Amendments Nos. 11 and 12 are being taken together.
Finance Bill, 1976: Committee Stage (Resumed) (Section 18).
Debate resumed on amendment No. 11:
In page 15, line 17, to delete "with effect on and from the 6th day of April, 1975,".
—(Minister for Finance).
When I concluded yesterday I was inquiring as to the effect of amendment No. 11, in the name of the Minister deleting the words "with effect as on and from the 6th day of April, 1975,". The consequence of that is that subsection (2) would then read
the said section 21 of the Finance Act, 1974, is hereby amended by the substitution...
The Minister explained that there is a loophole which has been uncovered and to which attention was drawn by the publication of this amendment. The consequence of drawing attention to it was that persons had claimed, in effect, artificial losses for earlier years. The Minister says that the effect of deleting the words "with effect as on and from the 6th day of April, 1975," is to preclude such persons from making these artificial claims of losses in respect of previous years. May I take it that genuine claims will not be excluded by this amendment? If the Minister is satisfied that that is so, on what basis can he be so satisfied? If he can be so satisfied, how does he achieve this and how does he exclude the non-genuine cases of this kind?
I can give an assurance that this legislation will not affect any claim made prior to 30th March, 1976.
Can the Minister be sure that all claims not made before that date are not genuine?
I would not like to apply or decline to apply that adjective to them. A claim can be a genuine claim once it is made. Claims have been made by the extension of the existing provisions, claiming that just as an artificial notional profit emerges from the application of the notional formula, that notional loss can also arise, and the claim is that that should be available for application against future notional or real profits. A claim has to be made where there have been very substantial real profits but the notional formula generates a loss.
Have there been actual refunds?
I am not saying the refund has as yet occurred, but a claim is being processed.
A claim for a refund?
Yes, a claim for a declaration of a loss which can be used in the future.
Amendment agreed to.
I move amendment No. 12:
In page 15, lines 27 to 29, to delete subsection (4A) and to substitute the following subsection:
"(4A) Subsection 4 shall apply—
(a) as respects the year 1976-77, and
(b) as respects any year of assessment for which an individual elects as provided for in subsection (1) and makes, on or after the 30th day of March, 1976, a claim for relief under section 307, 308, 309 or 318 of the Income Tax Act, 1967".
What effect does the Minister envisage from this amendment?
What I have already said. This stops a person from making an effective claim after 30th March, 1976. Any claim made on this basis after that date is by this section rendered null and void. In other words, the notional loss will not be available for setting off against future profits.
Amendment agreed to.
Question proposed: "That section 18, as amended, stand part of the Bill."
I think I am right in saying that this section proposes to continue the notional system for a further year. The Minister will be aware that there was a report from the NESC recommending that the notional system be extended for four years, that there was a minority view on that, representative of farming organisations in general, urging a different approach and urging the maintenance of the notional system virtually indefinitely but on a basis whereby the multiplier on the PLV would be increasing each year in relation to the average earnings of farmers. I do not want to go into the details but my purpose in raising this is to inquire whether the Minister has yet adopted any attitude in relation to these matters. If he has not, may we take it that the provision of this section represents a kind of holding operation? When may we expect a decision by the Minister and his colleagues on this recommendation?
It is agreed by the farming community that the notional system should be adopted indefinitely. The question of the multiplier is a matter that must be considered. I should like to know from the Minister when he intends making a decision on this matter because farmers are very worried.
The report was received on the last day of February. Since then we have been considering it and shortly I shall be having meetings with the farming organisations to discuss the matter with them. Following that, I will give the matter further consideration and I will report to the Cabinet. At this stage I am not in a position to say when a decision will be taken on the report. As Deputy Colley pointed out, conflicting views were presented in the report and we shall have to try to balance them. In the meantime we are providing a continuation of the existing system. Deputy Colley correctly described it as a holding operation. Obviously there are many issues involved that need mature consideration and Deputies may be assured that in the process of considering them we will be consulting with the farming organisations. In fact, I have an appointment to meet them next month.
In the report to which the Minister has referred there are certain paragraphs that have an anti-farm bias and the farming community are worried about the matter. They consider the fairest way is to continue the notional system and I would ask the Minister to give serious consideration to this.
Of course I will give the matter serious consideration. There are no grounds for saying that there is an anti-farm bias involved when 95 per cent or 96 per cent of farmers are not subject to tax at all.
Farmers have no objection to paying their fair share of tax but the problem is to have a fair system. It is very easy to assess a cash income but difficulty arises when an estimated income is involved. The farming community think that the notional system is the best system at the moment although we accept that it is not perfect. When a person has an income of £2,000 there is no difficulty because it is a cash income but problems arise with regard to a proper system of estimating income. I want to make it quite clear that what we are concerned about is the system, not about paying tax. There are many fluctuations in farming and it is difficult to estimate income.
I understand.
Question put and agreed to.
SECTION 19.
Question proposed: "That section 19 stand part of the Bill."
This is an anti-avoidance measure aimed at schemes devised by certain people with farmland of rateable valuation exceeding £100 so as to bring their farming profits outside the scope of the charge to income tax.
One of the schemes that has been thought up involves the transfer of ownership of the farm to a company set up by the farmer. The company then let parcels of land either rent free or at a nominal rent to the original owner and to one or more members of the family. In this way a farm with a valuation of £150 could be let in two parcels so that each occupier is deemed to occupy land of less than £100 valuation and is not chargeable to tax on farming profits. If the land is let rent free there is no tax charged to the company. If let at a nominal rent the charge is insignificant.
Another type of scheme is one in which the ownership of the land is retained but the owner claims the existence of a partnership with other members of the family. As a result of the scheme all or most of the farming profits can be said to flow to other members of the family each of whom is deemed to occupy only part of the farm and is thereby outside the scope of the tax charge. The present section counters these avoidance devices by providing that the £100 threshold will not apply in such cases.
Can the Minister be a little more specific as to how the section counters these devices? In particular, will he indicate if he is satisfied that in countering these devices innocent cases will not be caught?
