recognised for CGT purposes, the exchanged shares will be regarded as taking the place of the original shares and the CGT treatment is denied only if the exchanged shares are sold within three years of the grant of the share option.

This would cover the Eircom situation, if it is that type of scheme.

Would it cover similar situations?

Yes.

Turning to amendments Nos. 35 and 36, the Bill provides for a limited retrospection to options granted on or after 15 February 2001. However, in my Second Stage speech I announced that I would extend retrospection to all options unexercised on 15 February, irrespective of when they were granted, and amendments Nos. 35 and 36 provide accordingly.

On amendment No. 37, the Bill provides that in a group scheme the Revenue Commissioners must be satisfied that the scheme does not have the effect of conferring benefits wholly or mainly on directors of higher paid employees of the group, which is defined as the grantor company and any other companies which it controls. This is a provision designed to protect the interests of the ordinary employees under a scheme and is a common provision in all the employee share schemes. Revenue has recently been presented with an employee share scheme specifically designed to circumvent this anti-discrimination clause and amendment No. 37 is designed to deal with this loophole. There are other amendments, which will be taken later, which make a similar amendment to the existing employee share schemes, that is, APSSs, ESOTs and SAYEs.

Amendment No. 40 seeks to do two things. First, it rewrites the existing provision referring to an auditor's certificate to ensure the certificate will be an opinion as opposed to a statement of fact. The existing clause (b) of paragraph 4(2) is also rephrased consequent on the amendments to page 32, increasing the extent of retrospection. Second, the amendment inserts a new paragraph 21, which ensures that shares over which an individual has options will be taken into account in determining whether a person has a material interest in the company.

Since the publication of the Finance Bill, I received a number of representations about the operation of the scheme. One of the purposes of the provisions regarding share option schemes was to facilitate companies such as those which have made representations to me. The companies pointed out a number of their difficulties with the sections in the Bill and therefore we are looking at a number of amendments which I may introduce on Report Stage.

Chairman, perhaps at this stage I might also discuss the two amendments in my name, that is, amendments Nos. 38 and 39, together with those of the Minister.

Is that agreed? Agreed.

In principle, I have no difficulty with what the Minister seeks to do here. There are a number of important improvements and provisions which are part of the scheme and which I support unequivocally. It is good that people should identify with the company for which they work. Allowing them to have some form of ownership of or stakeholding in the company for which they work can only be a good development. Hopefully this will provide people with an incentive to work more and encourage them to be loyal to their employer. From the point of view of companies, it will create some form of flexibility in terms of remuneration because it will allow them to adapt to the circumstances in which they find themselves at any given time. Such flexibility will be useful, particularly in this era of monetary union, to a number of companies.

I am concerned about two or three provisions, or lack thereof, in the scheme put forward by the Minister. The first of my concerns relates to the 70%:30% rule. In my opinion the scheme should have been available, not necessarily on an absolutely equal basis, to all employees and directors in a company. It is reasonable to require that people have a certain length of service and to relate the options granted to the remuneration received by any particular worker. Broadly speaking, I would support discrimination - if that is the correct word - on those grounds. I do not agree with the provision which will allow up to 30% of the shares in any one company to be given to a very small number of managers or directors, most of whom are already likely to be on extremely high incomes. Share options should be a bonus, an incentive or an added extra; they should not be a means whereby a substantial part of any particular employee's income is paid at a reduced level of tax. I am concerned that this is what will happen.

A maximum limit should have been set, either in terms of a person's salary or in monetary terms. I understand that this is the norm in other countries where share option schemes of this kind have been implemented. My amendment suggests that one-third of the total remuneration received by any one person in a particular year should be the maximum amount they can receive by way of share options. That is, to say the least, quite a generous allocation and will, no doubt, in any event apply to the vast bulk of employees. The exception will be those people identified as "key employees".

The argument has been made by, among others, companies involved in the software industry that in order to retain key employees they must pay them enormous salaries. More to the point, they have to be able to give such employees these options, which can be worth a great deal of money. My counter-argument is that if they want to retain a certain number of key employees, these companies should simply increase their salaries. If they want to give them share options in order to remunerate them, that is fine. Given the flexibility this allows companies to exercise, I understand why they would want to do this. Employees also favour these options because of the incentives involved. However, I do not see why share options should be taxed as anything other than income because that is exactly what they are in this instance; they merely supplant, in many cases, a substantial amount of income.

I favour a measure which encourages a change of culture, the creation of a system of stakeholding and identification with the fortunes of a particular company, but I do not favour something which is designed to avoid the payment a substantial amount of additional taxation by high income earners. Amendment No. 39 deals with that matter and amendment No. 38 deals with the percentage of salary which can be obtained by an employee in the form of share options.

The Deputy's first amendment seeks to modify the so-called "similar terms" rule by limiting the value of options exercised each year to one-third of the employee's remuneration for that year. As it stands, the similar terms rule allows some differentiation between employees, as regards the number of options granted to each, on the basis of levels of remuneration and similar factors, but any such differentiation must be broadly proportionate. I do not believe it is necessary or desirable to go further and impose a fixed monetary proportionality of 3:1 or any other ratio. In order to make this new scheme a success, there has to be a reasonable degree of flexibility. The existing similar terms rule and other conditions for Revenue approval should limit the scope for abuse in the form of artificial loading of options in favour of directors and higher paid employees who are not key employees.

Deputy McDowell is proposing in his second amendment the scrapping of the key employee element in the new scheme. It would generally be acknowledged that most companies tend to have a few key people who, because of their mix of skills and abilities, are vital to the success of such companies. This is particularly true in many of the fast growing sectors, such as software, electronics and health care, which are so crucial to the country's economic success. Other countries also recognise this in their tax codes. For example, the UK has a particularly favourable tax regime for options granted to key employees.

It should be remembered that the scheme, as it is constructed, requires that as share options given to key employees increase, so also must the number given under the all employee part of the scheme increase in order to maintain the 30:70 ratio. This will put a damper on any tendency to overly reward the higher paid at the expense of those on more modest levels of remuneration. I am not convinced that Deputy McDowell's amendments would improve the terms of the scheme. I cannot, therefore, accept them.

As Members are aware, this matter has been the subject of much discussion and a number of reports, compiled by people in the industry, over the years. All parties have been lobbied in respect of it and it has been discussed in the context of the various partnership agreements. In the negotiations on the PPF, a sub-group was established to give the matter further consideration. I do not believe we will ever achieve agreement between all sides in respect of it. What it boils down to is whether one is convinced that the lack of an attractive share option scheme will limit or inhibit growth in a particular sector or in any number of sectors.

I have been forced to reach the conclusion that a share option scheme is needed at present. I deliberated long and hard on this matter and rehearsed the arguments put forward by Deputy McDowell and others. I have been convinced, however, that, because we are in competition with other markets and other countries, there is a need to introduce such a scheme.

That brings me back to the second question. If everyone agrees that there should be a share option scheme, what form should it take? I considered whether it should be an all-in, all-employee scheme, with no differentiation between workers, etc. The matter was discussed by officials in my Department and with officials from other Departments. The solution at which we arrived was to introduce the 70:30 rule. I was convinced that if we did not introduce some form of benefit for key employees, it would negative the entire purpose of the scheme for a certain number of companies. I believe I have taken the correct route. I must inform Members that certain people sought a higher percentage for key employees.

I can imagine what sort of percentage the Minister's soulmate's Department sought.

I think the 70:30 rule is quite reasonable.

In my opinion the Minister, in introducing these provisions, is bowing to the realities of the marketplace and international trends. However, that means that we are creating a favourable tax regime for those who work for companies which can offer shares. We are also favouring potential high earners within those companies. I do not believe we have any choice but to do that. However, it will add to the difficulties experienced in the public sector in terms of attracting and retaining high quality employees. As Chairman of the Committee of Public Accounts in recent years, I have witnessed the massive improvements made within Departments. These were brought about by public servants, under the leadership of Ministers of course. The improvements to which I refer, not least those which have taken place in the Minister's Department, have been incredible. However, we are not putting in place options for people who played a key role in bringing about the economic miracle we have witnessed in the past decade.

The share options scheme will make it more attractive for people to leave the public sector and seek employment in the private sector. We must find a way to recognise the work done by key employees in the public sector, reward them accordingly and retain their services. There is no doubt that these people find themselves at an enormous disadvantage. Every Department is experiencing difficulties not only in attracting employees but in retaining them. Share options are necessary but we must find a way to extend the scheme to achievers and major contributors in the public service. It is not easy and concepts such as gain sharing which are not as developed as I would like are mentioned. It is a major area and if we do not get it right soon there will be additional problems in the public service.

I am disappointed the Minister has not responded more positively to my amendments. Perhaps they were not clear enough. The 30% rule is a problem. Under this scheme there is nothing to prevent a company that might grant, for example, options worth £10 million in a given year and giving three or four managers £3 million worth. That is not covered by the overall requirement in the amendment.

If £10 million is granted in share options and £3 million is given to key employees the remaining £7 million worth of shares will be given to the other employees.

I understand that but there is nothing to prevent the company from ring fencing £3 million in share options. It is not subject to the overall rules of fairness to which the Minister referred.

A total of 30% will be kept for key employees.

Yes, but it could be the case that a small number of key employees would be granted options without any limit.

If there is a small number of employees involved, the company will be giving away much of its equity in this form. The owner will end up with control of only a small portion of the company's equity.

This scheme is not unusual in companies. I am thinking of an airline company where a small number of managers receive large remuneration in terms of share options. It is quite normal.

Is the Deputy only thinking of one case?

Yes, but fair play to him. I do not think he should be——

The individual is a constituent of Deputy McGrath.

I do not have that problem.

He is also a friend of mine.

I do not have a problem with him taking as much as he wants out of his company because it is a private company and he can take as much remuneration as he wants. However, a scheme should not be developed which allows anybody to take large amounts out of a company by way of remuneration at a knock down rate of tax. This key employee's provision is open to abuse. It should be subject to a monetary limit or a percentage of salary. It should not be open ended.

I support Deputy McDowell. We do not want to create an avenue for abuse.

I am sympathetic to the Deputies' comments regarding the cost of this provision. Share options were provided previously from 1986 to 1992. The Taoiseach abolished share options when he was Minister for Finance because of the abuses of the schemes. Most people did not cry about it when he did so. We have examined the matter and are in favour of introducing share option schemes again. Deputy Mitchell summed the issue up well. On balance we must examine the marketplace and share options must be provided under an attractive tax regime. I am prepared to move forward to see how it will work.

I am not closing my mind forever and a day to how this should work. Deputies Mitchell and McDowell agreed on the question of imposing a limit on the amount one gains. I concluded that to get the schemes off the ground and to see how they would work there should not be a limit. We are learning as we go along day by day. What we have done in one scenario may not have been what we intended in the first place and will not achieve in certain companies what it is hoped to achieve. We will have to make a call in that regard before Report Stage.

Let us see how the scheme works over the coming years. I know this is a short tax year and it is hard to make a judgment. I will have enough time before my next Finance Bill to examine it but we have debated whether we should reintroduce share options schemes for a number of years. I have concluded that we will do so and I have made them reasonably generous. There are issues in terms of whether the scheme should provide 100% or 70% of share options to all employees or whether there should be a limit on the amount one gains in any given year but I decided for better or worse that we will get the schemes off the ground and follow this methodology.

Deputy Mitchell raised an interesting point about the public sector and gain sharing. As the Deputy will be aware, the PPF was concluded shortly before last year's Finance Bill and a subgroup was set up to investigate all financial incentives in this area, including employee share options, gain sharing and so on, and it has met on a number of occasions. It has been difficult to reach agreement between the various members because there are different views about this area.

The Deputy asked how such a system could be introduced in the public service. A good deal of Mr. Buckley's recent report dealt with a recommendation on performance pay in the public service.

Will the Minister send it to the Committee of Public Accounts?

He made that recommendation in his previous report but we did very little about it in the public service. If we did not do anything about it this time he would not bother making such a recommendation again and that is another angle to this issue.

Performance pay for most civil servants would be taxed at the 42% rate.

That is correct. Gain sharing has been raised particularly by ICTU in terms of how a system could be in place with a similar taxation approach. It will be difficult but if it is possible I will have to leave it to another day. It is not possible to work something out in this legislation.

There is merit in encouraging gain sharing and when I published this Bill I indicated that I would seek to develop a viable option in the area for a future Finance Bill. I appreciate work has already been done on gain sharing by the committee which was established under the PPF. However, the difficulty remains of needing to maintain a broad definition of "gain sharing" so that it would be widely applicable while at the same time ensuring favourable tax treatment would apply only to genuine gain sharing schemes.

My understanding is none of the parties involved in the discussions want gain sharing to develop into a form of tax relief. In this context, there is the crucial issue of the body which would act as honest broker to approve and monitor gain sharing schemes. One suggestion is that the national centre for partnership and performance, possibly with the assistance of other relevant experts organisations, could perform this function. However, as this body is not yet in operation it is not clear whether it could and how it would perform this role.

