I move: "That the Bill be now read a Second Time."
I am very glad to introduce my first Finance Bill as Minister for Finance and I look forward to performing this function on many more occasions. The Bill gives effect to the budget tax cuts, a budget which cut tax rates for one million taxpayers by two percentage points, introduced a greater degree of effective tax equity by cutting back on tax shelters and gave a fillip to productive enterprise and endeavour. The Finance Bill also contains many technical and other changes to our tax law.
The budget delivered more than £500 million in personal tax reductions for all income levels, for the elderly, the widowed and those on lower pay generally. Taxpayers will see the benefit of this shortly when the new tax year starts on 6 April. They would have been experiencing these benefits already if our income tax year was coterminous with the calendar year. I have particular ideas and plans in that regard which I will deal with later.
There is another first this year for the Finance Bill. The income tax, corporation tax and capital gains tax provisions refer to the newly consolidated sections of the Taxes Consolidation Act, 1997. I recently had the pleasure of meeting all the staff, the outside referees and private sector contributors who made the consolidation happen. The Taxes Consolidation Act is great testimony to the efforts of all concerned. It is also a lasting tribute to my predecessor, Deputy Ruairí Quinn, without whose lead the project would have remained an aspiration and not a reality. I take some credit for picking up the ball last summer and completing the task of putting the Bill through the Houses.
It is usual in a Second Stage speech to give a run-through of many of the individual sections of the Bill. There is, however, this year a very detailed and extensive explanatory memorandum and a summary of the main features of the Bill was published last week. I propose, therefore, to mention only the main areas or features of the Bill rather than give a detailed description of individual legislation. I look forward to an interesting and good debate on this important measure. I will be introducing further measures into the Bill on Committee Stage and I will refer to these later.
The first few sections of the Bill give effect to the changes in tax rates, bands and allowances, income tax exemption limits and the increased widowed bereavement allowance announced in the budget. It is important to point out a number of important effects of the budget package on ordinary PAYE workers: in the case of single people the gains in net take home pay range from more than 2.5 per cent to 4 per cent and for married couples with two children, the gains range from 2.5 per cent to 5.5 per cent in some cases. These gains are before pay increases under Programme 2000.
Many workers on low pay will get more from this year's budget than they got from the 1997 budget. For a married couple on £14,000 per annum, just under the average industrial wage, the average tax rate has dropped from more than 21 per cent in 1996-97 to under 17 per cent in the forthcoming 1998-99 tax year. For a single person also on £14,000, the corresponding drop in average tax rates is six percentage points, from 28.2 per cent in 1996-97 to 22.4 per cent in 1998-99. At the same time, I have cut back substantially on certain well used tax shelters to ensure a fairer distribution of the tax burden. This is hardly the action of a Government portrayed by some Members opposite as cutting capital gains tax simply to enrich the better off.
The income tax provisions in Chapter 2 of Part I of the Bill contain a number of anti-avoidance measures. Section 8 is intended to counter tax avoidance arrangements relating to the commencement rules for taxing the profits or gains of trades or professions. Under current rules, some firms can engineer a situation where profits in the second year of assessment can fall out of charge. Action is being taken to prevent this. Section 11 is a further anti-avoidance measure to remove the risk of certain individuals moving assets offshore to avoid tax. This arises from a recent UK court case which cast doubt on the effectiveness of its tax law on which our 1974 legislation in this area was modelled. Section 10 improves the tax reliefs available for the purchase by employees of new shares in their company by reducing the minimum holding period for relief from five to three years.
It also clears up an anomaly whereby, if shares were sold by an individual, this single disposal could, in certain cases, lead to a withdrawal of BES tax relief, approved profit sharing scheme tax relief and relief on the purchase of new shares by employees. Section 10 will ensure that such a double or triple hit will not occur where tax relief under one of the schemes falls to be withdrawn.
Chapter 3 of Part I deals with various aspects of income tax, corporation tax and capital gains tax. Section 12 sets out in detail how the tax relief for the employment of the long-term unemployed will apply. This is a two-pronged initiative aimed at giving the employer an incentive to hire a person out of work for 12 months or more and affording that person an incentive to take the job offer. I have every hope of this scheme succeeding and I will make arrangements to have it actively promoted.
Section 13 sets out the conditions to be fulfilled to obtain tax relief on personal and corporate donations to disadvantaged schools. I am glad to be able to include this imaginative suggestion for reliefs which the Minister for Education and Science put forward at budget time. A number of new schemes of tax relief for investment are set out variously in section 15 in respect of capital allowances for airport buildings and structures, in section 17 in regard to capital allowances for the construction, extension or refurbishment of approved nursing homes and in section 18 with regard to investment in renewal, improvement or reinstatement of vessels in the whitefish fishing fleet.