I do not think there is any prospect of an innocent case being caught. For instance, if farmland is owned in partnership the section will have no effect. In other words, if a son is genuinely brought into partnership, including ownership partnership, no problem is created. If a farmer with a rateable valuation in excess of £100 disposes of part of the land and confers ownership on someone else that is an effective severance. It means he will be outside the scope if he disposes of property so as to leave him under the £100 rateable valuation. If he operates the device of setting up a company that effectively is himself and if the company lets the land back to him free of rent or at a nominal rent that is an obvious device and we would not regard such as being a genuine disposal of land. If there is a disposal to somebody who is not connected and there is not this movement backwards again towards the real owner that is an effective severance and avoids liability to tax.
There must be a transfer of ownership?
Yes.
(Dublin Central): In the case of a man owning land with a rateable valuation of £400 who decides to divide that up among three or four children in lots of £60 to £70 valuation will that type of a transaction be caught?
If there is a genuine transfer of ownership from father to son and the land transferred to the son is under £100, then the son is not caught.
If a man with an estate with a rateable valuation of £140 transfers portion of it to one of his sons, will he be caught?
No, assuming that the land transferred is less than £100 valuation.
I am assuming that. When I was a young lad I was involved in the division of an estate which had a rateable valuation of £100 and I genuinely got a portion of that estate with a rateable valuation of £50. Would the Minister catch that type of individual if such a transfer took place today?
No. I am delighted to be able to give the Deputy good legal advice free of charge.
I take it that a case like Tom Riordan's would be caught? He keeps talking about having a partnership with his son Benji but I do not think we ever heard of his transferring the land.
It is contrary to the rules of the House for us to discuss the tax affairs of any named person, particularly if that person is not here.
I take it that if there is no genuine transfer, as in that case and there is a partnership entered into between father and son such a transaction would be caught.
I do not like to give answers on fictional cases.
What is the effect of the proviso to subsection (1)?
That proviso deals with cases where the rateable valuation is already under £100. That section will not apply in such a case.
That is a little confusing. Subsection (1) of this section states that section 15 (3) of the Finance Act, 1974, shall not have effect for a year of assessment in the case of an individual or his wife and so on. That section also states:
Provided that this section shall not apply in any case where the farm land is owned by an individual or his wife, if the individual or his wife is an individual to whom section 15 (3) of the Finance Act, 1974, applies for the said year of assessment.
Is there not a contradiction there? We are told at the beginning of the section that section 15 (3) of the 1974 Act will not apply in these cases but the proviso seems to say that the section shall not apply where section 15 (3) applies. In effect, is it not repeating what is said at the beginning of the subsection?
No. If we had not this proviso we would be capturing for tax purposes people whose holdings are under £100 valuation and applying this section to them. They are not within the tax net and it would be wrong to apply this section to them.
How would the Minister catch them assuming he did not have the proviso? The section states that section 15 (3) shall not have effect for a year of assessment.
Section 15 (3) of the 1974 Act states:
Subsection (1) shall not apply, as respects any year of assessment, in the case of an individual who shows that the rateable valuation of all farm land occupied by him did not, at any time during that year of assessment, amount to £100 or more.
That is saying that subsection (1) of section 15 will not apply where the rateable valuation does not amount to £100 or more. Section 19 of the Bill states that that particular subsection is not to apply——
Where there are these special artificial arrangements?
Yes. That would mean, therefore, that subsection (1) of section 15 of the 1974 Act would apply unless we have the proviso in.
It seems to be a rather cumbersome way of doing that. In effect, the Minister is saying that it is possible to have these artificial arrangements provided they are under the £100 valuation?
Yes.
Question put and agreed to.
SECTION 20.
Question proposed: "That section 20 stand part of the Bill."
This section, which follows on Financial Resolution No. 10 passed on budget day, contains transitional provisions to curb the abuses of sub-contractors' certificates. All certificates were recalled for authentication following the budget. As from 1st March, 1976, principal contractors have been required to deduct tax at 35 per cent from any payment to a sub-contractor who does not produce a duly authenticated certificate. This will apply until 6th December, 1976, when the new scheme which is set out in the next section governing the issue of certificates will come into operation.
Question put and agreed to.
SECTION 21.
I observe that amendments Nos. 13 and 15 are cognate and I suggest that we take them together.
I move amendment No. 13:
In page 19, line 36, to delete "Income".
These four amendments are drafting amendments one of which corrects a grammatical error by substituting "his" for "their". Two of them repeal the word "Income" in the phrase "Income Tax Acts".
Are we dealing with amendments Nos. 13 and 15?
Yes.
The Minister referred to amendment No. 14.
I would like to take amendments Nos. 13, 14, 15 and 16 together.
The only one I have any doubt about is amendment No. 16 which appears to be, on the face of it, out of kilter with the others.
I will make my remarks and if the Deputy wishes to treat that amendment separately I have no objection.
It is agreed then to take amendments Nos. 13, 14, 15 and 16 together.
As I have stated, two of them repeal the word "Income" in the phrase "the Income Tax Acts"—that is dealt with in amendments Nos. 13 and 15—and by so doing convert the expression into the "Tax Acts" which is defined in section 155 (2) of the Corporation Tax Act as meaning the Income Tax Acts as defined in section 3 of the Income Tax Act, 1967, and the Corporation Tax Acts. Amendment No. 16 adapts the provisions of the original section for corporation tax purposes.
It will be noted that section 21 amends extensively section 17 of the Finance Act, 1970; the amendment runs to six pages of this Bill. This means that the legislation governing the tax treatment of payments to sub-contractors will be partially in section 17 of the Finance Act, 1970, and partially in section 21 of this Bill. However, I would propose to bring in an amendment on Report Stage which will reproduce in consolidated form section 17 as now amended. This will, I am sure, facilitate the general public, subcontractors in particular, and their tax agents by bringing together all the relevant provisions in one section.
Could the Minister give again the definition of the "Tax Acts" in the Corporation Tax Bill? Did he say that this includes all the Income Tax Acts and the Corporation Tax Acts?
Yes.
If that is so, could I refer the Minister to the part of the section that he proposes to amend, that is, on page 19, line 36, which would read as amended: "by the Tax Acts, or the Acts relating to corporation profits tax ..." Is that because the definition refers to Income Tax Acts and corporation tax as distinct from corporation profits tax?
Yes.
I see. The Minister has similar amendments down later relating to different sections. I presume he intends to make this amendment where there appears in this Bill the phrase "Income Tax Acts", or is that presumption going too far?
No.. It is generally correct.