We are not yet in a position to put forward viable proposals on gain sharing. I have asked the Department to continue its work on the matter in consultation, where necessary, with ICTU, IBEC and other interested parties. All these matters are intertwined. By doing something in one area, one creates an anomaly in another area. I have outlined in reply to parliamentary questions and finance debates over recent years when gain sharing has been discussed, all the reasons we should introduce it and myriad reasons why we should not in regard to tax equity and other considerations which must be borne in mind.

I have decided to proceed down the road of share options making them relatively attractive. I am anxious to see how the schemes will work. I am not closing my mind forever and a day. Whether I am or someone else is Minister for Finance, this matter will be revisited regularly. I have concluded we must move with the overall market and introduce share options. I have decided on this approach in regard to the extent of favourable tax treatment on share options.

There is a great deal of agreement on the Minister's intent but not on his urgency in dealing with the issue. I have been raising this issue since I was a Minister in the mid-1980s. John Boland was Minister responsible for the public service and there was a need for recognition of performance in the public service. It has become more urgent because of developments such as the share option scheme. Where there is a will there is a way. There is not a perfect way but it could be possible to put aside 1% of the public sector pay bill for this purpose which would reward service in different Departments. If there was a will, it could be done within months.

It could also be provided that any awards made under such a scheme would be charged at the same rate as share options, which is 20% rather than 42%. It is possible to do it and we should make provision to do it urgently. I have heard excuses over the years why we cannot reward top achievers in the public service in the manner they should be. It can be done for top achievers outside the service who, in most cases, earn considerably more than top achievers in the public service to begin with. The teachers' strike is an expression of exasperation at the lack of recognition for performance and contribution. The Minister should devise a scheme, even a pro tempore, ad hoc one, to reward civil servants. I am sure he recognises people in his Department who deserve special awards.

The Committee of Public Accounts received extraordinary service from committee staff and other staff in the Houses of the Oireachtas as well as co-operation from the Minister's Department. The staff of the Committee and the Houses were under enormous pressure and received measly allowances and awards, although they worked endless overtime and rose to the occasion. They were then taxed at 44p in the pound. What type of incentive is that? Why would they want to perform the same again when they were treated so shabbily?

I endorse what DeputyMitchell said about gain sharing in the public service. I understand some class of a performance management system is operating within the service. Will the Minister indicate how that works?

It has just begun.

My understanding is that the system of performance management was to allow for the reward of people who contribute to gain sharing and improved systems of operation within the public service. I know it has been very slow in its implementation and that that is not entirely the Minister's fault or that of his Department. It is something which requires agreement to move forward but it has been desperately slow.

In terms of profit sharing generally, the Minister introduced a save as you earn, SAYE, scheme a few years ago. I am interested to hear any information he has on the take up of that scheme. I understand it has been reasonably popular. I am concerned that, by granting this potentially very generous scheme, the Minister could displace the take up of the SAYE scheme and it would be a pity were that to be one of the results.

The Minister alluded to the pre-1992 scheme and I took the trouble to examine some of the comments the then Minister for Finance, now Taoiseach, made at the time. He was damning about the scheme in 1992. He suggested the bulk of options were granted to a small number of employees and that the scheme was not used to create incentives or encourage a sense of ownership or loyalty but as a means of remunerating people and a replacement for income. I am no expert in this area but the provisions of the pre-1992 scheme appear essentially the same as the scheme the Minister is introducing now. If there are distinguishing factors and reasons to assume we will not end up with the same conclusions in a few years' time, I would be interested to hear them.

The pre-1992 scheme was discretionary. It did not have any similar terms, no 30:70 rule or anything like that. It was used in the manner the then Minister for Finance outlined at the time and that is the reason it was abolished.

Whereas now only 30% of the total can be used in that way.

Even if only 30% is used, similar terms must be available for the other 70%. I do not suggest what we have drawn up is perfect but, having agreed that there should be share options, I was then confronted with either introducing a share option scheme that would be so restrictive and cause such contraction that the camel would definitely not pass through the eye of the needle, which is how many schemes were usually run before I became Minister for Finance, or doing the opposite. Once I am convinced by an idea, I am inclined to take a bold chance with it.

The Minister is not just doing that. He is creating the 30% rule which he knows will lead to what I think is abuse. Why not opt for a limit of £30,000 or £50,000 on individual beneficiaries within the 30%? Why leave it completely discretionary?

If we are to see if this will work in the manner in which I was told it would when it was sold to me by the Irish Software Association and other people who have pushed it for years, I am inclined to take the chance to see how it works and then, if a future Administration believes restrictions should be imposed, the Minister will have evidence to support his case. Having bought into it, I am inclined to go this route. My mind is not closed as to what I might do in future.

Does the Minister have anything on the SAYE scheme?

There are 70 schemes covering 40,000 employees. I launched the scheme two years ago.

Is the Minister concerned that the measure he takes now could displace them or make them less attractive?

I do not expect it will have much effect on the SAYE schemes. My tax and savings incentive scheme might have more of an effect. That is a guess.

Why would people bother buying shares at a discounted level when they can be granted them and when the companies involved are likely to grant them?

There is another way of looking at this. If the capital gains tax rate were still 40%, there would not be much pressure about having share options. With the income tax rate being reduced to 42%, very few would be bothered as there would be only a small gain. The attraction is that we have opted for a capital gains tax rate of 20% and reduced the standard rate of income tax to 20% and the top rate to 42%. It justifies the thinking that low tax rates incentivise people and higher tax rates do the opposite. The lower the tax rates, the happier everyone will be.

Is it not the case that it is not meant to be an incentive for a certain group of people but to encourage a different culture in the companies involved?

I am told by people in the computer industry that this will be an incentive to hold on to employees. The Deputy said, if that is the case, why not pay the employees more? However, that creates wage inflation and makes it very expensive. It creates the type of market which exists to some extent at present where people stay with a company for six months to a year before moving to another company which pays more. There is no loyalty. The purpose of share option schemes is to build up loyalty to a company or product by giving employees an incentive to stay with the company.

I have seen in one case where people joined a company seven, eight or nine years ago, worked for lower salaries in the expectation that something good might happen, and have since broken through. In Silicon Valley in America, the push was to get people to take lower starting salaries in the expectation that one day the company would strike pay dirt which, if it did, meant it could be floated. As with the gold prospectors of old, not everyone was successful and not all hit pay dirt. Nonetheless, it incentivised people to do more and has definitely led to the expansion of industry in the United States. We learn from that experience. Different things motivate different people and such an incentive motivates people tremendously. It has worked elsewhere and I am inclined to take people at their word that it will also work in Ireland. It is a reasonable approach and the matter can be re-examined to see how it has operated. As I have bought into the idea, I will try to make it a success.

We agree on 90% of this. I would agree with the Minister's argument if applied to all employees or people who have been there for a certain period. If there was no 70-30 rule and 100% of the shares were available to all employees, subject to other criteria set out by the Minister, I would be happy with this or if there were a maximum in terms of salary or a monetary maximum.

I inclined more to the "all employees" rule rather than having no limit.

I would go with that as companies would have to give benefits to everyone.

It was represented strongly to me that there should be an element regarding key employees.

We disagree on that.

The Minister has to do this and there will be a bigger take-up than heretofore. There is also the fact that income from this source is not only taxed at 20% but there is no PRSI on it. Having removed the employers' ceiling more employers will have more of an incentive to go for such schemes and to encourage their employees to take them up. It is something we have to face.

If tax is now at 20% for capital gains and for share options and 25% for unearned income, it is very hard to sustain a case for 42% on earned income. Yet to reduce that will involve all sorts of unfairness and social injustice. We are doing a number of things alongside each other this year which will probably have certain unintended consequences.

I believe we will reach the situation I outlined this morning, that we will have a soundly grounded taxation system at rates of say, 20% and 42% or whatever lower figure we can move to so that very few people will hit the top rate and at a very high level of income. Deputies may have noticed that I seem fond of 20% in taxation - even VAT is down to 20% - and the capital gains tax, the standard rate of income tax and capital acquisitions tax, effectively. There is another one.

Corporation tax is at 12.5%.

It will be by 1 January 2003. A small number of people will pay tax at the top rate, whatever that may be, and I have signalled that I do not have an objection in principle to an intermediate rate. A case was made by Deputy McDowell for a lower starting rate also but all that comes up when we get the system on a good foundation. My approach is right and when we reach that stage the temptation not to reverse it will be greater than other short-term political gains might demand.

To go back to that point, we have 42% plus more than 8% PRSI——

It is 6% now.

Anyway, it is effectively 48% or 49% on income right up to the ceiling. Almost half——

No. I did away with the ceiling for employers but I did not for employees.

I kept the high ceiling at £28,050.

The Minister is right.

That should be reduced for the shorter tax year.

I did away with the ceiling for the self-employed and proprietary collectors, which people did not know. I reduced the rate of PRSI to 3% for them. Their rate of PRSI was 5% and a 2% levy. I did away with the ceiling and I reduced that to 3% and 2%, so if one goes above a certain figure one does not get any benefit at all from the budget, including the top rate of tax. Interesting figures came out——

There are hundreds of them.

Yes but something the PRSI matter showed is that there is a relatively small number of people with colossal personal incomes. There were figures about this in some newspapers after the budget.

Most of them did not pay tax.

These were the people making returns for tax, so those not making returns for tax are outside the State for all we know. A relatively small number of them have colossal high earnings.

I know. That is the case for the two rates.

I am on a steep learning curve with this as share options do not come up in conversation among people coming to my clinics, apart from those with Eircom shares.

The one exception.

The general point being made by Deputies McDowell and Mitchell is a good one. The Minister may not be able to concede the point now but he should look at it. I interpret this as boiling down to some young whizz-kid earning £50,000, and instead of being given a rise of £10,000, he can get share options that could be valued at between £20,000 and £50,000, depending on the value of his company. In essence he can use those at 20%, so he is getting his salary increases by way of share options rather than in the normal way.

The Deputy must remember that in a rising market, people will think things will keep going on for ever. In very recent times share options would not have been a great option as the shares have gone in the other direction. Some people think prices will always rise but they have recently learned that is not the case. Some people have been saddled with tax bills they cannot pay because the value of the shares does not meet the tax bill. It is a two way street.

There is a great deal of validity in what is being said and we have discussed this on a number of occasions. It was time to make a decision rather than keep putting it off. The points are valid and I do not dispute them but I have decided on this route as of now to see how it works.

I am not too concerned about the whizz-kid who can earn £50,000. I am more concerned by the manager who effectively owns the company already, giving himself an extra £200,000 as part of the employee system. I know what the Minister's response will be.

Has the Minister given thought to profit-sharing? As Deputy Mitchell pointed out, this only applies to companies quoted or which will be quoted in the future.

It is a small number.

Yes, but we have to move to provide——

Private companies can theoretically involve themselves in share option schemes but as the Deputy knows, the value rating of private companies is a very inexact science.

I refer to some kind of profit sharing scheme whereby a designated percentage of profits could be set aside.

The matter is being investigated in relation to gain shares. Coming up with a definition that would not be, effectively, a tax relief bonus scheme defies the best minds. Deputy Mitchell put forward an interesting idea, that other Members may also have suggested, regarding a certain percentage being put aside. The first Buckley report recommended a certain performance-related percentage for assistant secretaries and other groups be set aside, as did the Gleeson report. However, the problem I have seen in my Department and elsewhere is that decisions must be made at the end of the year as to what is to be done. Effectively, nearly everyone got it. It is hard.

Suppose the head of the Revenue got a percentage of the tax collected.

The Public Accounts Committee would not agree with that.

How then would we reward the person who drew up the taxation legislation? We cannot measure his output.

The Minister can.

I accept it is more difficult to try to come up with an equitable scheme. It could be done but the difficulty with this in the public service is that the unions jealously guard the equal treatment of all kinds of people. Whereas people in Department might know who should be rewarded and it would be easy to do it, it might destroy harmonious work relationships.

My eldest son works for Merrill Lynch which has more staff than the entire Irish public service. The company has a bonus scheme which distinguishes unit by unit in every office. If a certain unit is assessed as having produced a particular performance it gets a bonus of £5,000. If it did not do so well it might get £1,500 and if it was the worst it might get nothing. Merrill Lynch, Goldman Sachs and all these large companies are able to do this. These are large operations which are able to distinguish across an enormous range of activities and within different departments.

My son complained that he only got a bonus of £5,000 while people in other units got £7,000. His salary is higher than mine anyway. It can be done if there is a will. Perhaps we should ask Merrill Lynch to advise us.

We are making a determined effort to try and implement some such suggestions. However, it will be difficult and many hurdles have to be crossed. The Deputy is right in principle. There is no reason, with the right effort, we cannot do so but it will not be easy given the structures in the public service.

I heard this before.

Amendment agreed to.

I move amendment No. 35:

In page 32, line 17, to delete "obtained" and substitute "exercised".

Amendment agreed to.

I move amendment No. 36:

In page 32, lines 29 and 30, to delete "15 February 2001" and substitute "the time the right was obtained".