Sections 24, 27 and 28 also provide for the implementation of the budget changes on capital allowances generally and on the BES. Given their importance both in tax equity terms and in refocusing tax reliefs more narrowly on clearly defined sectors, I propose to go into some detail on these changes.
As the House is aware, the budget day Financial Resolution limited the amount that an individual passive investor can set off by way of capital allowances against non-rental income to £25,000 in any tax year. This restriction applies to all types of commercial and industrial premises, with the exception of hotels which I will come to later. This initiative was taken after it became clear that the availability of unrestricted capital allowances on these properties was being used by high income earners to reduce their tax liability on earned income by very significant amounts. The closing off of this tax shelter will have lasting effects in ensuring a fairer sharing of the tax burden.
As with all measures restricting reliefs, it was necessary to provide for transitional provisions to let through certain projects well in hand or committed to by firms and investors prior to budget day. This we did on budget night but, on further examination, a number of modifications proved to be necessary to the transitional provisions to allow borderline cases to proceed. I announced the changes to both the main capital allowance and BES budget day provisions on 29 January.
In the case of capital allowances, the amendments to the qualifying conditions for transitional reliefs are as follows: the extension of the deadline for investors to sign a binding contract for investment in the project from 1 February 1998 to 1 May 1998; the removal of the condition to have individual investors in place for the project prior to the budget for any project where the IDA had in the two year period prior to 3 December 1997 given approval for grant aid; and, the addition of a condition to allow promoters to satisfy Revenue that detailed discussions had taken place before budget day with the planning authority as an alternative to having to show receipt of a planning application by a planning authority. These changes will allow a number of pipeline projects to proceed to completion especially a number of key projects in the Custom House Docks area.
In addition, where one investor pulls out of a project after signing a contract to invest, the remaining investors will be allowed to increase their contributions to cover the funding deficit. This can be given effect to administratively by Revenue. However, where an original investor dies, it is necessary to provide that a substitute investor will be allowed. There is also a technical change to deal with refurbishments which were not dealt with in the budget day transitional provisions.
In the case of hotels, I announced in the budget that there would be a ring fencing of capital allowances whereby the allowances can be set off only against rental income in the case of individual passive investors. However, this ring fence does not apply to hotels above a certain standard located in counties Cavan, Donegal, Leitrim, Mayo, Monaghan, Roscommon or Sligo except for those hotels in designated seaside resorts in any of those counties. Capital allowances may be set off against all the income of a passive investor's total income, without restriction, in the case of those hotels. I see this as an important incentive to investors to fund good quality accommodation in areas which, to some extent, are off the beaten track and which have not so far shared to their full potential in the increased tourism activity in the State. The restrictions in capital allowances apply only to outside, namely, passive, individual investors. Owner-operators and corporate investors are not affected.
The aggregate amount that a company can raise under the BES was reduced from £1 million to £250,000 with effect from budget day. This will refocus the relief on those more risky projects which require tax relief to obtain investment in them and which would not be prime candidates for investment from other sources such as the banks. However, to cater for projects that were well advanced prior to budget day, the budget night Financial Resolution included transitional arrangements for such BES projects. In the case of individual companies raising their own funds the following conditions had to be met: the shares in the company had to be issued before 30 June 1998; the company had to prove to the Revenue Commissioners that before budget day it had the intention to raise money under the BES; and, in addition, certain companies also needed to have had binding contracts in place committing them to spend at least 25 per cent of the money they intended raising. These transitional arrangements caused unintended difficulties for a small number of companies who fell foul of the requirements, particularly the 25 per cent expenditure commitment.
Under the BES applicable up to budget day, any company wishing to raise in excess of £250,000 required a certificate from a certifying agency, for example, Forbairt, to the effect that the project would create or save jobs. This required the submission of a detailed business plan. On this basis and in order to ease the transitional problems I decided to extend the transitional arrangements as follows: projects that had been certified prior to 3 December 1997 by a development agency will be able to raise the amount for which they were certified up to the maximum limit of £1 million. The need for binding contracts will not apply in these cases.
The deadline for the issue of shares to investors will be extended in all cases from 30 June 1998 to 30 September 1998. These changes will cater for many current projects affected by the budget change.
The BES reduction to £250,000 also affected the seed capital scheme. The seed capital scheme is aimed at assisting individuals who give up employment to start their own business. The scheme provides a refund of PAYE paid in the five years prior to setting up one's own business. Seed capital projects can also seek BES moneys. To ensure that the budget day change does not impact unduly on these new start-up projects, I decided to provide for the Bill to allow seed capital projects to raise £500,000 with no more than £250,000 of the £500,000 being raised under the BES. This hybrid approach fuses the good elements of both schemes into one focused approach.