No doubt if there are any being missed out he will pick them up. I think there are, in fact, some being missed out, but I am not certain of that. The position, therefore, in regard to amendments Nos. 13 and 15 is clear, and I think No. 14 is purely a drafting amendment, but I am not quite clear on the purpose or the relevance to the other amendments of amendment No. 16.
The Deputy will recall that the Corporation Tax Act was not law at the time of the circulation of the Bill, so we could not presume it was going to be passed, even if we had the "boots" that Deputy de Valera referred to yesterday. Therefore we have to make this amendment now that that Act has passed. For historical and transitional reasons, we could have certificates arising in respect of queries during which corporation profits tax was payable. The reference to corporation profits tax will obviously become an anachronism in due course, but as of now we have to keep it because tax liability can arise in respect of periods during which corporation profits tax was paid.
Why is this amendment, which is, in effect, an amendment on subsection (2) of the original section appearing at the end of the section? The Minister will note that the section starts with "By the substitution for subsection (1) of the following subsection" and goes on then to later parts and ends up with "by the substitution for subsection (8) of the following subsection". It is now proposed at the very end to put in "By the substitution for subsection (2)——
That is wrong. It should be 11. I am sorry.
That makes a little more sense. Have we to make that additional amendment, the 11 for the two?
Yes. If the House would agree we could do it now.
Yes.
The House agrees that the amendment should read: "By the substitution for subsection (11) of the following subsection"? There is a subsequent change there. Is that agreed also?
That is right.
You should have 11 in brackets twice.
Is it in the amendment?
Yes.
Amendment No. 13 agreed to.
I move amendment No. 14:
In page 20, line 2, to substitute "his" for "their".
Amendment agreed to.
I move amendment No. 15:
In page 20, line 41, to delete "Income".
Amendment agreed to.
I move amendment No. 16 as amended by the substitution of "(11)" for "(2)" wherever it occurs:—
In page 22, after line 16, to insert the following paragraph:
"(i) by the substitution for subsection (11), of the following:
`(11) In relation to a case where a sub-contractor is chargeable to corporation tax, unless the context otherwise requires, references in this section to tax shall include references to corporation tax and references to a year of assessment shall include references to an accounting period.' ".
Amendment as amended agreed to.
Question proposed: "That section 21, as amended, stand part of the Bill."
This section contains the provisions for the revised arrangements to be applied as from 6th December, 1976, and which are intended to counter the evasion of tax by subcontractors in the construction industry. These arrangements are being introduced because of the abuse of certificates issued under the present system. The new scheme provides that subcontractors will have tax deducted from payments made to them on or after December 6th 1976, unless they obtain a certificate of authorisation for the use of construction payments cards. A number of conditions must be satisfied before such certificates will be issued. These conditions are designed to ensure that certificates will be issued only to those subcontractors who comply with, and have been complying with, their tax obligations. Provision is made for the cancellation of certificates and for the imposition of substantial penalties in cases of fraud or evasion.
Paragraph (g) replaces the existing section 17 (7). The new subsection (7) sets out the conditions which a subcontractor must satisfy before a certificate of authorisation may be issued to him, which will entitle him to receive payments in full without deduction of tax. These conditions are: first, that the applicant for a certificate of authorisation is or is about to become a subcontractor in the construction business; second, that the business is carried on from an established place of business with equipment, stock and other facilities which the Revenue Commissioners consider are required for business purposes; third, that proper records as defined in section 6 (2) of the Finance Act, 1968, are being kept. These are such records as are necessary to enable true returns to be made for the purposes of computing the profits or gains of the trade for the purposes of income tax under Schedule D; fourth, that the applicant —and in the case of partnerships and companies, each partner, proprietary director or proprietary employee— has throughout the qualifying period of three years complied with his tax obligations in relation to the payment of tax, the delivery of returns of income, and the supply of accounts or other information to the inspector; and that there is good reason to expect that the applicant will continue to keep proper records in respect of periods ending after the end of the qualifying period.
However, the Revenue Commissioners have discretion to disregard the failure to fulfil any of the conditions for the granting of a certificate, if they consider that it is reasonable to do so.
The House will note the use of the wording that "there is good reason to expect that the person will comply with the obligations referred to". That, of course, is a most unusual and, indeed, imprecise form of words to use in a taxing statute. Nevertheless, I am not complaining about it. I would normally express grave reservations about it, but I am not in these circumstances because I recognise the enormous difficulty for the Revenue Commissioners in dealing with the problem involved in this section. Although some of the provisions which have previously been made to deal with this were quite elaborate, it is obvious that even more elaborate arrangements are required and that many of the persons sought to be affected by this—lumpers in the main—have both a natural ingenuity and an acquired knowledge from, perhaps, other jurisdictions of the various loopholes that exist. Consequently, I am not objecting to the use of this wording. I merely draw attention to the unusual nature of it.
I would ask the Minister in regard to the other definitions that have been now substituted in paragraph (g) what the conditions are on which a certificate will be granted. He quoted them and I will refer him again to subparagraph (i) at the top of page 19 of the Bill which reads:
that the person is or is about to become a sub-contractor engaged in the business of carrying out construction contracts.
Other conditions also refer to the future. It is my experience in the past that even people who have been engaged in this kind of activity found it very difficult to get the certificate. Conditions were being imposed by the Revenue Commissioners which appeared to go beyond or to be much stricter than those laid down because they found that the situation was being abused. I wonder if there are any cases in which people have got certificates heretofore who had not been engaged in the business up to now and were about to become engaged but, nevertheless, managed to get a certificate.
There have been certificates issued where the Revenue Commissioners were satisfied that legitimate business was about to commence but, obviously, the number of such was not very great because, in the nature of the occupation, they tended to be starting in a very small way, perhaps a single individual, but if a number, for instance, came together to form a partnership or business and had premises and so forth they would have received certificates in the past. It is desirable that one would make the facilities available to one genuinely starting off in business. That is the purpose of this provision, but obviously, it is hard for such a person to provide the proofs necessary. I do not think there is any way around that.