Amendment agreed to.

I move amendment No. 37:

In page 34, to delete lines 25 to 27, and substitute the following:

"(3) For the purposes of subparagraph (2), 'a group of companies' means a company and any other companies of which it has control or with which it is associated.

(4) For the purposes of subparagraph (3), a company shall be associated with another company where it could reasonably be considered that-

(a) both companies act in pursuit of a common purpose,

(b) any person or any group of persons or groups of persons having a reasonable commonality of identity have or had the means or power, either directly or indirectly, to determine the trading operations carried on or to be carried on by both companies, or

(c) both companies are under the control of any person or group of persons or groups of persons having a reasonable commonality of identity.”.

Amendment agreed to.

I move amendment No. 38:

In page 35, line 43, after "terms" to insert "provided that the market value of the shares acquired during the course of any one tax year shall not exceed in value one third of the total remuneration acquired by that employee during the course of that tax year".

Amendment put.

In accordance with the order of the Dáil of 1 March the division is postponed until 4.30 p.m.

I move amendment No. 39:

In page 36, to delete lines 1 to 20.

Amendment put and declared lost.

I move amendment No. 40:

In page 40, to delete lines 36 to 44, and substitute the following:

"auditor of a grantor company certifying that, in his or her opinion-

(a) the terms of any rule or rules included in the scheme by virtue of either or both paragraphs 8 and 9 are complied with in relation to a year of assessment, or

(b) as respects rights obtained under the scheme before it was approved under this Schedule, the conditions in subsection (7)(b) of section 519D are satisfied.

Options etc.

21.-(1) For the purposes of section 437(2), as applied by paragraph 10(b) of this Schedule, a right to acquire shares (however arising) shall be taken to be a right to control them.

(2) Any reference in subparagraph (3) to the shares attributed to an individual is a reference to the shares which, in accordance with section 437(2) as applied by paragraph 10(b) of this Schedule, fall to be brought into account in that individual’s case to determine whether their number exceeds a particular percentage of the company’s ordinary share capital.

(3) In any case where-

(a) the shares attributed to an individual consist of or include shares which that individual or any other person has a right to acquire, and

(b) the circumstances are such that, if that right were to be exercised, the shares acquired would be shares which were previously unissued and which the company is contractually bound to issue in the event of the exercise of the right,

then, in determining at any time prior to the exercise of that right whether the number of shares attributed to the individual exceeds a particular percentage of the ordinary share capital of the company, that ordinary share capital shall be taken to be increased by the number of unissued shares referred to in clause (b).’,”.

Amendment agreed to.

We will put the question that section 15, as amended, stand part of the Bill at 4.30 p.m.

NEW SECTIONS.

I move amendment No. 41:

In page 41, before section 16, to insert the following new section:

"16.-The Principal Act is amended:

(a) in Schedule 11, as respects profit sharing schemes approved on or after the passing of this Act, by the substitution in subparagraph (1A) (inserted by the Finance Act, 1998) of paragraph 4 of the following for clause (b):

'(b) For the purposes of this subparagraph:

(i) "a group of companies" means a company and any other companies of which it has control or with which it is associated, and

(ii) a company shall be associated with another company where it could reasonably be considered that:

(I) both companies act in pursuit of a common purpose,

(II) any person or any group of persons or groups of persons having a reasonable commonality of identity have or had the means or power, either directly or indirectly, to determine the trading operations carried on or to be carried on by both companies, or

(III) both companies are under the control of any person or group of persons or groups of persons having a reasonable commonality of identity.',

(b) in Schedule 12, as respects employee share ownership trusts approved on or after the passing of this Act, by the substitution in paragraph 2(2) (inserted by the Finance Act, 1998) of the following for clause (b):

'(b) For the purposes of this subparagraph:

(i) "a group of companies" means a company and any other companies of which it has control or with which it is associated, and

(ii) a company shall be associated with another company where it could reasonably be considered that-

(I) both companies act in pursuit of a common purpose,

(II) any person or any group of persons or groups of persons having a reasonable commonality of identity have or had the means or power, either directly or indirectly, to determine the trading operations carried on or to be carried on by both companies, or

(III) both companies are under the control of any person or group of persons or groups of persons having a reasonable commonality of identity.',

and

(c) in Schedule 12A (inserted by the Finance Act, 1999), as respects savings-related share option schemes approved on or after the passing of this Act, by the substitution in paragraph 3 of the following for subparagraph (3):

'(3) For the purposes of subparagraph (2):

(a) “a group of companies” means a company and any other companies of which it has control or with which it is associated, and

(b) a company shall be associated with another company where it could reasonably be considered that-

(i) both companies act in pursuit of a common purpose,

(ii) any person or any group of persons or groups of persons having a reasonable commonality of identity have or had the means or power, either directly or indirectly, to determine the trading operations carried on or to be carried on by both companies, or

(iii) both companies are under the control of any person or group of persons or groups of persons having a reasonable commonality of identity.'.".

As regards substantial amendments would it be possible in future to have the equivalent of an explanatory memorandum - a note explaining the purpose of the amendment?

I made a similar suggestion when in Opposition.

It is very hard to comprehend pages of amendments.

I think we should do so for the future. This amendment proposes to make changes to existing employee share schemes as regards the new approved share option scheme regime being proposed in section 15, that is the provision designed to forestall any attempts to circumvent the anti-discrimination clause of those schemes.

That clause provides that in group schemes, the Revenue must be satisfied that the scheme is not designed to benefit wholly or mainly directors and higher paid employees of the group. We are trying to ensure that the Deputies' objectives are achieved. The figure was 70% and this will carry it into the ESOP. The provision is aimed at situations where people try to use a group of companies to get around this measure. I am sure we will learn a lot more about this in the coming months.

Since the Minister introduced it in this way, the previous section gives a general discretion to the Revenue to reject a scheme in circumstances where it feels it is designed to be excessively discriminatory. Is this mirrored in existing legislation? It what circumstances does the Minister envisage this power being used?

It would be easier to give the Deputy an answer if we went into private session.

The committee went into private session at 3.56 p.m. and resumed in public session at 3.58 p.m.

Amendment agreed to.

I move amendment No. 42:

In page 41, before section 16, to insert the following new section:

16.-(1) The Principal Act is amended:

(a) in section 511A-

(i) by the insertion in subsection (2)(c) of ’or paragraph 11A, as the case may be,’ after ’paragraph 11’, and

(ii) by the insertion in subsection (5) of 'or paragraph 11A, as the case may be,' after 'paragraph 11',

(b) in Schedule 11-

(i) in paragraph 4-

(I) by the insertion in subparagraph (1A)(a)(i) of ’, having regard to subparagraph (1B),’ after ’subparagraph (1)’, and

(II) by the insertion of the following subparagraph after subparagraph (1A):

'(1B) As respects a scheme which has been established by a relevant company (within the meaning of paragraph 1 of Schedule 12)-

(a) any reference in subparagraph (1)(a)(ii) to an employee or a full-time director shall be deemed to be a reference to an individual who was such an employee or a full-time director, as the case may be, of that relevant company or of a company within the relevant company’s group (within the meaning of paragraph 1(3A) of Schedule 12) on the day the scheme was established, and

(b) for the purposes of satisfying the qualifying period requirement referred to in subparagraph (1)(b), such periods in which an individual was or is an employee or a director of a company referred to in subparagraphs (3)(b) and (13) of paragraph 11A of Schedule 12 shall also be taken into account.’,

(ii) in paragraph 12A by the insertion in subparagraph (b) of ’or paragraph 11A, as the case may be,’ after ’paragraph 11’, and

(iii) by the insertion of the following paragraph after paragraph 13A:

'13B.-(1) Nothing in paragraph 13 shall prevent shares being appropriated to an individual under an approved scheme established by a relevant company (within the meaning of paragraph 1 of Schedule 12) and where, in a year of assessment, shares have been appropriated to an individual under such an approved scheme, paragraph 13 shall apply as if those shares had not been appropriated to that individual in that year of assessment.

(2) Section 515 and paragraph 3(4) shall, subject to any necessary modification, apply in respect of all shares appropriated to that individual in that year of assessment.',

and

(c) in Schedule 12-

(i) in paragraph 1-

(I) by the insertion in subparagraph (1) after the definition of 'ordinary share capital' of the following:

' "relevant company" means:

(a) a company into which a trustee savings bank has been reorganised under section 57 of the Trustee Savings Banks Act, 1989, or

(b) ICC Bank plc;

and

(II) by the insertion of the following subparagraph after subparagraph (3):

'(3A) For the purposes of this Schedule a company falls within the relevant company's group at a particular time if:

(a) it is the relevant company, or

(b) at that time, it is controlled by the relevant company and the trust concerned referred to in paragraph 2(1) is expressed to extend to it.’,

(ii) by the insertion of the following paragraph after paragraph 7:

'7A. Notwithstanding any other provision in this Schedule, in a case to which paragraph 11A applies, any reference in paragraph 8, 9 or 10 to an employee or a director of a company shall be construed as a reference to an individual who:

(a) was an employee or a director, as the case may be, of the relevant company or of a company within the relevant company’s group on the day the trust was established, and

(b) is, at the relevant time (within the meaning, as may be appropriate in the circumstances, of paragraph 8, 9 or 10), an employee or a director, as the case may be, of a company referred to in paragraph 11A(3)(b).’,

and

(iii) by the insertion of the following paragraph after paragraph 11:

'11A.-(1) Notwithstanding any other provision of this Schedule, in any case where a trust is established by a company which is a relevant company, this Schedule shall, with any necessary modification, apply as respects the beneficiaries under the trust as if this paragraph were substituted for paragraph 11.

(2) The trust deed shall contain provision as to the beneficiaries under the trust in accordance with this paragraph.

(3) The trust deed shall provide that a person is a beneficiary at a particular time (in this subparagraph referred to as the "relevant time") if:

(a) the person was an employee or a director of the relevant company or of a company within the relevant company’s group on the day the trust was established by that relevant company,

(b) the person is at the relevant time an employee or a director of-

(i) a company (in this subparagraph referred to as the "first-mentioned company") which is, or was at any time since the day the trust was established, within the founding company's group,

(ii) a company within a group of companies (within the meaning of paragraph 2(2)(b)) which has acquired control of the first-mentioned company,

(iii) a company to which-

(I) an employee, or

(II) a director,

referred to in clause (a) hasbeen transferred under either or both the European Communities (Safeguarding of Employees’ Rights on Transfer of Undertaking) Regulations, 1980 and 2000 and the Central Bank Act, 1971, or (iv) a company within a group of companies (within the meaning of paragraph 2(2)(b)), of which the company referred to in subclause (iii) is, or was at any time, a member,

(c) at each given time in a qualifying period the person was such an employee or a director of a company referred to in clause (b),

(d) in the case of a director, at that given time the person worked as a director of a company referred to in clause (b) or of a company within the relevant company’s group at the rate of at least 20 hours a week (disregarding such matters as holidays and sickness), and

(e) the person is chargeable to income tax in respect of his or her office or employment under Schedule E.

(4) The trust deed may provide that a person is a beneficiary at a particular time if, but for subparagraph (3)(e), he or she would be a beneficiary within the rule which is included in the deed and conforms with subparagraph (3).

(5) Subject to subparagraph (6), the trust deed may provide that a person is a beneficiary at a particular time (in this subparagraph referred to as the "relevant time") if-

(a) the person was an employee or a director of the relevant company or of a company within the relevant company’s group on the day the trust was established by that relevant company,

(b) the person has at each given time in a qualifying period been an employee or a director of a company referred to in subparagraph (3)(b) at that given time,

(c) the person has ceased to be an employee or a director of a company referred to in subparagraph (3)(b),

(d) at each given time in the 5 year period, or such lesser period as the Minister for Finance may by order prescribe, commencing on the date the trust was established, 50 per cent or such lesser percentage as the Minister for Finance may by order prescribe, of the securities retained by the trustees at that time were pledged by them as security for borrowings, and

(e) at the relevant time a period of not more than 15 years has elapsed since the trust was established.

(6) The trust deed may provide that a person is a beneficiary at a particular time (in this subparagraph referred to as the "relevant time") if-

(a) the person was an employee or a director of the relevant company or of a company within the relevant company’s group on the day the trust was established by that relevant company,

(b) the person has at each given time in a qualifying period been an employee or a director of a company referred to in subparagraph (3)(b) at that given time,

(c) the person has ceased to be an employee or a director of a company referred to in subparagraph (3)(b), and

(d) at the relevant time a period of not more than 18 months has elapsed since the person so ceased.

(7) The trust deed shall not contain a rule that conforms with subparagraph (5) unless the rule is expressed as applying to every person within it.

(8) The trust deed may provide for a person to be a beneficiary if the person is a charity and the circumstances are such that-

(a) there is no person who is a beneficiary within the rule which is included in the deed and conforms with subparagraph (3) or with any rule which is so included and conforms with subparagraph (4), (5) or (6), and

(b) the trust is in consequence of being wound up.