Section 29 extends the relevant contracts tax — RCT — system to the poultry processing trade and certain haulage operations in the meat industry generally. The RCT system at present relates to payments to subcontractors in the construction, red meat processing and forestry sectors and is commonly referred to as the C2 or C45 system. Under this system, where a principal contractor makes a payment to an uncertified contractor who does not hold a C2 certificate, he or she is required to deduct relevant contracts tax from those payments at the rate of 35 per cent. The system is essentially an anti-evasion measure designed to ensure the deduction of tax which might otherwise not be collected. There is an essential issue of what is subcontracting and what is actual employment liable to PAYE. The Revenue Commissioners have issued guidelines to the industry setting out the criteria established by the courts under which a person may be regarded as an employee as distinct from a self-employed subcontractor.
Principal contractors and subcontractors creating self-employment contractual arrangements must sign a declaration to the effect that these guidelines have been considered by them and that they are both satisfied that the contract created is a genuine contract of self-employment. However, if it emerges as a result of an investigation that an employment, rather than a subcontract exists and PAYE-PRSI and levies are not being deducted, the principal becomes liable for the PAYE-PRSI and levies.
The operation of this system has given rise to some recent comment about its effectiveness. Revenue are currently engaged in a nationwide campaign to ensure that declarations made by principal contractors and subcontractors represent the true situation. The campaign commenced in November 1997 and the results at this stage indicate that, in the Dublin area, 74 per cent of the cases examined were correctly designated as subcontractors, leaving 26 per cent to be reclassified as employees. Resistance to reclassification has been met from some principal contractors. The Revenue Commissioners intend to visit every principal contractor not only to ensure compliance with the PAYE-PRSI and levies system, but also to ensure an even-handed approach in its campaign. In addition to this campaign, the Revenue Commissioners and the Department of Social, Community and Family Affairs regularly conduct joint investigations into the construction industry through the joint investigation programme to ensure employers fully comply with the tax system and to protect the employment rights of employees. I have dealt in detail with this matter to indicate that there is an active and integrated approach to tackling abuse in this area.
Section 37 of the Bill proposes certain changes to the self-assessment system. The present arrangements for the payment of tax and the filing of returns are complicated even for tax professionals. At present, if one has an accounting year end in the current tax year — 1997-98 — preliminary tax must have been paid on 1 November 1997, the accounts and return for that year filed by 31 January 1999 and the balance of tax paid by 30 April 1999. Thus, if one's accounting year in the 1997/98 tax year ended on 30 April 1997, the accounts for that year would not have to be filed with the Revenue Commissioners for 21 months until 31 January 1999. If the accounting year end were 31 March 1998, the filing gap would be ten months.
I propose to bring forward the filing date by two months beginning in the tax year after next, from 31 January 2000 to 30 November 1999, and to delay the payment of preliminary tax by one month from 1 November 1999 by moving that payment date forward also to 30 November so as to bring the two dates together. There are a number of good reasons for doing so. First, it is a simplification measure. Second, it should assist practitioners by requiring them to examine a client's file only once in order to pay preliminary tax and file accounts in a particular year. Third, it will help clients avoid interest charges on underpayment of preliminary taxes.
At present, the amount of preliminary tax to be paid can be calculated as either 90 per cent of the estimated tax liability projected for the current tax year or 100 per cent of the previous year's tax liability. Most taxpayers use the 100 per cent rule because of uncertainty at the time about the current year's liability. However, given that under the current system final accounts for the previous tax year do not have to be filed until three months after the preliminary payment date, there is often no reliable figure on which to base the 100 per cent. This leaves the taxpayer open to interest charges which can be substantial.
If the account filing date for the previous year and the preliminary tax payment date for the current year were harmonised, this would greatly assist in the payment of correct preliminary tax and the avoidance of interest charges. This is in both taxpayers' and tax advisers' interest. To help support the change, the Revenue Commissioners are also prepared to reduce significantly the documentation that must be filed with the return.
A case has been made by accountants and advisers representing smaller practices that bringing forward the filing date by two months will cause problems. These fears have been echoed by the associations representing the small firms sector. The fears and difficulties envisaged, while genuinely put forward, are, I believe, overstated. I am prepared, nonetheless, to make the section subject to a commencement order so as to give time for a fuller impact assessment to be made before going ahead.
Ultimately, there is a clearer and simpler solution towards which we should work. All income tax should be put on a calendar year basis. It has been explained to me that the 6 April date arises from a time when the financial year ended on 25 March and debts fell due for payment on that quarter day. When the calendar changed in Great Britain and Ireland from the Julian to the Gregorian calendar in the mid-18th century, 11 days were dropped from the calendar. To compensate for this, the year end payment date was deferred by 11 days from 25 March to 5 April.
It is reasonable to offer the view that now, over two centuries later, some change might be needed. If the income tax year ended on 31 December, accounts could be required to be filed by, for example, 30 June following and tax paid by 30 September.