I agree that such a provision is necessary, at least in theory, because a person who complies with the law is entitled to this certificate and he should not be prevented from starting off in business because he cannot get the certificate. The practical position is rather different, and I would be very surprised if anybody were able to set up in the subcontracting business with a fixed and permanent place of business and all the other requirements and still get the certificate, even though he was just starting off. In practice he has to suffer the deductions of tax from all payments due to him for a considerable time before he will get the certificate from the Revenue Commissioners. I feel that while in theory provisions should be made for a person about to become a sub-contractor, in practice this phrase is mere lip service and no such person is going to get the certificate at all.
We prefer to provide the means to give a certificate. Having regard to the fact that if there were a number of new checks being built into the system, there is a possibility that certificates might be more liberally issued because the certificate has to be presented to the principal who then has to obtain the sub-contractor's signature on the return to the Revenue Commissioners and ultimately a construction payments card is issued and that also has to be signed by both parties. The opportunities for fraud have been severely restricted by this new scheme. The genuine person should, therefore, be more easily facilitated than in the past.
I hope the Minister is right because I know of a number of genuine people who have found it extremely difficult to carry on business because of the regulations which had to be made to catch those who were trying to avoid their liability.
There is what might be regarded as a drafting matter to which I wish to draw the Minister's attention. On page 17, line 3 the Minister will see "such operations as are described above". I presume that that means such operations as are described in paragraphs (a), (b), (c) and (d), but it seems an unusual method of description in a Bill. I merely draw the Minister's attention to it. I am not making any issue. He may wish to have it worded differently.
The major point I want to raise on this section concerns a matter that has been drawn to the Minister's attention, I understand, in the form of representations from certain accountancy bodies who visualise certain problems arising under this section. The main contractors will have to obtain a construction payments card from the Revenue Commissioners in respect of each sub-contractor before he can make any payment to that sub-contractor, that is, make a payment without deducting tax. The new procedure that is envisaged in this way will possibly result in main contractors having to deduct tax from the first payment they make to a sub-contractor because of the administrative problems that can arise initially in construction payments cards. This can also arise in the case of sub-contractors who are employed on a small contract which is carried out over a short period. The result could well be that small sub-contractors in particular who are probably accounting for their taxation liabilities, will have serious cash flow difficulties. I understand that a recommendation was made to the Minister that to try to deal with this problem he should consider providing that each main contractor would be authorised to make payments not exceeding £200 in any tax year to any one sub-contractor without deduction of tax, provided a sub-contractor produces a valid certificate issued under section 17 of the Finance Act, 1970. This seems on the face of it to be a reasonable suggestion because I can visualise circumstances in which small sub-contractors could find themselves in the position of having 35 per cent of the tax deducted when it should not be. This can be a very crippling situation for any sub-contractor but particularly for small sub-contractors and I do not see any amendment from the Minister which would meet this suggestion. I would appreciate it if the Minister would indicate his reaction to the suggestion, that is, the suggestion that the main contractor be allowed to make payments not exceeding a total of £200 in any tax year to any one sub-contractor without a deduction of tax.
The fears of the committee would not be justified in the light of experience. It is intended that construction payments cards will be issued to sub-contractors by the Revenue Commissioners on the day the application is received.
The road to hell.
No. It is a good intention that I hope will be discharged. In the unlikely event of any delay occurring it will be arranged that any amount retained on account of tax by the principal will be refunded to the sub-contractor on receipt of the appropriate construction payments card. There should not be any adverse effect on the cash flow and, accordingly, I would not feel justified in amending the legislation. There will be another separate unit dealing with this. It will be worthwhile doing it because I believe the return in tax will be considerable because there has been quite an amount of evasion in this field and we will see how the new system works. There should not be any serious cash flow problems. It will be at most a matter of some small delay which will hardly generate a cash flow problem. The case that Deputy Colley makes is for a small sub-contractor and a matter of a few days will not matter.
I made the interjection about the road to hell, because I recall what I said when I was in the Minister's shoes when introducing the section which he is now amending to deal with lumpers. I gave certain assurance, in good faith on the basis of advice given to me in good faith, as to how it was intended to deal with certain matters arising in particular with claims for repayments. I know that in practice what has happened since does not conform to what was intended at the time and that is solely because of the sheer pressure and volume of work involved. I am rather afraid that the same thing can happen here. I fully accept that it is intended to issue wherever possible—hopefully in the vast majority of cases—construction payments cards on the day of application. I feel in my bones, and the Minister must suspect, that this is simply not going to happen in a number of cases for one reason or another and that there is going to be a hold up for administrative reasons in the Revenue Commissioners.
We are talking here about very small contractors. This is obvious when we talk about authorising the payment of £200 to the sub-contractor from the main contractor in any one year. Because they are small sub-contractors small sums of money and small delays can be extremely important to them in a way that would not register at all with even medium sized contractors. Furthermore, I would strongly urge the Minister to consider the implications in the minds of such persons if there are even relatively short delays which arise in the Revenue Commissioners' Office, not on the part of the contractor or sub-contractor. The reaction of persons who have tax deducted at a very high rate for payments due to them, and as a consequence may be left without any income at all even for a few days, is that they will go berserk. If you stand back from it and are not directly involved, it may seem as if it is something that is unfortunate and nothing else but if you are on the receiving end you can go virtually berserk when this happens to you. The Minister should not run the risk of this kind of situation arising. There is no great risk involved in the suggestion that has been put forward and the Minister must know that he cannot with reasonable assurance say that there will be no delays in the issue of these cards or that there will not be delays in the issue of refunds of tax where tax has been deducted and has to be refunded on production of cards. The Minister must know that there will be cases of delays under each of these headings. They will be unfortunate, they are not intended, but they will exist for one reason or another. A sub-contractor, particularly a small sub-contractor genuinely complying with the law who finds himself without money on a Friday and unable to hand over any money to his wife as a result of this measure, should not be put in this position. But it will happen, simply because the Minister cannot guarantee that no delays will occur.
Some effort should be made to cover that possibility by adopting this suggestion or something similar. It is not good enough merely to say that it is not intended to have any delay and to leave the case rest on that. We know there will be some delays but the genuine sub-contractor who is complying with the law, particularly when he is in business in a very small way should not be the one to suffer because of a delay of that kind, a delay which everybody hopes will not occur but which we know will occur at some stage. Can we not make some arrangement to cover that sort of situation? We may not be able to overcome all the difficulties but we will at least avoid the worst excesses of what can happen if a sub-contractor finds that there is a very large deduction from the payments due to him and about which he can do nothing for a few days. These may be vital days so far as he is concerned.
