I move: "That the Bill be now read a Second Time."
I am pleased to put before the House my latest Finance Bill. This builds on and develops measures taken since I became Minister to ensure we have a tax system that facilitates growth in employment and prosperity. The budget and Finance Bill deliver Government commitments on personal taxation and contain various measures to tackle inflation. This Bill will introduce innovative new measures to promote savings and encourage donations as well as providing for significant structural changes arising from the move to tax credits, the change to a calendar tax year and the conversion to the euro.
The income tax and capital gains tax year will, from January 2002, correspond with the calendar year. This change is long overdue. The 6 April start to the income tax year is a leftover from the 18th century. From January 2002 we will also be operating in euros. The change to the calendar year, the short tax year this year and the conversion to euros require extensive revisions throughout the tax code and these are contained in this year's larger than usual Bill.
I will now outline the main contents of the Bill. The Committee Stage provides the opportunity to debate the detail of the Bill. I will listen with interest to the contributions from Deputies.
Sections 2 to 4, inclusive, set out the main personal tax changes announced in the budget. The increases in basic personal allowances, or tax credits as they now become, are set out in section 2. Section 3 provides for the reductions in the standard rate of tax from 22% to 20% and in the higher rate from 44% to 42% as well as for an increase in the standard rate band. Section 4 increases the income tax exemption limits for persons aged 65 years or over.
Section 2 and the First Schedule also reflect the move to a tax credit system. This is the final step in the move to convert standard rated allowances into tax credits. As part of the simplification process, permanent health contributions will be given on a net pay basis similar to superannuation contributions. Section 2 and the First Schedule also reflect the transition to the calendar year and the euro in relation to personal tax credits.
Section 7 increases the allowance for family members who employ a carer to look after an incapacitated relative from £8,500 per annum to £10,000 per annum. Section 8 changes the rules for claiming medical expenses in respect of a dependent relative. Currently medical expenses relief can be claimed only in respect of a relative where the claimant qualifies for a dependent relative allowance for which there is an income limit. Alternatively relatives had to use covenants to achieve a similar result. In future taxpayers will be able to claim medical expenses relief directly for designated relatives. The restriction on relief for routine maternity care is also being removed. I also intend to introduce an amendment on Committee Stage to bring expenditure on educational psychologists and speech therapists for children within the relief. I indicated in the budget that I favoured providing tax relief for insurance products geared at providing for future care needs. I will introduce an amendment on Committee Stage to provide for this.
Section 11 is new and recognises the role of trade unions by providing a flat rate allowance of £100 at the standard rate of tax in respect of trade union subscriptions. This provision will have effect from 6 April 2001 but the Bill provides that the amount for the 2001 year will be added to the amount for the 2002 tax year and the total allowed in 2002 to facilitate the administration of the credit in the introductory period. Section 13 amends the ESOT legislation to allow an ESOT trust to give either shares, or cash if the shares are encumbered or the holding period has not expired, tax free to the estate of the deceased's beneficiaries. Until now such a payment or transfer would have given rise to a tax charge.
The appropriate tax treatment of share options has been the subject of significant discussion over the last few years with arguments made for and against giving tax relief. 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. This section will change the tax treatment of share options where they are granted under an approved scheme so that the benefit is taxed at the CGT rate of tax rather than at the taxpayer's marginal rate of income tax.
For a share options scheme to qualify for this tax treatment, it will, as with other employee share schemes, have to be approved by the Revenue Commissioners. Schemes must be open to all employees on similar terms. However, schemes may incorporate a key employee element which does not meet the similar terms conditions provided at least 70% of the total amount of share options is made available to all employees. There will be a requirement for a retention period of at least three years between the time the option is granted and the time the shares are sold by the individual. There will be no limit on the amount of shares that can avail of the tax treatment.
The Bill as published provides that the new scheme will apply to share options granted on or after 15 February 2001 provided the scheme is subsequently approved by the Revenue Commissioners and would have met all the conditions applying at the time of grant and exercise. It has been put to me by various industry representative groups and individual companies that it would facilitate staff retention if those employees who had share options granted before 15 February 2001 but had not yet exercised them were eligible for the new tax treatment provided, of course, that the scheme under which the options were granted met all the other conditions. I see the benefit of this approach and I intend to bring forward a suitable amendment on Committee Stage to provide for this.
Section 16 amends certain provisions relating to retirement annuity contracts. For ease of administration and to prevent any tax leakage, the Bill provides that annuity payments will be subject to deduction under PAYE from 1 January 2002. Where a person contributes to a contract for dependants or for life assurance, there is, within the overall limit of relief, a limit of 5% of net relevant earnings on the tax relief for these contributions. The Bill provides that the splitting of the overall tax relief in this way will be abolished. Individuals will still be free to contribute to a RAC for their dependants. Contributions to the contract for the dependants and contributions to the main RAC will now simply be aggregated and subject to the overall tax relieved limit for contributions to retirement annuity contracts.
Sections 17 to 21 deal with arrangements for introduction for tax relief at source for medical insurance relief and mortgage interest relief. Section 17 also extends the coverage of medical relief to cover premia for primary health care. My recent initiatives in moving certain reliefs to a tax relief at source system are aimed at relieving some of the pressure on the tax administration system and at the same time making life a little easier for taxpayers claiming those reliefs. Under relief at source the correct relief will be given up front, there is no annual paper chase and generally no need to contact the tax office to get the proper relief due. From April 2001, medical insurance relief will be given at source. From January 2002 mortgage interest relief will also be dealt with in the same way. This is a simple and efficient method of channelling these tax reliefs to the persons who wish to avail of them and will help to ease the burden on an over stretched tax administration system.
With the aim of increasing the supply of child care the 1999 Finance Act introduced an exemption from benefit-in-kind tax to employees in respect of employer provided child care. Section 22 amends this to allow the exemption for schemes where employers are involved in financing but not managing the facility. In such circumstances the exemption will be restricted to cases where the employer provides financial support for items of capital expenditure and equipment but not other costs. Where the employer is involved in the management of the facility, the current financing conditions will continue to apply.
Section 26 provides for the amalgamation of the existing tax relief for third level education fees and for standardising the conditions that apply. Various restrictions which currently apply to the reliefs will be removed and the relief will be extended to postgraduate fees paid in the US and other countries not covered by the existing scheme. This is something I undertook to look at for this year following requests on Committee Stage last year.
A special allowance of £5,000 per annum is currently available for seafarers. Section 27 reduces, from 169 to 161, the number of days a seafarer is required to be on voyages to or from a foreign port in an EU flagged ship for the purposes of claiming the allowance.