(9) For the purposes of subparagraph (3), a qualifying period shall be a period-

(a) whose length is not more than 3 years,

(b) whose length is specified in the trust deed, and

(c) which ends with the relevant time (within the meaning of that subparagraph).

(10) For the purposes of subparagraphs (5) and (6), a qualifying period shall be a period-

(a) whose length is equal to that of the period specified in the trust deed for the purposes of a rule which conforms with subparagraph (3), and

(b) which ends when the person ceased as mentioned in subparagraph (5)(c) or (6)(c), as the case maybe.

(11) The trust deed shall not provide for a person to be a beneficiary unless the person is within the rule which is included in the deed and conforms with subparagraph (3) or any rule which is so included and conforms with subparagraph (4), (5), (6) or (8).

(12) The trust deed shall provide that, notwithstanding any other rule which is included in it, a person cannot be a beneficiary at a particular time (in this subparagraph referred to as the "relevant time") by virtue of a rule which conforms with subparagraph (3), (4), (5), (6) or (8) if-

(a) at the relevant time the person has a material interest in a company referred to in subparagraph (3)(b), or

(b) at any time in the period of one year preceding the relevant time the person has had a material interest in that company, and for the purposes of this subparagraph any reference to a company shall, in a case to which clause (a) of the definition of relevant company applies, also include a reference to a trustee savings bank which has been reorganised into the relevant company concerned.

(13) For the purposes of satisfying the qualifying period requirement referred to in subparagraphs (3)(c), (5)(b) and (6)(b) a person shall also be regarded as such an employee or a director for any period in which that person is an employee or a director of, in a case to which clause (a) of the definition of relevant company applies, a trustee savings bank which has been reorganised into that relevant company.

(14) For the purposes of this paragraph "charity" means any body of persons or trust established for charitable purposes only.

(15) Where an order is proposed to be made under subparagraph (5)(d), a draft of the order shall be laid before Dáil Éireann and the order shall not be made until a resolution approving of the draft has been passed by Dáil Éireann.’.

(2) Subsection (1) shall apply and have effect as respects-

(a) a profit sharing scheme, or

(b) an employee share ownership trust, approved on or after 12 December 2000.”.

This amendment introduces a new section concerned with employee share ownership trusts and approved profit sharing schemes being established for the current employees of TSB and ICC Bank in the context of their impending sale to Irish Life and Permanent and Bank of Scotland, respectively.

Under the terms of restructuring arrangements involving these sales, employees are being given 5% of the share capital of the companies with the possibility of purchasing a further 9.9% at market price. Changes are necessary to existing ESOT and APSS legislation to accommodate the schemes set up in these circumstances although, in broad terms, they will be established on the same basis as conventional ESOPs and APSSs, namely, open to all employees on similar terms.

The important difference is the need to ensure that the benefits of these ESOPs and APSSs will be restricted to the employees involved in the restructurings. There will be no justification for other employees in the takeover companies expecting to benefit also. The amendment will achieve this objective. In addition, provision will be made to enable these TSB and ICC employees to continue to benefit in the event of the businesses in which they are currently employed being sold on again by the takeover companies, although there is no indication that this is likely to happen. Provision is also made to enable the takeover companies to establish ESOTs and APSSs in their own right and to include in them ex-TSB and ex-ICC employees. The normal annual limits on tax relief shares which can be appropriated to participants under an APSS will continue to apply to the aggregate of all shares appropriated to those employees under such schemes. In other words, no double benefit will accrue.

We may table amendments on Report Stage in regard to this matter.

This matter highlights the difficult situation in which employees of the companies in question will find themselves in that they will be sitting alongside those who do not have the benefit of ESOT shares. The original motivation behind the establishment of ESOTs inEircom and Aer Lingus——

Eircom was the first.

The original motivation was to give the employees a stakeholding in the company and a share in its profitability whereas this has simply become an additional remuneration, in fact, a bribe, to facilitate privatisation. It has been shown up as such by virtue of the fact that only a small number will have a stakeholding in the company.

We could spend all day debating what happened in Eircom and Aer Lingus. I agree that the original purpose of ESOTs was to transfer shares to employees. The manner in which the ESOTs were set up means it will be some time before the employees receive shares. I have made some changes to ESOTs and ESOPs in all the Finance Bills I have introduced. We learned as we went along. Perhaps the next stage will be to consolidate ESOTs, ESOPs and share options legislation. That may produce commonality.

That is not a bad idea.

Amendment agreed to.

I move amendment No. 43:

In page 41, before section 16, to insert the following new section:

"16.-Section 774 of the Principal Act is amended by the substitution of the following for subsection (7)(c):

'(7)(c) “the aggregate amount of any contributions (whether ordinary annual contributions or contributions treated as ordinary annual contributions) allowed to be deducted in any year shall not be more than-

(i) in the case of an individual who at any time during the year of assessment was of the age of 30 years or over but had not attained the age of 40 years, 20 per cent,

(ii) in the case of an individual who at any time during the year of assessment was of the age of 40 years or over but had not attained the age of 50 years, 25 per cent,

(iii) in the case of an individual who at any time during the year of assessment was of the age of 50 years or over or who for the year of assessment was a specified individual, 30 per cent, and

(iv) in any other case 15 per cent, of the remuneration for that year of the office or employment in respect of which the contributions are paid.'.".

As matters stand, those not participating in a company pensions scheme can make tax deductible contributions to a pensions scheme as follows: those aged over 30 years and below 40 years, 20% of income; between 40 and 50 years of age, 25% of income, and over 50 years of age, 30% of income, whereas the maximum rate for those participating in company pension schemes, regardless of age, is 15%. The amendment seeks to equalise the position.

The proposed amendment seeks to apply to employees who are members of occupational pension schemes the same contribution levels for tax purposes as currently apply to contributions which self-employed persons and employees who are not in pensionable employment make for their pension provision. The employee in pensionable employment is limited to a contribution of 15% of his or her remuneration whereas self-employed persons and employees not in pensionable employment are entitled to contribute between 15% and 30% of net relevant earnings, depending on age.

The cost to the Exchequer of the Deputy's amendment would depend on the take-up level. The amendment's purpose appears to be the equalisation of the position of employees in occupational pension schemes and the self-employed. To compare occupational pension schemes for employees with retirement provision for the self-employed and employees not in occupational pension schemes is not to compare like with like. In particular, the amendment fails to take account of the contributions which an employer makes to an occupational pension scheme on behalf of his or her employees. Where employers provide an occupational pension scheme for their employees, they must contribute to it. Taking any employee contribution - which does not apply in a considerable number of cases - into account, employers must contribute sufficient amounts to fund benefits under the scheme, the maximum benefit being a two thirds pension. No such employer contribution would be made to the pension scheme of self-employed persons or those not in pensionable employment. Such persons have to fund their full pension provision from their own resources.

My information is that tax relief for pension contributions made by or on behalf of employees in occupational pension schemes is generally considered to be at least as favourable as the regime which applies to the self-employed and, in some cases, more favourable. This is particularly the case for employees where an employer is prepared to fund the pension to the maximum extent allowed over a relatively short period - a minimum of ten years applies.

The benefit to employees of an increased contribution level, as sought in the amendment, is only relevant to employees where an employer's scheme does not provide for maximum approval benefit, the main element being a two thirds pension. In that event, the employee may make additional voluntary contributions - AVCs - to enhance the maximum approval benefit of his or her entitlement under the employer's scheme. The limit on such AVCs is 15% of remuneration, less any contribution to the employer's scheme. Even where there is a contribution to the employer's scheme, this is generally set at 5% or 6%. An employee, therefore, has considerable scope for AVCs. In the circumstances, I do not accept that the amendment is warranted. I cannot accept it.

I have made some significant changes to self-employed and proprietary directors' pension schemes in recent years. I introduced a sliding scale between 15% and 30% of net relevant earnings, dependent on age. I also made some other significant changes in regard to the ownership of the pension fund for self-employed persons and proprietary directors. I amended the rules in the past two budgets and most agree that this has been successful, effectively revolutionising this aspect of the pensions industry. Other countries, having looked at our system, are considering moving in the same direction.

I have received representations in recent years, since making this very significant change in pensions for self-employed and proprietary directors, to make further changes such as those proposed in the amendment. I have done not done so because the Minister for Social, Community and Family Affairs is due to publish the pensions Bill in the near future, a key element of which will be the establishment of PRSAs - personal retirement savings accounts. The taxation element will be incorporated into the pensions Bill and subsequently lifted back into the Finance Bill next year. I am ideologically disposed to much of what Deputy Mitchell is trying to achieve.

Many welcomed the changes I made in regard to the self-employed and proprietary directors, but others in occupational pension schemes and the trade union movement did not. We will await the enactment of the pensions legislation, monitor the development of PRSAs and revisit the matter at a future stage. I have received representations from people throughout the country seeking the same concessions as apply to the self-employed and proprietary directors and predict that in six, seven or eight yearss time occupational pensions will be more liberalised. The PRSA regime will be far more liberal than it would have been had I not made changes in regard to the self-employed etc.

I support Deputy Mitchell's amendment and welcome the Minister's ideological disposition to the principle of its contents. I have encountered three cases in my constituency in which the people concerned embarked on a particular career, but changed careers late in life. All three whom I came across were religious. Two of them spent a number of years as teaching brothers, after which they left. One of them who lives quite close to me is now married and has a young child. He is very concerned about the future prospects for his wife and child when he retires because, having done his calculations and so on, he will have a very low pension.

Presumably because he began the scheme so late.

That is correct. He wanted to pay additional money because, on leaving, he received a lump sum which he wanted to use towards this scheme. He was very disappointed that the self-employed are treated differently. The other person worked as a priest abroad for some time and came back. He also changed career late in life. He would end up with the same kind of scenario and was looking towards his future. If we must wait six or seven years, these people will be out of business. It will then be too late to do anything about this aspect because we all know the earlier one contributes to a pension, the better. Perhaps something could be done on Report Stage for people in those special circumstances.

It will be recognised, for better or worse, that I have made very radical changes in the whole area of pension provisions. This was welcomed by the late Deputy Coveney when I signalled on Report Stage of my first Finance Bill what I intended to do in this respect. I did it the following year. When he welcomed what I proposed to do, I do not know whether he ever believed that the Department of Finance would allow me to do it, but we did it in any event.

I have not finished with pensions. In my first Finance Bill, I did not do a great deal on pensions. At that time I was asked to wait because something would happen in the Pensions Bill. By the time we got to the second Finance Bill and the Budget, I had laid the groundwork and did what I intended. I still have not seen the Pensions Bill but it will soon be published. This will not just relate to PRSAs, it is a major tome. When that Bill is passed, I promise Deputy McGrath that I may revisit this area in next year's Finance Bill. I cannot oppose what has been said, because as a result of what I did in the other area, people will demand to have rights over their own particular fund. That is what the PRSA will be about in any event. People will have their own fund which will include tax breaks and so on. I will see what develops in relation to the PRSA and if the amendment is tabled next year, I will consider it. That has upset some erudite officials.

Perhaps we could table a similar amendment to the Pensions Bill.

The Minister and I have some ideological difficulties in relation to parts of this provision. I do not have a difficulty in terms of the input or encouraging maximum flexibility for people who wish to invest in their own pensions in the future, including generous tax relief for people who want to make AVCs. I would be inclined to go further than the Minister and include a measure of compulsion in terms of private provision. We have a difficulty in relation to what to do with the fund when it is built up. Whereas the Minister is anxious to liberalise that aspect, I am not and would insist there should be a minimum level of annuity at the other end. That is where we disagree. However, I do not have a difficulty in terms of the input and tax relief as set out in the amendment.

There is a little bit of difference in relation to occupational pensions in that there is no restriction on the amount the employer can put in. That is of great benefit where the employer owns all the company. Given that corporation tax rates are decreasing, this provision is not as attractive as it once was. What used to happen is that the company put in a big contribution for the employee, namely, the proprietary director. This was all written down and there was only a 15% limit. There was a limit at the other end in that one could not have more than two-thirds of a salary and more than one and a half times a going away present. There were all kinds of complicated rules to work out the average salary for the three previous years before the pension was taken up. All kinds of innovative accounting was used to achieve the best results.

I would be more inclined to go down the road of more liberalisation so that the individual can control his or her fund. Some pension schemes allow people to buy added years, for example, the Civil Service operates such a scheme.

They are very expensive and it depends on age.

There were two reasons for not doing a great deal with pensions over the years and for placing so many restrictions on them. One reason was to avoid tax planning. It is the job of the Department of Finance and the Revenue Commissioners to ensure they get the best Exchequer yield, which is a legitimate concern. The second reason is that people in the Civil Service do not recognise the value of their own pension vis-à-vis people outside of the public service. People who have come from outside the public service, such as me, know that one could not possibly get as good a scheme as civil servants have. One would want to invest a great deal of money as a self-employed person from a very early age to have such a scheme. People in the public service do not value the benefits of their pension schemes, which are very valuable in terms of what private employers can do.

——PRSI——

I understand as AVCs.

For the sake of argument, what happens if one ceases to be a public servant? I understand at the moment public service pensions are frozen until one is 65.