It is proper to remember that the sub-contractor will be receiving 65 per cent.
But he will be paying out that and, perhaps, more. His own income would be in the other part.
I share the Deputy's anxiety that nobody would be inconvenienced but he understands my problem and the problem of the Revenue Commissioners in this regard. The new system will operate from 6th December so we will have time before next year's budget to have had some experience of how the system works. If correction is needed, it can be effected then with the minimum delay. However, these sub-contractors are not unknown to each other and I am sure they could arrange suitable accommodation among themselves in order to avoid the hardship which the Deputy visualises occurring occasionally.
That is all very well for the bigger or even the medium contractor but the smaller fellows are not in that position. I understand that the Minister has certain difficulties in this regard but I do not think they are insuperable. I am a little unhappy at the attitude that sub-contractors and, by definition we are talking about the smaller ones, can afford to wait and see how the system works. They should not have to depend on the question of whether the system works smoothly. We must make every effort to prevent even one case of hardship arising. The general attitude should be that the taxpayer, be he a small sub-contractor or otherwise, would get the first consideration and that we should not adopt a wait-and-see attitude in relation to a new administration scheme. It may seem reasonable to say that if the scheme produces hardship it can be changed but we should not risk somebody being put in dire difficulty. A sub-contractor who has some credit is not likely to find himself in real difficulty because of this scheme but I am concerned with the one whose weekly income is buried in that 35 per cent deduction. He is the one who will be held up to ransom because of some delay or difficulty in the administrative procedure. He will not understand why he should be subjected to this kind of difficulty and hardship simply because something goes wrong with the system.
I urge the Minister very strongly to consider some method whereby these kinds of hardships can be avoided. He may not be able to make the change now but he should endeavour to do so before the Bill is finalised. He should not rely on the approach of waiting to see how the system works and then deciding in next year's budget whether it should be changed. If only one or two sub-contractors were to be left without money for themselves and their families for a week-end, the price would be too high to pay in order to determine how the system works.
I will take a look at the situation but I do not wish to generate another convenient way of evading tax. There might be a situation in which some smart operator would ensure that he did not work for the same contractor more than once a year. In other words, that he would go from contractor to contractor.
That may be so but if the figure is kept low enough it would hardly pay him to move around in that way for the sake of £100 with each contractor. Rather, he could find himself in considerable difficulty.
These boys are fairly sharp and it is not beyond their ingenuity to prepare a list of 52 contractors and swap the work around among themselves.
They would not really qualify under this section. They must be supplying more than labour.
I have a great regard for their ability to avoid tax.
In paragraph (ii) of page 19 there is reference to a fixed place of business established in a permanent building. Is this a condition?
Yes.
Might there not be a sub-contractor without a fixed place of business?
The kind of sub-contractor the Deputy has in mind would invariably require equipment and equipment must be located somewhere. In practice, it has been found necessary to have a condition requiring an established place of business. There is a provision enabling the commissioners to forego any particular condition should they consider that there is good reason for so doing so it is better to leave it to their judgment rather than remove a provision of this kind which is the only practical way of deciding whether a person is genuinely in business and is returning an account to the commissioners. The Revenue Commissioners must have an address for every taxpayer.
I am not thinking of the tax dodger but of the one engaged in individual enterprise who may not be living in his own home but may be moving around the country where the address he would give would be that of digs he was staying in at the time. He may not be able to provide a permanent address.
Even the person moving around would tend to have a base somewhere. We would have to require a base at which the Revenue Commissioners could find him ultimately if that was necessary. Does not everybody like to hear from his friendly Revenue Commissioners from time to time?
Question put and agreed to.
SECTION 22.
Question proposed: "That section 22 stand part of the Bill."
This section provides that benefits in kind enjoyed by persons, employed here by non-resident companies, and whose remuneration arises outside the State are to be charged to tax to the same extent as similar benefits enjoyed by employees whose remuneration arises within the State.
The benefits in kind legislation which applies to employees generally is contained in Chapter III of Part V of the Income Tax Act, 1967, sections 116 to 123, and covers expense payments, provision of accommodation, entertainment and cars.
Section 119 applies the provisions of Chapter III to employments the emoluments of which would fall to be assessed under Schedule E. There are a number of people resident in the State who are employees of companies not so resident. If such employees derive their emoluments from the country of residence of the company the emoluments fall to be regarded as income from a possession outside the State. As such, the emoluments fall to be assessed, not under Schedule E, but under Case III of Schedule D. Because section 119 applies only to Schedule E, benefits in kind enjoyed by an employee whose emoluments are chargeable under Case III of Schedule D fall outside the scope of the charge. This position leaves the door open for some tax avoidance as well as creating anomalies in ordinary cases.
An anomaly may be illustrated by the following example. Assume that a British company has a subsidiary in this country. The subsidiary provides a rent free house for its manager. The subsidiary being resident here, has to operate PAYE for the manager and he is liable in the normal way in respect of the benefit flowing to him from the rent free house. The parent company in Britain also employ one of its own managers for duties in this country and provides him with a rent free house. His emoluments arise in Britain and are chargeable under Case III of Schedule D. He, therefore, escapes tax on the benefit flowing to him from the rent free house. Because he is being paid from Britain he enjoys an advantage over the man who is, in effect, his colleague, who is paid in the State. If the legal position is not corrected, employees of British and Northern Ireland companies are likely to ask their employees to make arrangements to take advantage of the position.
If the section were enacted, what would be the practical difference in the case illustrated by the Minister where the manager was being paid from London and was supplied with a rent free house here?
The person who is resident here and being paid by the subsidiary which is resident here is paying tax on the rent free house because it is a benefit in kind. If he is paid from across the water he is not paying tax on the house.
Is it correct to say that the person being paid from abroad is not liable to tax on that at all?
He is not.
Can the Minister make that statement without qualification?
Without qualification. It applies to Schedule E, not D.
What I am coming at is that in the case the Minister has given the effect of doing this is to make the availability of a rent free or rent reduced house liable for tax but such person presumably is not paying PAYE.
No. He would be charged to Schedule D and you cannot charge PAYE where the payer is outside the country.
Where is he paying the tax?
Here, under Schedule D.
And he is claiming credit for his liability in Britain?
No. He is fully resident here and the employer is resident across the water.
What the Minister envisaged then are two people, each fully resident here, one being paid by the Irish subsidiary and one by the parent company abroad?
Yes.
Which other benefits in kind are being covered by the section? The Minister mentioned a rent free house or presumably a subsidised value on the house. Which other benefits in kind are covered?
A car, an expense allowance, entertainment.
Subsidised interest on loans?
No.
Under any Schedule?
Under any Schedule.
Logically, presumably the Minister would think that any benefit in kind of whichever nature ought to be included.
Is the Deputy arguing that subsidised loans should be included?
They are a very obvious area where benefits are given in certain categories of employment and it appears the Minister is bringing certain benefits in kind into consideration for taxation which were not heretofore subject to tax. Since he is doing that, it would seem an appropriate time to consider which should not be taxed and why. I know the Minister will say he is simply taking the position as it is and that what is applied under one Schedule will be applied under another. Why should a rent free house be assessed for the purpose of tax but a house being purchased with the aid of one's employer, we will say at 1 per cent interest, should not be taxed? I do not understand the reasoning behind it.
The situation outlined by the Deputy may be looked at in various ways but it is there and has been for a long time.
The rent free or rent reduced house is definitely included?
Yes.
It is strange.
Question put and agreed to.
SECTION 23.
Question proposed: "That section 23 stand part of the Bill."
This section imposes a minimum charge of £300 or, if greater, 15 per cent of the cost of the car, on employees or directors who are chargeable under the provisions of section 117 of the Income Tax Act, 1967, on the benefit in kind accruing to them from the private use of a car provided for them by their employers or companies. The minimum charge applied for 1976-77 and subsequent years of assessment.
The section also secures that where the taxpayer enjoys the benefit of the car for portion only of the year of assessment, for example, where he commences with a new employer, the amount of the minimum charge will be determined by apportionment of a time basis. The yield from this measure is expected to be about £4 million in a full year.
Section 117 of the Income Tax Act, 1967, is the section which provides that benefits in kind, including an employee's private use of a car supplied by his employer, are chargeable to tax under Schedule E. Where a car is owned by an employer and is placed at the disposal of an employee or director, the liability to tax is computed by reference to the sum of (a) the annual value of the use of the car and (b) the running costs borne by the employer less such part of that sum, calculated normally on a mileage basis, as is shown to relate to the use of the car in the performance of the duties of the office or employment.
The "annual value of the use" of the car is taken as 12½ per cent of the purchase price. In practice, however, the assessable figure in the case of employees normally ranges from £100 to £200. Attempts to have those amounts increased to more realistic levels, to take account of the present-day cost of running a car for private use, lead to time-consuming correspondence and endless disputes.
The fixing of the minimum amount of the benefit at £300 or 15 per cent of the cost of the car has two advantages: (1), it quantifies the value of the benefit at a more realistic figure and (2), it will simplify administration of the benefits in kind code by ending the protracted disputation as to the extent of the private use of the car and the measure of chargeable benefit. It will not, of course, preclude the charging on the existing basis of the benefit in kind in respect of the private use of a car in a case where such benefit is of an amount that is greater than the minimum of £300 or 15 per cent of the relevant cost of the car. The "relevant cost" of the vehicle for the purposes of this section is as defined in section 31.
The reason, as I understand it, for the proposed change of the law is to avoid time consuming correspondence and protracted negotiations. One can understand the desire to avoid these things but I wonder if this section will avoid anything. Surely the Minister expects that there will be many taxpayers who will argue with the inspector and engage in protracted correspondence as to the amount that should be allowed under this section. Is there any gain from the point of view of administration in this section? I doubt it. From the point of view of the taxpayer, the introduction of this minimum—am I right in saying there is not a minimum at present?
Yes.
The introduction of the minimum is a new departure?
Yes.
It can work out quite unjustly, because if one were to calculate in certain cases what the value should be, it could well be below £300. The wording of this section is that the amount to be charged shall not be less than the greater of the two amounts, either £300 or 15 per cent. This section is now laying down a minimum, assuming in a particular case that the 15 per cent is smaller than the minimum of £300. On what basis can one justify either the principle of a minimum, irrespective of the facts of the case, or, in so far as one accepts that there should be a minimum, how does one arrive at £300? It seems to me to be much too arbitrary an approach and an effort to subject what should be a question of negotiation and judgment by the Revenue Commissioners to a kind of a machine operation. Hopefully that is what is thought will happen: there will be a push-button arrangement which will simplify matters for the Revenue Commissioners, without any great regard to the justice or equity of what happens to the taxpayer.
I think it is objectionable from the point of view of the lack of concern for the justice and equality being meted out. In addition, it will not give the benefit hoped for administratively and we will have the worst of both worlds. We will have the failure to get the benefit administratively, and at the same time, we will have introduced a very doubtful principle, as is being done in this section, of having a minimum allowance in the case of this kind without reference to the facts of any particular case.
The existing provision is section 117 of the Income Tax Act, 1967, which appears to give the Revenue Commissioners plenty of scope for taxing the benefit arising from the use of a car and gives them the option and discretion to make an equitable judgment in the light of the facts in each case and, in particular, of the apportionment as between business and private use. I am not aware of any major complaints in regard to how this has operated.
It would appear from what the Minister says that so far as there are complaints, they are coming from the Revenue Commissioners, not from the taxpayers. I do not really think it is good enough to try to approach a problem of this kind—presumably there is a problem or we would not have this section—in this purely arbitrary way. Clearly, although the section does not say so, the intention is to say to the people: "Look, it will be £300 or you prove otherwise. We will not encourage you very much to prove otherwise because it involves protracted correspondence and negotiations." I freely admit that that may be exaggerating the position somewhat, but not grossly. The thinking involved in this section is fairly clear. It is putting expected administrative convenience and saving ahead of any question of justice or equity for the taxpayer. It is disregarding the facts of particular cases that can arise. It is saying: "I do not care what the facts are. The minimum charge to tax in respect of benefit in kind, or a car, will be so much, irrespective of the facts." I do not know how anybody can justify that kind of approach. Certainly, administrative convenience, even were it to be achieved, would not justify it. However one may talk about equity in taxation, there can be no equity in a situation in which irrespective of the facts, one lays down a minimum. I would hope the Minister would think a little further about what is involved in this and whether he is really achieving anything at all by this section.