It is preserved.

Therefore, the portability element that is part of PRSAs will not apply to that in future?

Public service pensions will stay within the public service and be frozen. Public service pensions are defined benefit schemes, all of which are now on the way out. Guinness's, Deputy Mitchell's former employers, had as good a scheme as the public service, if not better.

I was about to say that.

All the schemes are now defined contributions and the two cannot be merged. Pensions are defined if one works for 40 years in the public service or the civil service. Teachers and gardaí are somewhat different. TDs now have a scheme which is quite attractive. It is attractive in the sense that we were outside private sector employment.

I do not agree with the Minister.

Other parliaments have a better scheme.

I do not wish to talk about our scheme but the Guinness scheme and many other private sector schemes provide for people retiring on two-thirds pay. We are talking about half pay. There are also other benefits.

Most schemes now are not as good as that.

Some schemes are not as good but many are better. A widow of a Member of this House or a widow of a civil servant ends up with a quarter of the salary, which is appalling. A woman who loses her husband or a man who loses his wife who is the breadwinner ends up with a quarter of the income. This is terrible.

If a civil servant dies, the widow or widower is on the amount Deputy Mitchell spoke about and they do not qualify for any of the other schemes. They do not qualify for a social welfare pension and so on. There was a case not so long ago of a Member who had 29 years' service in one of these Houses. When he died his wife received a pension of less than £6,000. The same applies to the civil servants here. Many of those coming on stream were not established for a long time when they took up employment and not included in schemes. For example, secondary school teachers not included in the scheme during the early stages of their career are experiencing difficulties. The average period a person works as a Member is 11 years, but under the pension scheme for Members of the Houses of the Oireachtas one must have worked for 20 years to receive the maximum pension. Members must work twice the average to receive a maximum pension. This gives a fair indication of the difficulties being experienced. The pension regime is important. As we get older we become more conscious of it and look at it more closely.

Like me, the Minister's father died when he was young. I am amazed at how poorly we treat widows both in terms of social welfare pensions and pensions generally. Widows are the most neglected category in terms of pensions. One has only to look at the plight of some of the widows of Members who died in recent years to realise this. They are in dire straits as they only receive a quarter of the pension and lose allowances. I acknowledge the steps taken by the Minister - successive Ministers have done much in recent years - but widows have been totally neglected.

When Minister for Social Welfare I tried, because of my background, to deal with widows' pensions - succeeding Ministers also tried to address this category - but was held up by the introduction of the lone parent category. As the Minister for Social, Community and Family Affairs explained, if one tries to differentiate between a widow and a lone parent, one runs into all kinds of difficulties. I agree with Deputy Mitchell that I have not grappled fully with the position of widows. The changes I have introduced benefit widows with an income. I also gave them the same mortgage interest relief as a married person and other allowances, but I agree that not enough has been done for them in terms of social welfare.

I accept the difficulty in dealing with widows as lone parents, but even so, the scheme could be extended for those over a certain ago who have no dependants and live on a small income. I know women in my constituency in their fifties who wish they were 66 years of age in order that they would qualify for the free schemes, which would be worth £30 per week to them. They live in desperate poverty. Some single people over 50 years of age who cannot work because of illness etc. have to live on £70, with no free schemes. They are extremely badly off. Widows are similarly badly treated in terms of pension schemes. I would love widows to receive at least three quarters of what their spouses are entitled, rather than half. I do not know how much this would cost, but some action should be taken to deal with them.

The McAleese commission on public service pensions recently published its report, which I am sure contains figures on the cost of the Deputy's proposals. While I agree that some action should be taken in this area, I cannot accept the amendment. However, I promise Deputies Mitchell and McGrath that I will look at pensions in next year's Finance Bill.

I thank the Minister.

I hope the PRSA system will be operational by then.

What does PRSA stand for?

Personal retirement savings account.

There are many new terms.

In fairness, the PRSA concept was advanced three years ago, but the Bill has not been published.

Amendment, by leave, withdrawn.

I move amendment No. 44:

In page 41, before section 16, to insert the following new section:

"16.-Part 30 of the Principal Act is amended-

(a) in Chapter 1-

(i) in section 770(I):

(I) by the insertion of the following after the definition of 'pension':

' "pension adjustment order" means an order made in accordance with either section 12 of the Family Law Act, 1995, or section 17 of the Family Law (Divorce) Act, 1996;',

(II) by the substitution of the following for the definition of proprietary director:

' "proprietary director" means a director who, either alone or together with his or her spouse and minor children is or was, at any time within 3 years of the date of-

(i) the specified normal retirement date,

(ii) an earlier retirement date, where applicable,

(iii) leaving service, or

(iv) in the case of a pension or part of a pension payable in accordance with a pension adjustment order, the relevant date in relation to that order, the beneficial owner of shares which, when added to any shares held by the trustees of any settlement to which the director or his or her spouse had transferred assets, carry more than 5 per cent of the voting rights in the company providing the benefits or in a company which controls that company;',

and

(III) by the insertion of the following after the definition of 'relevant benefits':

' "relevant date" means, in relation to a pension adjustment order, the date on which the decree of separation or the decree of divorce, as the case may be, was granted, by reference to which the pension adjustment order in question was made;',

and

(ii) in subsection (3A) (inserted by Finance Act, 1999) of section 772, by the substitution of the following for subparagraph (i):

'(i) a proprietary director of, or where a pension or part of a pension is payable in accordance with a pension adjustment order, the spouse or former spouse to whom the pension or part of the pension is so payable, of a proprietary director of, a company to which the scheme relates, or',

and

(b) in Chapter 2-

(i) in section 784, by the insertion of the following after subsection (6):

'(7) Notwithstanding anything in section 18 or section 19, any payment of an annuity made on or after 1 January 2002 in respect of an annuity contract approved under this section or under section 785 shall be regarded as a pension chargeable to tax under Schedule E, and Chapter 4 of Part 42 shall apply accordingly.',

(ii) in paragraph (c) of subsection (6) of section 784E (inserted by the Finance Act, 1999), by the substitution, as on and from 25 March 1999, for ’subsections (2) and (4) of ’subsections (2) to (4)’, and (iii) in section 787-

(I) by the deletion of subsection (9),

(II) by the substitution of the following for subsection (10):

'(10) Where in any year of assessment a reduction or a greater reduction would be made under this section in the relevant earnings of an individual but for an insufficiency of net relevant earnings, the amount of the reduction which would have been made but for that reason, less the amount of the reduction which is made in that year, shall be carried forward to the next year of assessment, and shall be treated for the purposes of relief under this section as the amount of a qualifying premium paid in the next year of assessment.',

and

(III) by the deletion of subsection (12).".

The amendment proposes to substitute a new section for section 16 which deals with pensions. Section 16 amends certain provisions of the Taxes Consolidation Act relating to the taxation treatment of retirement annuity contracts, RACS. First, with effect from 1 January 2001, payments under the resultant annuity will be subject to PAYE. Such payments are subject to deduction of tax at the standard rate only with the recipient having to settle any higher rate liability directly with the Revenue.

Second, the restriction, within the overall limitation on tax relief, to 5% of net relevant earnings in respect of contracts for a spouse or dependants of an individual and contracts for lump sums payable to a spouse or dependants on death of the individual before reaching the age of 75 years is being abolished. Contributions under such contracts will in future be aggregated with the contributions under contracts for the taxpayer subject to the overall limitations for tax relief of 15% to 30% of net relevant earnings depending on age. Within those percentages, individuals will have greater freedom to decide how much they will put into an annuity for themselves, their spouses and dependants.

Third, the section makes a technical amendment to section 784E of the Taxes Consolidation Act, 1997, to correct an incorrect cross-reference.

In addition to the foregoing, the amendment proposes to amend the occupational pension scheme regime in relation to pension adjustment orders in favour of separated and divorced spouses. The committee will be aware that in 1999 I liberalised the pension regime in relation to the self-employed to permit them various options as to how their pension provisions could be used. These options were also made available to proprietary directors who are members of occupational pension schemes. I am extending these options to cover pension provision made for separated or divorced spouses of proprietary directors.

Amendment agreed to.
Section 16 deleted.
SECTION 17.
Question proposed: "That section 17 stand part of the Bill".

On a first reading, the section seems to be a positive provision. I particularly like the refundable credit section which will increase the benefit of mortgage interest relief even where one does not have a taxable income.

Next year the tax free allowance certificate will not include mortgage interest relief. I am sure this will give rise to a big row, but effectively people will be paying in.

This section amends section 470 of the Taxes Consolidation Act, 1997, which provides for tax relief for medical insurance premiums. It has two aims: first, to widen the range of expenses which can be covered by medical insurance policies qualifying for tax relief and, second, to introduce, with effect from 6 April 2001, tax relief at source for medical insurance premiums. As a result of the first of these changes, the expenses which may be included in medical insurance policies qualifying for tax relief will be the same as those for which health expenses tax relief is allowed under section 469 of the Taxes Consolidation Act, 1997. This widening of the range of qualifying expenses will include items of primary care such as the services of a general practitioner which do not, under current arrangements, come within the scope of qualifying medical insurance policies.

On the second change, under the tax relief at source scheme, TRS, tax relief for qualifying medical insurance premiums will no longer be given through the tax system. Instead the relief will be granted at the time the insurance premium is paid to the medical insurer. The premium will be reduced by a percentage equal to the standard rate of income tax only, thereby giving relief to the person paying the premium. The medical insurer will be reimbursed the equivalent of the standard rate reduction by the Revenue Commissioners. Supporting regulations will deal with the administrative aspects of the scheme, including the manner in which repayment claims are to be made by medical insurers.

The new TRS system will be a more efficient way of giving tax relief in respect of medical insurance premiums. Subscribers will obtain relief in the form of reduced insurance premiums as payments are made. It will not be necessary to claim the relief in an annual tax return or to contact the tax office. Adjustments to the tax relief, for example, if an individual changes from a particular health insurance plan to another in the course of the tax year, will be made automatically by the insurer.

The new method of giving relief for medical insurance premiums will mean an extension of that relief to persons paying such premiums but who, at present, do not get tax relief because their taxable income is insufficient to avail of the relief. Under the TRS scheme, all individuals regardless of their income and their tax liability will be entitled to the same reduced premium payments.

Under the arrangements that have applied up to now, relief for medical insurance premiums for a year of assessment has been allowed by reference to the qualifying premiums paid in the year preceding that year of assessment. However, under the new TRS scheme from 6 April 2001 relief for medical insurance will be given on a current year basis. Furthermore, to ensure that tax relief for premiums paid in the tax year 2000-01 is not lost in the move to a current year basis, the full amount of such premiums will also be relieved, through the tax system, in the short tax year 2001.

As it is now 4.30 p.m., before putting the question as provided for in the order of the Dáil of 1 March, I am required to take the vote on amendment No. 38 to section 15 which was postponed earlier this session.

Amendment put.
The Select Committee divided: Tá, 7; Níl, 8.

  • Belton, Louis.
  • Deenihan, Jimmy.
  • McDowell, Derek.
  • Naughten, Denis.
  • Mitchell, Jim.
  • Ryan, Seán.
  • McGrath, Paul.

Níl

  • Ahern, Michael.
  • Briscoe, Ben.
  • Browne, John (Wexford).
  • Dennehy, John.
  • Fleming, Seán.
  • Foley, Denis.
  • McCreevy, Charlie.
  • O’Flynn, Noel.

I am required to put the following question in accordance of an Order of the Dáil of 1 March:

That the amendments, set down by the Minister for Finance to sections 12 to 21 and not disposed of are hereby made to the Bill, and in respect of each of the said sections undisposed of, other than section 16, that the section, or as appropriate, the section as amended, is hereby agreed to.

The Select Committee divided: Tá, 8; Níl, 7.

  • Ahern, Michael.
  • Briscoe, Ben.
  • Browne, John (Wexford).
  • Dennehy, John.
  • Fleming, Seán.
  • Foley, Denis.
  • McCreevy, Charlie.
  • O’Flynn, Noel.

Níl

  • Belton Louis.
  • Deenihan, Jimmy.
  • McDowell, Derek.
  • Naughten, Denis.
  • Ryan, Seán
  • McGrath, Paul.
  • Mitchell, Jim.
Question declared carried.
SECTION 22.
Question proposed: "That section 22 stand part of the Bill".

This section deals with the area of child care. I am not sure if what is contained in the Bill is reflected in practice. For example, the Minister made provision for £40 million last year, most of which was not taken-up before the end of the year, and it is simply included again in this year's Estimates. I have asked on a number of occasions during the year by way of parliamentary question what the take-up has been. As I understand it, hopefully I am wrong, the Revenue is not in a position to let us know the take-up. This reflects what applies in a number of other cases where provision is made for the purpose of capital allowance write-off or whatever to encourage the provision of certain facilities, in this case child care facilities, and we have no idea whether it is working. To assess whether these provisions make sense, a methodology will have to be developed which will allow us assess what is happening on the ground. The provision looks brilliant but if we do not know the take-up there is a problem. If the Minister has any information on the take-up I would be interested to hear it. There is anecdotal evidence that employers are still reluctant to provide in-house crèches or semi in-house crèches or crèches for which they provide the capital equipment, which this provision was intended to encourage. What is happening in relation to these provisions?

On the question of child care, the Minister said last year he was allocating £46 million, £20 million of which was specifically for capital projects. In October 2000, some £3.5 million had been allocated but the actual drawdown was £58,000. In the meantime one of his colleagues had made two further announcements about allocations for child care facilities amounting to about £25 million. His colleagues announced further provision for child care but had they made inquiries they would have been aware it was not taken up. There is a need for child care. Some of the existing facilities are inadequate and unsuitable for child care. The initiative will have to be probably addressed not by the Minister's Department but by the Department of Justice, Equality and Law Reform which has been dealing with this issue. Unless initiatives are taken at local level it will not happen. Recent news reports have highlighted that people who wanted to provide child care facilities could not get planning permission, owing to objections from neighbours. I have a bee in my bonnet about this. We should discuss the matter with local authorities and when estates are being planned the developer should be required to identify the house that will be used for child care. This would get over the problem of planning permission as an objection cannot be made subsequently if the plan was part of the initial permission. The house could be situated in a place suitable for cars to drop off children. The person buying the house would know it was built for a specific purposeand if grant aid is available that can be drawn down.

The whole business has drifted on. Few employers have taken the initiative in providing child care. I do not know the tenure of the section which deals with benefit-in-kind for child care services. Will it provide additional facilities? Will it mean more child care places around the country and better facilities for those availing of them?

The Revenue Commissioners are not in a position to supply details on the take-up of the scheme or the exemption from benefit-in-kind in this area. They intend to conduct a survey of employers to determine the take-up. The tax form would have to be a gigantic size to incorporate all the information. For example, under the capital allowances section there is provision for capital allowances, wear and tear, balancing allowances, balancing charges, industrial buildings, etc. but it does not indicate from where they come. We will, therefore, have to rely on some survey in this regard.

The purpose of the section is to try to ease the exemption which is intended in the first place. It amends section 120A of the Taxes Consolidation Act, 1997, which provides for an exemption from benefit-in-kind taxation for certain employer provided child care facilities. This was a measure I introduced in the Finance Act, 1999, to encourage an increase in the supply of employer provided facilities. Under the existing provision, where the premises are made available by the employer jointly with other persons or made available by other persons on behalf of the employer, the employer must be wholly or partly responsible for both financing and managing the child care service in order to benefit from the exemption. That was the change made in 1999.

In order to make the scheme more attractive for employers, the amendment provides that the employer may opt not to be involved in the management of the child care facility. In such circumstances, the benefit-in-kind exemption will be restricted to cases where the employer provides financial support for items of capital expenditure as opposed to ongoing day-to-day running costs. Where the employer is involved in the management of the facility, the current financing conditions will continue to apply.

In previous budgets I introduced a number of changes to tax law aimed at encouraging the increased supply of child care facilities. I am glad to say that these appear to be having an effect. The modification of the scheme for exemption from benefit-in-kind for employer provided child care facilities should secure increased provision of child care facilities at reasonable cost to the Exchequer. The provision I introduced in 1999 was not attractive to many employers because they did not want the job of managing the facility. They did not mind doing many other things, but in order to qualify for the relief they had to manage the facility, which they did not want to do. It was put to us by IBEC, in particular, that a change in this regard might be helpful. On the other hand, I do not want a situation to arise where, rather than provide this type of facility for employees, employers will reward their employees for the cost of child care because we have resisted giving tax breaks in that area. This suggestion was made by the employers' organisation to effectively help some employers to do that.

Deputy McGrath asked some interesting questions about the expenditure side. The Deputy is right in saying that most of the money was channelled through the Department of Justice, Equality and Law Reform and that at the meeting in June or July last year, in response to the inflationary aspects, we made an extra allocation of several million pounds. There has been a slow take-up, however, for a variety of reasons, including delays in getting the scheme off the ground. It was said that it was not worth the hassle due to difficulties in obtaining planning permission and all the regulations that had to be adhered to. There is not much money to be made. For these and many other reasons, the take-up of expenditure has not been great, but I understand from my colleagues in the Department of Justice, Equality and Law Reform that this year the scheme is proceeding more satisfactorily. I am sure we will receive an assessment in the next few months. The purpose of the section is to make more attractive a provision I introduced two years ago.

The purpose of this and similar provisions is to encourage the supply of services which members of the public are not providing. I do not have a difficulty with this. Employers should be encouraged to provide child care facilities. This is a legitimate use of the tax system, but we need to develop a mechanism, whether by way of survey or forms, whereby we can assess what is actually happening. Obviously, if the State funds the provision of child care facilities, we know they are available, but if we are going to go down the route, by which I know the Minister is taken, of tax incentivising the provision of care facilities, such as nursing home care, we have to be sure that it will have the desired effect. It will be too late in five or ten years time to say that it did not work in the way we wanted it to work. There has to be some mechanism whereby we can assess, within a reasonable time, what is actually happening.

To digress slightly - I do so deliberately because there will be no other opportunity to do so - the same applies on a micro level to the provision introduced by the Minister some years ago in respect of the benefit-in-kind treatment of bus passes. I spoke recently to a senior person in Dublin Bus who told me that it has found it difficult to develop a scheme in a number of places of employment, not least the civil and public service, because of the way in which they are structured. There is concern about the way in which these schemes can work, not least the fact that we find it difficult to assess their effectiveness.

On child care, this is a classic case of where something requires urgent attention, but we have not faced up to it. It is a multifaceted area which extends beyond the range of the Finance Act. Nonetheless, it is a serious problem. I am sure that the Minister's move towards individualisation was, at least in part, prompted by the costs of child care for those at work.

While I disagree with him on individualisation, I agree that the cost factor in going out to work, including the cost of child care, needs to be recognised. The regulations introduced by the local authorities are too rigid. They are not flexible enough to recognise the various child care facilities available, whether it be the woman next door, the grandmother, mother-in-law or formal crèches. There are informal payments between relatives or neighbours and formal payments to another agency. There is a strong case for allowing a certain amount per year for unvouched child care costs with anything above that level being vouched and tax deductible. This is an idea that I have been mulling over in my mind. It is one of the pressure points about which we need to do something. There is a need to recognise not only the costs, but also the stresses caused to those involved. Some significant recognition is overdue, but it also needs to be flexible to meet the different demands.

If the Minister intends to conduct a survey, will he note the crossover in the provision of services? For example, ADM and Leader have been grant-aiding the establishment of services in disadvantaged areas. In some cases they have provided substantial grant aid to establish child care facilities. Will the Minister examine the matter from their point of view also?

In deciding on a tax break to fund child care facilities, will the Minister examine the Australian system which would be particularly suitable and which I have suggested would work well in Ireland? It is a voucher system whereby any family with children in certain age groups qualifies for vouchers which it can use at its local child care facility. It is means-tested up to a certain level. It was suggested to that in Australia a nurse married to a policeman would qualify. That would be the cut-off point in terms of income. The vouchers are available to everybody, whether it be the stay-at-home or working spouse. There is equality across the board. The vouchers do not cover the full cost of child care. If a stay-at-home spouse did want to use them, they would cover the cost of two or three days' care in a local crèche. It strikes me as being an equitable system.

The Minister needs to apply standards to those who run operations in terms of experience and training and introduce regulations on the quality of the facilities to be used. This is falling into place, although Deputy Mitchell said that some of the regulations are restrictive and do not work well. Perhaps the Minister will examine the system if he intends to implement something on that front.

I wish to clarify the Government's position. On the supply side, we will not only incentivise the supply of child care places through the tax system but we will also grant aid the provision of good facilities through the expenditure system. On the demand side, on which most of the debate has focused, I could fill this corner of the room with reports we have received on child care. This debate has raged in recent years, particularly in the past four years. All these matters, including tax breaks, have been considered. We had a row about the position concerning people who do not have a taxable income. It came into the question of widening the standard rate band. We had reports on a system favoured by the Irish Congress of Trade Unions, but others in the area favoured another system. Proposals were put forward on an income disregard. A proposal was put forward on a universal system with a tax applying at a certain point separate from child benefit. We have enough opinions to fill this room and one could agree or disagree with them all.

After deliberating on the matter for the best part of four years, and having had many arguments about it in Cabinet and with the wider public, we would all agree this issue will not be easily solved and there is not universal agreement on it. Taking all that into account, we opted for what is definitely the most expensive solution, a universal child benefit system. We decided that over this budget and the next two budgets we will increase child benefit payments by effectively doubling them. We will spend £1 billion extra in child benefit. It is more expensive by a long shot than any of the solutions put forward on the taxation side, the demand side, but it is the most equitable. The Government has concluded this is the way to proceed and for the remainder of the term of this Administration that is what we will do. I announced in the budget this was our conclusion. That is what we are speaking on and, as far as this Administration is concerned, the matter is now closed on that side. We will go down the child benefit route and all other routes are now closed. This route is more expensive than any of the others, including the voucher system. They were all considered. Government groups and outside groups considered this issue and we decided this is what we will do. That is the way we will proceed over the next two budgets.

We started the first process this year and the increases in child benefit will come into effect in July rather than September. That will be the first substantial increase, there will be another increase the following year and another the year after that. It is a system that exists and it is fair to all. It does not discriminate between those who stay at home to look after their children and women who go to work. They will all get the benefit. Having considered this matter in different ways, proceeding on this route was our considered view.

Deputy Mitchell raised the matter of local authorities and the restrictions that apply. They are all valid and I have experience of them in my area. The survey to which I referred is the one Revenue will conduct regarding the tax breaks. The Department of Justice, Equality and Law Reform is undertaking a county by county assessment of child care facilities and it will produce a separate report. Revenue will carry out a tax survey, but the county by county assessment will reveal the exact level of child care facilities in every county. For better or worse we have gone down the child benefit route.

Is the section agreed?

The Minister is probably right. There are all sorts of arguments. I presume he intends child benefit will continue to be tax free.

No Government in which the Deputy or I has been involved, and we have been involved in a few, has gone down that route. It is too late in the term of this Government to introduce it and one could not introduce it after an election. I have been in Governments with different parties from the left to the right. On the taxation aspect, all politicians say it is a great idea, but none of us wants to introduce it.

I do not think it is a great idea.

They say it would be equitable when it would get to a certain level because it would be less to the benefit of the high income earner than to the low income earner. I have been in Governments of various persuasions, with the exception of the Deputy's party, and none of them has said we had better do that. One can reasonably conclude that we will not do it.

So say all of us. It favours the well off equally as much as it favours those more in need, but to do anything else would create a worse anomaly. If one was to tax the husband of a stay at home spouse on child benefit, his take home pay could be lower than if he was on the dole. They are the anomalies.

When we thought such a measure was a good idea some years ago, we had an open debate in a committee of which the Deputy was chairman.

The Deputy pointed out some of these problems.

I had done a great deal of work on this. I had to persuade Revenue and the Departments of Finance and Social, Community and Family Affairs about replacement ratios, as they were not taking account of other benefits people got or did not get.

The Deputy proved such a measure would lead to a worse poverty trap than we had before.

Differential rent, a medical card and other benefits were not taken into account.

The tax strategy group paper on the website sets out the position. Many of these arguments are covered in that.

If one had time to read it.

Question put and agreed to.
SECTION 23
Question proposed: "That section 23 stand part of the Bill."

Perhaps the Minister will spell out the position as the section does not make sense to me. In terms of how the capital allowances work on the acquisition of a milk quota, is it suggested that the leasing costs are capitalised and can be written off as capital allowances. Is that what we are talking about here?

If I am not mistaken, in last year's Finance Act I introduced an amendment to allow capital allowance tax to be written on milk quotas. This is a minor amendment to this section. This section amends section 669A of the Taxes Consolidation Act, 1997, which contains the definitions used for capital allowances on the purchase of milk quotas. The definition of qualifying quota is amended to allow individuals who are leasing milk quotas from relatives to qualify for the tax relief when they subsequently purchase the lease quotas.

Are we capitalising those leasing costs?

Can we go into private session to deal with this matter?

The committee went into private session at 5.08 p.m. and resumed public session at 5.12 p.m.

The milk quota holders are happy with the Minister but the sugar beet quota holders are not so happy. The IFA and the sugar company negotiated the sugar beet contracts restructuring scheme last year. I have been in correspondence with the Minister in that regard and some beet growers from Kildare met him about it. The word came back to Wexford farmers that the Minister was on side with regard to introducing capital tax allowances for sugar beet contract growers.

I told them the opposite.

Yes, it turned out that the Minister was not on side. Will he look at this again? It would not involve a big charge on the Exchequer. The milk producers have the benefit of section 61 of the Finance Act, 2000, and the sugar beet growers are looking for the same benefit. I asked the chairman how to put down an amendment on this and he told me I could not so I am depending on the Minister to do it.