In my view the likely result of this section is that every taxpayer will argue like hell with the inspector about the value being placed on his car and the administrative work will be even more than it was heretofore. The consolation to the Minister may be: well, at least there is a minimum figure. I do not know. Is it assumed that the inspectors are incapable of enforcing what they consider to be the correct or reasonable value or is it really seriously thought that by introducing this section most taxpayers involved are simply going to take it lying down and not raise any arguments or queries? Because, if that is what is thought, I venture to suggest that the Minister is in for a rude awakening. I do not believe that is what is going to happen at all. The volume of work involved in dealing with claims of this kind will be increased considerably if this section is enacted. Therefore, we would have the worst of both worlds—no gain administratively, possibly even a loss. Certainly, the introduction of a section which proposes to lay down a minimum charge, irrespective of the facts, is something that can hardly be justified on theoretical grounds, whatever practical grounds the Minister may advance from an administrative point of view to try to justify it.
My recollection of the provision the Minister introduced last year in the budget was that the maximum value of a car allowable was £2,500. Is that correct?
Yes.
And it was increased to £3,000 or £3,500?
£3,500 under this year's Bill.
Is it not correct to say that if the minimum charge here is to be £300, that is the equivalent of £4,500 at 15 per cent?
Yes.
That means that the employee is being charged on a thousand pounds over and above the value that can be allowed on a car to a business firm? It is a bit strange.
No. £2,000 would be the figure.
The charge of £300, or 15 per cent, whichever is the greater. I take it that it cannot be less than £300?
No, but that would be 15 per cent of £2,000.
Perhaps then my calculation is wrong. I am fairly sure that there are some cases where cars are used exclusively for the individual rather than for the business. But, in the majority of cases, the use of a car is an essential part, particularly for people who are agents or travellers. The £2,000 against £3,000 is almost approaching sole use for the individual. I do not dispute the fact that there may be some cases. Certainly, in the case of any person who is a commercial traveller, who is travelling five days a week, he cannot do his travelling in any kind of an efficient way unless he has a car. Therefore, the five days' travelling is being done in connection with the business.
If one takes the £2,000 the Minister set out against the maximum £3,000 allowable for a car, he is being charged on that car as if he had its full use for two-thirds of the week, I think. To my mind that is what it is working out at. The Minister says the value of a car at £300 is £3,000 and the maximum allowable is, what, £3,000 or £3,500?
£3,500.
Well, over half the value of the car. Is this 15 per cent per annum? If it is, what happens if the value of the car falls, we will say, to £1,000, £700 or £600? Is he still charged at the rate of £300?
Yes.
The car is being written down each year on a basis, I understand, of 20 per cent.
Its trade-in value probably is not going down at the same rate as people have discovered to their pleasant surprise in recent times.
Its trade-in value is a different thing altogether.
Not at all.
What the Minister is saying here is that the minimum value of this car is never going to fall below £2,000, where it could easily. I can see in my mind at present a few cars that are valued at approximately £400 to £600. If the commissioners had discretion, that is fair enough but they do not have it here. It says quite clearly in the explanatory memorandum: "...£300 per annum or, if greater...". It amounts to charging the individual with something over half the total use of the car even though it is for his job. I am speaking now of individuals who have to have cars for their jobs. I agree that there is a separate area in which there are people who can hardly be described as using the car for the benefit of the business; it is probably more for their own benefit.
Taking the £300 or 15 per cent— the Minister mentioned 12½ per cent as being the annual value of the car— there arises the question of tax and insurance which are fairly substantial now, apart from the running costs of the car. If the running costs are being paid by the employer, is the annual tax or proportion of it and, if so, what proportion and the insurance and what proportion, to be added to the minimum of £300 or 15 per cent?
No, there is no question of adding on the items of motor tax or insurance. The £300 charge is calculated after taking into account the average cost of running cars, including——
It is an inclusive charge.
Including the capital cost, insurance, tax, fuel, depreciation, average repairs and so on. When one considers that 15 per cent of a week is just marginally more than a day that the average person works a five day week—he does not work for 18 hours during the average day either but proceeds to and from his place of employment, often in his private car and uses the car in the evening time—one can see that the figures we have in mind are quite reasonable. Some months ago—this was last year and, like everything else, car costs have increased since then— the Automobile Association calculated that the lowest running cost of a car—this would be in respect of a small car—was £16 a week. The running costs of what might be called the average car were not less than £20 a week. By any reasonable assessment the figure of £300 is a fair measure of what might be regarded as the private use of a car. The tax laws do not allow a deduction in respect of the cost of going to and from one's place of employment and there are very good reasons for this. It amounts to a considerable part of what is called the private use of a car; probably it accounts for a large proportion of most private car use.
It is interesting that since we made our announcement last January in the recently introduced Finance Bill in Britain they have introduced not dissimilar provisions to deal with the same benefit in kind. Clearly what is involved is a benefit in kind. If a person is provided with a company car he is not obliged to put up the capital and usually he is not required to pay either insurance or tax. Even the car repairs may be discharged by the company and that is a very considerable saving.
I am not arguing against that.
Obviously the person who has to provide a family car at his own expense has a much greater expense. Nobody will dispute that there is a benefit in kind. The only criticism may be whether the figure of £300 is an arbitrary one that cannot be justified——
And whether there should be a minimum at all.
Having a minimum will avoid a certain amount of argument. Those of us who have professional experience in this area will be aware of the appalling disputes that can arise between inspectors of taxes and taxpayers regarding the car. It seems to generate more emotion than any other possession or benefit in kind.
In Britain they have produced a most elaborate system. There are nearly 30 or 40 different rates, depending on the cylinder capacity of the car in cubic centimeters, the value of the car where they have not got cylinder capacity and so on. Their system is probably more arbitrary than ours. I agree that we have an arbitrary minimum but it should avoid a great deal of disputation. We can go to 15 per cent of the cost of a car if it is greater.
It is a reasonable system. It will avoid a lot of the argument that must frustrate the taxpayer as much as the staff of the Revenue Commissioners and it will help to achieve finality in relation to accounts at a much earlier time than is possible now.