It is not my intention to introduce a tax relief here. For a number of years before the restructuring of the milk quota regime, there had been pressure to allow the capital allowance regime to apply to the purchase of milk quotas. I and previous Ministers for Finance rejected that on the basis that it was the acquisition of an asset which had a sale value afterwards and people could not have it both ways. It was far more beneficial for 98% of people who sold a quota to have it regarded as a capital asset because there was a formula for working out, if one sold it on, how much related to the quota etc. and it was measured like that. However, the situation changed with regard to milk quotas when the Agenda 2000 negotiations were being concluded. As a result of those negotiations, in time there will not be a value on the milk quota. I considered it, therefore, a reasonable compromise to break the principle and to allow capital allowances on milk quota.

With regard to sugar beet, that arrangement was drafted over the years by the sugar company and the beet growers so I do not feel compelled to accept the same principle there. It is a different scheme, an artificial creation between the two. I like the beet growers in my county, although most of them are in south Kildare. As far as I know there is nobody growing sugar beet in Kildare north. We believe the farm organisations are divided on this issue. Much as I would like to assist the beet growers in Counties Wexford, Carlow and Cork, I cannot accede to the Deputy's request.

There is a related topic, that is, connected persons for the purposes of leasing, tax relief and so forth.

Yes, there are many parliamentary questions on it.

I believe it is an insidious way to treat people. It is not fair. Let us say I am a farmer who is retiring from farming. I lease my land to my son, he supposedly pays me an amount of money and I pay tax on that. If I lease my land to a stranger or anybody who is not a connected person - it could be a neighbour or even one's partner - I can get up to £6,000 per annum tax free if the lease is over seven years. That is dreadful. It was introduced by the Taoiseach when he was Minister for Finance.

No, it was introduced by the Deputy's former party leader.

I think not. It was introduced in 1992.

Much earlier, I understand.

I will have to check that again.

There is a difference between us as to which Minister introduced it. However, we can agree that it was introduced.

I think it was 1992 but I might be wrong.

The original measure was introduced by Deputy Bruton and the amended measure was introduced by Deputy Ahern.

There is a lesson in this for us.

It is not a fair way to treat people and it does not encourage farmers to pass on land.

I can only say the same as all my predecessors. A tax planner will seek all kinds of opportunities for people to plan their affairs in such a way as to minimise the tax take by the State. It is not the job of Ministers for Finance to encourage people in tax avoidance but one can readily appreciate that if there are connected people, there is scope for making leasing agreements that are not really the same as the agreements one would make with a complete stranger. That is the reason the connected person's rule exists.

The Minister could make one exception in the case of a retiring farmer who is passing on the farm to a member of his family. Many retiring farmers——

My experience of things like that has been somewhat worse. Many people in my constituency would claim that some farmers who are officially retired from other schemes are still running the show.

People have been knocked off the scheme because they did not really retire. They can give, lease or sell their property when they are retiring from farming. The Minister is familiar with the farming community and he would know that many farmers do not like to hand over the farm to a young son in his early 20s. They want to have some hold on the reins to ensure they are not put out on the side of the road so they lease the land to the son. They believe there should be some clawback in money terms. If there is, however, they must pay tax on it. That is mean.

While I agree that in other situations one could manufacture all sorts of artificial arrangements which would lead to tax evasion, the farm retirement scheme is extremely focused. There are only 10,000 people on the scheme at present and the numbers retiring in the future will be smaller. There is a case to be made that where the farmer is availing of the farm retirement scheme, there should be a degree of flexibility.

I doubt that I will be able to bring myself to make that quantum leap about connected persons either in this Bill or in next year's Bill.

The Minister is very hard.

It is easy to manipulate it. In the case of a father and son, it is an expense in the son's accounts and it is income in the hands of the father. Therefore, the optimum amount of rent or lease the son would pay the father is worked out to bring down the profits of the farm, thereby reducing the son's liability, and to give the father enough income up to exemption level, which I have increased dramatically in recent years.

The maximum is £6,000.

Am I correct, Chairman?

I am out of practice.

A sum of £6,000 is the maximum allowable. It is £4,000 tax free if the lease is for up to seven years and it is £6,000 tax free if the lease is for over seven years. It is not open ended. It is very restricted and all that is available to retired people is £6,000 at 20%, which is £1,200. It is considered anti-family and heartless. The perception is that the Minister is encouraging them to give the land to somebody other than their son or relation.

Deputy McGrath made a good case, but the principle of connected persons is applied throughout the tax code.

Question put and agreed to.
Section 24 agreed to.
SECTION 25.
Question proposed: "That section 25 stand part of the Bill."

Will the Minister explain the section?

This section amends section 530 of the Taxes Consolidation Act which contains the definitions used in relation to the relevant contracts tax system. This section inserts a definition for "certified sub-contractor" and "uncertified sub-contractor" to clarify the meaning of the terms used throughout the section.

This subject is of major concern to the Committee of Public Accounts. Over 120,000 people work in the construction industry, but only 40,000 are registered employees. Some 80,000 people are so-called sub-contractors. This is of great concern to the Irish Congress of Trade Unions and the building unions. The strong case they made to the committee, which has not been refuted by the Construction Industry Federation, is that this sub-contractor status is being abused on a widespread basis. I intended to make this a major issue for the Committee of Public Accounts this year, but, unfortunately, I will vacate the Chair of that committee shortly. The matter has been the subject of memoranda from the Department of Finance to the Departments of Social, Community and Family Affairs, the Environment and Local Government and Enterprise, Trade and Employment. What are the Minister's thoughts on this issue?

I have answered parliamentary questions in recent years about the on-site investigation the Revenue Commissioners conducted with the purpose of reregistering or deregistering people who were classified as sub-contractors, but who they considered were employees. This matter arises monthly and it is a bone of contention among sub-contractors and union representatives. The tax position up to 1970 was very haphazard, but the first attempt at a tax system for sub-contractors was introduced in the 1970s. That system has been changed and rewritten many times since then. I recall answering parliamentary questions tabled by Deputy Broughan on this matter, but the Revenue Commissioners recently reclassified people on sites.

The basis of the construction industry is flexibility in the labour force. If everybody on building sites worked under the PAYE system, the level of productivity would not be sufficient. The C2 certificates were first introduced under section 17 in the relevant Act in the 1970s. The system was abused, but it was rewritten and has been significantly tightened up. It is a much better system and my humble suggestion is that the Revenue Commissioners are more on top of the construction industry in 2001 than they were in 1971. The position in 1981 was better than in 1971, and the position now is much better than it was then. The trade unions have always been concerned about the sub-contracting system, but it is effective.

If one is on a site, one is either an employee paying PAYE and PRSI or a registered sub-contractor. If one is a registered contractor, one has a certificate and a relevant payment card. All payments are recorded and one pays tax at the end of the year in the same way as any self-employed person. One deducts the tax of one's employees or people working as registered or unregistered contractors. A person can also be an unregistered sub-contractor. If there is an unregistered sub-contractor on the site, the principal contractor must deduct tax at 35%. When the tax rates were 70%, 62% and 58%, a tax deduction rate of 35% was not a great imposition. People could do well in terms of the money they could earn. However, when the top tax rate fell to 42%, submissions were made to me about why the rate was still 35%. My view is that it should remain at that rate because it compels people to keep their affairs in order.

The replies to the parliamentary questions outlined the number of visits and details of the reregistering that took place in the past two years. Another inspection by the Revenue Commissioners will take place this year to reclassify people. My experience tells me it is not as big a problem as it was in the past. The problem may be overstated, but I do not have evidence to back up that view.

I suggest we get Mike Murphy on the job and have secret cameras installed on building sites. When the representatives of unions arrive, people scatter. This happens regularly.

It used to happen regularly.

The ICTU appeared before the Committee of Public Accounts a couple of months ago and said it is still happening. The chairman of the Revenue Commissioners was there and heard it. I understand there must be flexibility and portability of workers between various builders. I do not want restrictions that would inhibit that portability and I would make allowances for the disadvantages involved in not having permanent pensionable employment. However, we cannot allow a scandal, such as the DIRT scandal which went on for years, to continue. We must do something about it or it will blow up in our faces. The matter must be studied in a determined way.

Many of the 80,000 sub-contractors were previously employees of the same firms for which they are working. This ruse has been used not only in the construction industry where people who were employees become contractors.

It is only a means of evading or avoiding tax.

Avoiding tax.

It is technically legal.

It is avoiding higher taxes.

One of the other consequences is that once these people get older, they come back into the PRSI net at the most efficient age. This ensures they get a State pension when they retire, but they pay the minimum contributions. The State is losing contributions and also incurring costs. The Department of Finance, the Department of Social, Community and Family Affairs, the Revenue Commissioners and the Department of the Environment and Local Government - the matter would be of particular interest to it - should undertake a determined and co-ordinated study of this area. This matter needs to be addressed.

When the Minister says he believes that abuse is less frequent or obvious than it used to be——

It is proportionately less frequent.

Many people who might otherwise have been concerned about the absence of the various fringe benefits are not quite so concerned when times are good and when almost everyone in the building industry with skills is in almost constant employment. The absence of holiday pay, sick pay and, down the line, pension entitlements, does not bother these people as much as it might do if they were working on a month on-month off basis, as was the position not too long ago.

This discussion offers us the opportunity to take a careful look at the situation. The Minister stated that the Revenue has done a number of inquiries——

The Revenue carried out an examination in 1997. There were 60,000 reviews in that year and, as a result, 12,000 people were reclassified as employees.

That is approximately one fifth.

So 1997 was the last occasion on which this was done?

Yes, and another one is being done now. I agree with Deputy Mitchell that, in the past, when the then Department of Social Welfare and the Revenue carried out a joint examination, a scattering would occur. In recent times, however, the situation has been brought under greater control. This is the one industry where what used to be called the "black economy" - we refer to it now as the "shadow economy"——

Or the grey economy.

——is more prevalent.

Why can it not be called the "black economy" anymore?

Because we cannot use the word "black".

I would not like to think that I had pulled the Minister up when he was being politically correct.

I am only learning about these things now and, I have to say, it goes against my nature to be politically correct.

We will refer to it as the "shadow economy".

My erudite adviser informs me it is called the "unofficial economy". The building industry is the one area where the unofficial economy has held sway for many years. The Revenue Commissioners have made greater efforts to deal with the problem in that industry than in any other and they have encountered many difficulties. I believe that, in recent years, activities on building sites have been much better controlled. Most employers want to operate in the correct manner because the unofficial economy creates problems for them in terms of running their affairs.

What happened in the past was that groups of people came together and stated that they would not enter the system. In recent years, however, the workmates decided that they did not want to operate in that way and wanted to be officially registered as sub-contractors. If someone is operating as an unofficial sub-contractor, 35% tax is supposed to be deducted. I estimate that the Revenue is obtaining a greater amount in tax from these people than ever before. Whether people should be classified in different ways is a completely separate matter.

There is also the question of whether a person is self-employed or whether they are working for someone else. Over the years this matter has been dealt with in a raft of taxation legislation. Deputy Mitchell is correct that ten or 15 years ago, with at least a nod from the relevant union officials, certain categories of workers in factories were reclassified as self-employed. This was a form of legal avoidance mechanism.

C2 tax collections have risen dramatically in recent years. In 1987, £16 million was collected, while in 1999, £196 million was collected. Repayments in 1987 amounted to £13 million, while in 1999 they rose to £179 million. Therefore, the net collection was £3 million and £17 million.

How many people have C2 tax certificates?

I will try to obtain those figures for the Deputy. I must inform him, however, that it will not be easy to do so. When the original certificate was introduced in 1970, one only needed to indicate on the green form that one would keep records and a certificate would be forthcoming. We have reached a situation now where people can benefit financially from having a C2 certificate because, for obvious reasons, many contractors will only deal with registered sub-contractors. I may have to correct myself later but I estimate that there are approximately 28,000 certified C2 holders. I refer here to certified sub-contractors and principal contractors who hold C2 certificates. Many principal contractors hold C2 certificates because the people with whom they deal rely on their having the certificate to obtain payment.

In that case, why are there difficulties in the construction industry?

The Deputy must remember that many registered sub-contractors have employees and they would also have sub-contractors. These people could be registered or unregistered sub-contractors. There are, therefore, a number of different layers. The main contractor on a site might state that all the carpeting was to be done by a registered contractor known as Mitchell & Co., that the blocklaying was to be done by McGrath & Co. and the plumbing was to be done by Ahern & Co. Ahern & Co. might be a registered sub-contractor, McGrath & Co. might be an unregistered sub-contractor and Mitchell & Co. might be employees. These three firms might be obliged to hire other registered and unregistered sub-contractors and employees in the course of their work. There are, therefore, many categories involved and differentiating between them is not a simple science.

As of September 2000, there were 10,811 principal contractors who did not hold C2 certificates, there were 16,367 certified contractors holding C2 certificates, there were 11,019 principal contractors holding C2 certificates and there were 36,059 uncertified sub-contractors.

That gives an approximate total of 80,000.

Yes. The figure for uncertified sub-contractors includes a number of persons who fell into this category at some time in the past but who are no longer sub-contractors. The number of inactive cases is not identifiable but it could be a significant proportion of the total. I have no objection to a further study being carried out but——

It would be useful if hidden cameras were put in place on sites to see how many people scatter when representatives from congress and the building trade unions arrive. Mike Murphy could present a candid camera style programme on it.

The Minister stated that there were 16,000 sub-contractors and indicated that the net tax payable by them was £16 million.

What happens is that a certified sub-contractor is paid a gross amount and, therefore, his accounts will be completed in the same way as those of any other business person. An unregistered sub-contractor is paid the full amount, less 35% tax. Each month, or every few months, the registered sub-contractor is obliged to submit VAT returns to the Revenue Commissioners and they usually issue a refund. That is how the system operates.

The total tax collected was £196 million while the total refunds amounted to £178 million, which leaves a net figure of £16 million. This means that 16,000 people paid £16 million in tax, which works out at £1,000 per man.

The Deputy is referring to the RCT tax.

Another important point is that there was a clampdown on the movement and mobility of and allowances paid to social welfare officers during the period in which the Minister served as Minister for Social Welfare. I am acquainted with a number of those social welfare officers who inform me that the workforce is now more mobile than it was in the past. For example, car loads or bus loads of people are travelling from Mullingar to their place of work in Dublin each morning and, because of the restrictions on the expenses and allowances available to them, social welfare officers cannot mount the type of surveillance operation required to catch these people on their way to work. At present, there is a cap of £10,000 on the expenses of social welfare officers who earn £25,000.

The Deputy is wandering somewhat. We are not discussing social welfare officers. This section deals with tax.

It is happening in the building trade. There should be a combined effort by social welfare officials because they are losing out on PRSI. Given all the people who are not registered for PRSI, there is a huge loss to the Exchequer.

Is it all the people coming from Westmeath?

There should be a combined effort to act together.

There are combined efforts. There are joint investigating units, or JIUs as they are known, of Revenue and the Department of Social, Community and Family Affairs that investigate building sites. I have no problem with the Committee of Public Accounts having a wider debate and conducting further investigations. It is a troublesome area.

Question put and agreed to.
SECTION 26.

I move amendment No. 50:

In page 54, line 31, after "Part 15" to insert "of the Principal Act"

This is a technical amendment to section 26 to correct an error in the section as drafted. The reference to the Principal Act was omitted from the introduction to the section. I wish to signal that I will be brining forward a technical amendment to section 26 on Report Stage to correct some drafting errors.

Amendment agreed to.
Question proposed: "That section 26, as amended, stand part of the Bill."

Can the Minister do anything about the tax relief on third level fees? The cost of a standard night course in NUI Maynooth, Dublin University or elsewhere is generally around £2,000, but travelling expenses, for example, for someone travelling from my area or the Minister's area present an extra difficulty. The total amount of relief they receive on that £2,000 will be £400. If they have a particularly good employer, he or she may pay part of the fees, or may promise them a higher wage when they finish the course. There is no real incentive, however, for people on ordinary wages to pursue further education, even though it is something that we should be encouraging as far as possible. Looking at the global picture there is a downside to it. If the same person goes on the dole for six months they would qualify for the back-to-education allowance which will give them the full dole for the period of pursuing a course, and their course fees would be paid with book and rental allowances. The 20% allowance is too low for many such courses, especially in this era when we need many people to retrain and upskill for different jobs. It would be worthwhile to introduce an added incentive to take part in these courses. The Minister will recall that when free third level fees were introduced, fees for those courses were not taken into account. They are excluded, so perhaps the Minister should re-examine them.

I will read the note regarding what I am doing about fees for third level education. As the Deputy is aware, in recent years I have made a number of changes, including additions. Last year I tried to bring them all together to bring a little rationality into it.

This section inserts a new section to the Taxes Consolidation Act, 1997, to provide for the amalgamation of existing tax reliefs for third level education fees. Currently, the tax reliefs available on the payment of fees for education courses are somewhat complex, each with its own rules. Section 474 provides tax relief for a full-time undergraduate course in a private third level college in the State. Section 475 provides tax relief for a part-time undergraduate course in a publicly funded and approved third level college in the State. Sections 474A provides tax relief for a full-time undergraduate course in a publicly funded third level college in the European Union. Section 475A provides tax relief for a full and part-time postgraduate course in a publicly funded or private college in the State and in a publicly funded college in the EU.

This section proposes to streamline the provision of the four reliefs. The section, besides amalgamating the reliefs, extends relief in a number of specific areas by removing the following restrictions for repeat years: on individuals undertaking more than one course; on individuals already holding a third level qualification; and on the exclusion of certain courses, that is, medical, dentistry and veterinary medicine teacher training. Until now, they were excluded from tax relief, but I have changed the section to include them.

Last year, I undertook to look at extending tax relief for postgraduate fees paid to third level colleges outside the European Union. I am pleased to announce that this section providing relief for such postgraduate fees is extended to private and publicly funded third level colleges in non-EU countries. Tax relief will also now be available for undergraduate fees in EU countries for duly accredited private third level colleges. The amalgamation and streamlining of these four reliefs is a further measure I have taken in rationalising and simplifying the tax system.

Before we started bringing relief in this area, there would have been a view abroad that people should look after themselves and that there should be no tax break. One theory was that the higher up one goes on the educational curve the better one's earnings and standard of living, so why should one get a tax break? I rejected that thinking and introduced reliefs in a number of areas over a number of years. I am now trying to streamline the reliefs that I have already introduced.

I do not have a closed mind about some of the matters the Deputy is suggesting. He may be suggesting that relief be given at the marginal rate of tax rather than at the standard rate. However, since I have been trying to standardise most of these reliefs at the 20% rate, I did not want to break the principle here. I will be prepared to look at the matter on another day, but I think I have provided enough tax breaks in this Bill.

Question put and agreed to.
SECTION 27.

I move amendment No. 51:

In page 59, paragraph (b), line 12, to delete “161” and substitute “100”.

This amendment refers to the allowance of £5,000 that is granted to seafarers who spend a certain amount of time on the high seas each year. The Minister is reducing that period from 169 days to 161. I have received representations suggesting that the figure of 161 is still higher than that which would facilitate most seafarers who work, for example, on ferries travelling to Britain or France. I have taken an indicative figure of 100, although there is no particular science behind that statistic. It seems the 161 day figure does not meet the needs of most of the people who work as seafarers, even on a full-time basis.

The seafarer's allowance was one of the measures I initiated as a result of recommendations from the industry. When it was first introduced, they recommended 180 days. Before Committee Stage, however, they said that figure was mistaken and it would have to be reduced further. Then the Department recommended another figure, and they wanted it brought back up. I amended it three or four times, including last year, before it was brought into effect. On account of bringing in the seafarer's allowance which gives a special break to seafarers, I have been inundated with requests from all walks of life to introduce the equivalent of that allowance under various headings. That is the difficulty. On that occasion, I should have listened to my departmental advice not to introduce it because I am now being knocked over from every type of hardship case claiming they should have a special allowance, including people who live on islands. Maybe they should have a special allowance, for all I know. Farmers, carers and fishermen also want such special allowances because they work unsocial hours. I think the departmental advice was to allow it at the time.

It was the thinking that people who were working on ferries on the Irish Sea were working alongside——

It is good that at least Deputy McDowell and I remember what it was about. That is exactly the category for which it was originally brought in. That is the category in other countries as well. It was not brought in for other categories, including fishermen - notwithstanding the hard life fishermen have.

Deputy McDowell's amendment relates to section 27 which provides for amendment to section 472B of the Taxes Consolidation Act, 1997. That section provides for an annual allowance of £5,000 for certain seafarers. The allowance applies to employees on board EU registered passenger ferries and trade carrying vessels as well as to the crews of vessel servicing drilling rigs in Irish or foreign waters. That was brought in the following year at the request of Deputy Michael Ahern and others who had cases in Cork.

To qualify for the allowance, a seafarer must spend at least 169 days at sea in a tax year. Section 27 reduces this figure to 161 days. Deputy McDowell now proposes to reduce this further to 100 days. As the reduction from 169 to 161 days provided for in the Bill brings the days at sea requirement into line with the actual working pattern of the seafarers concerned, I see no good reason to accept the amendment. A reduction in the days at sea requirement to 100 days would be generous in the extreme. The Irish Marine Development Office sought the reduction to 161 days, which is the normal number of days worked on the ferries.

As I understand it, the working arrangements tend to be week on, week off so it would typically be six days every fortnight.

The IMDO recommended the reduction on this occasion.

The number of days would be 156, so it is there or thereabouts. If they are happy that 161 days covers it——

I would like to notify the committee that I will bring forward an amendment on Report Stage to allow for the making of a commencement order in relation to the reduction in the number of days a seafarer is required to be at sea. The commencement order is required because the EU Commission must approve the change from 169 days to 161 days. That shows one——

People tell me we have an easy time in Brussels, but that has not been the case since I became Minister.

Amendment, by leave, withdrawn.
Section 27 agreed to.
SECTION 28.
Question proposed: "That section 28 stand part of the Bill."

We made changes to foreign earnings deduction relief in last year's Finance Bill to get over certain anti-avoidance devices which were in place. Section 28 amends section 823 of the Taxes Consolidation Act, 1997. That section provides tax relief by way of a deduction against earnings in the case of certain Irish resident employees who work overseas, other than in the UK, during a tax year. The relief does not apply to civil and public servants, military personnel or employees of any State board or bodies. The relief is aimed at those committed to working abroad for significant periods. Thus, to qualify, a person must work abroad for at least 90 days in a tax year or in a relevant period. A relevant period is a continuous period of 12 months straddling two tax years. However, no one day can form part of two relevant periods. Each period of absence must include a continuous period of at least 11 consecutive days referred to in law as qualifying days. The amount of the deduction is related to the time spent on a foreign employment but there is an overlap of £25,000 on the amount of the deduction which may be availed of by the individual in any one tax year.

The purpose of section 28 is threefold. First, the definition of "qualifying days" is amended to put beyond doubt that such a day is a day on which an individual is absent from the State for the whole day and not just at midnight. Second, a termination date of 31 December 2003 is provided for in the relief.

In the meantime, it is intended to review the relief to determine its effectiveness and whether it is abuse free. Third, a number of changes are made to the relief consequent on the introduction of a calendar tax year and the necessary operation of a short preceding tax year to cover the period 6 April to 31 December 2001. The amount of relief is calculated by way of a formula which includes a denominator of 365 representing the number of days in a normal tax year. For the short tax year, this denominator will be reduced to 270, being the number of days in the period from 6 April to 31 December 2001. In addition, for the short tax year, the minimum number of days on which it is necessary to work abroad in order to qualify for relief is being reduced from 90 days to 76 days. Finally, for the short tax year, the overall cap on the relief has been reduced from £25,000 to £18,500.

Why is there a termination date of 2003?

It is to allow for a review of the effectiveness of the relief and to see whether it is abuse free. It will ensure that all the abuses can be eliminated in terms of the relief. Last year we eliminated a fairly major abuse.

Question put and agreed to.
SECTION 29.
Question proposed: "That section 29 stand part of the Bill."

Under the rent a room scheme, a landlord can rent a room and not be liable for tax on any rental income up to a maximum of £6,000 in a year. What happens if the rental income exceeds £6,000?

The scheme is operable provided rental income is under £6,000 per annum.

If income is over £6,000 does that mean everything is payable?

The Social Welfare Bill excludes people who are in receipt of living at home allowance from availing of this scheme. That is a bad mistake for what is a good proposal. The law should be changed so that those who benefit from the living at home allowance under the social welfare code should not lose it and other allowances if they avail of this scheme. That would be a wise social move.

I will take up the matter with my colleague, the Minister for Social, Community and Family Affairs. The means test for widows may be the stumbling block. There is a difficulty in the area referred to by the Deputy.

Perhaps this could be amended on Report Stage. Many elderly live on their own in big houses. They hold valuable assets but have very poor cash flow. They are afraid to take in lodgers because they would loose their living at home allowance.

I accept that. It will necessitate change in the Social Welfare Bill or regulations, not in this Bill.

The matter was raised in respect of the Social Welfare Bill by my colleague, Deputy Hayes, but no concession was granted. However, it may not be too late to do something about it. This scheme may benefit most those living at home alone. It would be a pity if the success of the provision was diluted by excluding this aspect.

It was decided to proceed with this scheme for two reasons. First, approximately two years ago a parliamentary party colleague advised me that in his constituency there were many old people living in houses who were afraid to take in lodgers for fear they would lose benefits and be taxed. Second, I read that a similar scheme operated in the UK. The purpose of the scheme is to utilise outstanding accommodation space. If something in the social welfare code militates against that it will need to be looked at.

There is a need for co-ordination.

Perhaps the Minister should consider an amendment for Report Stage.

The Finance Bill is not the place to address the issue.

Question put and agreed to.
The select committee adjourned at 6.05 p.m. until 10.30 a.m. on Wednesday, 7 March 2001.