I appreciate the argument about saving the time of highly paid officers in the Department. However, I regard the fixing of a minimum as unwise even from the economic point of view. If an employee is to be charged at a minimum he may look for a new car every second year on the principle that if he is to be taxed he should have the maximum value. It is a non-economic approach. A fixed charge on the value of the car as written into the books would be a more efficient and a fairer way of approaching the matter. I accept that the problem of time arises when dealing with the question of running costs. If the Minister puts in a provision regarding the greater figure it will be necessary to work out the cost of the car for the year. The Minister has said that he will take the 15 per cent of the value of the car as being the overall figure including running expenses but I do not see how he can avoid checking the running costs as the inspector and the accountant do at the moment. It will be inevitable.
The fixing of a minimum is not wise because it will keep up the cost of the car. There will not be an efficient use of transport and some individuals will also have a sense of grievance about the matter. A person may say that his car is worth only £1,000 but he is being charged an extra £150 tax for the use of the car. The question then arises if the employee is charging the firm for the use of the car during his private time, perhaps in the evenings or at weekends. There may be a number of people who are not charging up the expenses for running the car unless it is being used for business purposes.
I would recommend the Minister to look at the matter again. It is not a question of trying to persuade him to reduce tax; it is a question of being reasonable. We should not create a sense of grievance among some sections, particularly as this is an annual fixed charge, either £300 or 15 per cent, whichever is the greater.
I should like to get some experience of the operation of this new system before considering what changes, if any, should be made. I appreciate the arguments of the Opposition but I would point out that none of us can make any clear judgment on what would be the most appropriate way of handling the matter. When we have some experience of the new system we will see if it produces any wrinkles that need to be ironed out. If that proves to be the case, certainly we will do it.
My argument is that the Revenue Commissioners will have no alternative. They will have to make the charge irrespective of the circumstances and I do not think that is right.
I agree with Deputy Brugha on this. Whatever the Minister may say about getting experience of how this works he can be sure now, without any experience, that it will produce a sense of grievance among a number of taxpayers for the reasons spelled out by Deputy Brugha. It is a minimum and in a number of cases the charge being made will be demonstrably greater than should be made on the basis of the value of the car and the facts. That arises because there is a minimum there. Whether it is going to save administration costs is, of course, a matter for estimation and judgment. Nobody can be certain whether it will or will not do that. My belief is that it will not save administration costs but even if it did it will not be justified having regard to the fact that it is proposing to lay down charges irrespective of the facts appertaining in the case of a particular taxpayer. That will cause trouble and dissatisfaction.
Apart from that aspect of the matter, I should like to know how the situation is envisaged in the case of a person like a commercial traveller who is supplied with a car by his employer and who spends most of the week, and sometimes part of the week-end, using the car for business purposes. What will be the situation as regards such a person? On what basis will his use be assessed? How will that compare with somebody who is supplied with a car but does not use it for anything like the same amount of his time? How are the two different cases to be approached under this section?
I agree it is arbitrary but I think it will operate to the advantage of several people although possibly to the disadvantage of some. It is hard to think of any situation where the availability of a car to a person is not worth £300 per year. Just think of the costs of hiring a car for a day in every week and it will exceed £300 per annum. The figure is a small one. I know people quickly overlook the actual costs of running a car. One thinks of it when buying or when one has major repairs carried out on a car or when one has to pay tax but the continuing depreciation of cars, loss of value and so on all add up to a considerable sum. People overlook the actual cost then if they are providing the sole cost themselves and if they have the cost at the expense of their employer they certainly are not aware of the tremendous advantage it is to them. It would be very difficult for anybody to argue that the availability of a car and even its modest use is not worth at least £6 per week.
There are cases of commercial travellers who leave Dublin on a Monday morning, travel around the country during the week and return late on Friday night or on Saturday. It depends on the business the traveller is engaged in but for some businesses the Friday evening can be important for doing business and if travellers are far away from Dublin they may not return to the city until Saturday. In such a case all the use from Monday morning until the traveller returns has been for business purposes. Are we saying that the benefit in kind he is assessed as having got from the use of the car for his own benefit is a minimum of £300 or, if it happens to be a car worth a reasonably large sum which a traveller would have if he travels long distances, it would be more than £300 because 15 per cent of the sum involved is more? Is this what is to happen under this section? Is the Minister saying that it is a kind of average arrangement.
£450 would be a fair average for such a person. The car would hardly be worth less than £3,000.
This cannot be done on an average basis which is what the Minister is trying to do.
We did the same in relation to the blood content of persons charged with drunken driving. There are many cases where the Legislature have to act arbitrarily because it is the only feasible way of administering something.
That may seem like a good example to the Minister but it is not a good example from his point of view. No matter what the alcohol content in the blood shown in a sample it is still possible to convict a person of being drunk in charge of a car, if he was drunk, irrespective of the content of alcohol in his blood. I do not think it is a pursuasive factor. If he acted in a drunken manner that could be given as evidence. In other words, there is one arbitrary thing to go by but one must also allow for the other flexible approach which is what we are urging on the Minister. There should be a flexible approach here related to the circumstances of the case. One can easily pick out extreme cases and show how badly they are going to be affected by this but that is not our purpose. Our purpose is to show that one cannot have an average approach in this and that seems to be what the Minister is trying to imply.
Deputy Brugha raised an important point and I am not sure that the Minister replied to it. It was in relation to the 15 per cent. To what figure is that to apply? Is the value of the car to be reduced every year and the 15 per cent to be applied to the reduced value?
It is still £300 when the car falls below £2,000.
And then one is operating with a car which is clearly, under the method of valuation provided in the Bill, below the value of £2,000 and going lower. Nevertheless, the £300 minimum is being charged as though the car was worth £2,000. The clear anomaly that arises in such circumstances is something that at least requires some explanation or some attempt at justification by the Minister. In his reply to Deputy Brugha I do not think the Minister attempted to justify the anomaly or to acknowledge that it existed. There can be no question but that such an anomaly exists and for that reason some explanation is required for the deliberate creation of it under this section. This section, combined with section 31, would clearly create this kind of anomaly.
Another point I should like to touch on is the necessity to increase the £1,500 per annum limit provided in section 119 (3) of the Income Tax Act, 1967, in order to even keep pace with inflation since then.
Progress reported; Committee to sit again.