The Finance Bill is intended to give statutory effect to this year's budget provisions and it also incorporates a number of other changes designed to improve the taxation code. It covers a wide area of taxation and includes some measures of major significance for the economy. While the details are frequently of a highly technical nature, the Bill as a whole provides for changes which affect all of us in our daily lives.
Before dealing with individual aspects of the Bill, I would like to make a few general comments on the budget situation. The budget was designed to strike a realistic balance between the need to encourage employment, our greatest priority, and to achieve a reduction, however modest, in borrowing. There is general agreement that this was the only rational option in our present circumstances. The necessity to curtail borrowing inevitably requires that public spending be curtailed.
The critics of our restrictions on public spending, however, will rarely pursue the logic of their case and argue in favour of higher borrowing or higher taxation. The process of reducing our dependence on borrowing will have to be continued. If we abandon this policy and incur higher and higher debts, the economy will suffer in the longer term and so will employment. Reducing budget deficits is not about bookkeeping but about protecting the very fabric of the economy.
The National Planning Board proposals are being considered in detail by the Government. The board acknowledged unemployment to be the most serious economic and social problem facing the economy. They recognised at the same time that, in coping properly with this problem, we have no choice but to bring the amount of current public expenditure into line with what can be financed at tax rates which are broadly acceptable. In other words, discipline in the public finances on the lines already being applied by the Government is seen by the board as an essential part of a correct policy to favour the expansion of employment. Those who criticise the Government for being over-preoccupied with arithmetic would do well to study the views of the planning board on this point.
The board's taxation proposals in particular have received some considerable publicity, largely, I think, because of the immediate and rather hostile reaction from some pressure groups who felt that their position was being threatened. The board have drawn attention to the basic fact that, if tax rates are to be reduced, then the base must be widened and reliefs and exemptions curtailed. Public reaction to the proposals seems to have overlooked the fact that the board recommended tax concessions corresponding to the tax increases suggested, with the objective of ensuring that there would be no overall increase in the tax burden. The board also underlined the fact that tax levels will remain high while we continue to maintain an excessively high expenditure profile.
I want to see both a reduction in the longer term in the overall level of taxation and a better distribution of the tax burden and I aim to make substantial progress in this direction in later budgets. Ultimately, however, the pace of progress must be influenced by our attitude to public expenditure.
We now have substantial reports on taxation both from the Commission on Taxation and the National Planning Board. Their general approach and many of their individual recommendations are on the same lines. Essentially they want to bring down the rates of tax and achieve a better distribution and, as I have already said, this is the policy that I intend to pursue. I have been criticised for paying inadequate attention to the commission's recommendations and the allegation has been made on a number of occasions that the reports to date from the Commission on Taxation have been conveniently put on the shelf. This is not true. Already some of the commission's proposals have been put into effect. Some of the more substantial proposals can be introduced only over an extended period and this fact is recognised by the commission. Some of the individual proposals, both from the commission and the planning board, are impractical, however, at least while tax rates are so high, but it must not be inferred from this that the proposals in general are being set aside or ignored.
The National Planning Board have also made some interesting comments on individual aspects of budget policy. They differentiate between what they call the structural element and the cyclical element in the budget deficit. They consider that the principal focus of the budget should be on the public sector borrowing requirement rather than the Exchequer borrowing requirement. These are important comments and I will consider them very carefully before I arrive at any firm conclusions. No presentational change, however, will alter the fact that, as a prerequisite for satisfactory economic progress, we must improve the position of our public finances.
I would like now to return to the issue of employment. The outlook is reasonably encouraging for the longer term provided we make proper use of our opportunities. It is right that the community should look to Government for direction on this issue and there is much that the Government can do. The Government must provide the best possible environment. They must encourage and attract employment projects. They must implement many individual measures which, taken together, have a substantial impact.
There are items in the Bill before the House which are small in relation to the overall situation but which, nevertheless, can make a most useful contribution to employment creation. The Government cannot, however, find instant solutions and Government policies will not succeed fully unless they are supported by economic interests. The effort to maximise employment opportunities must be a community effort. New structures and new schemes can go only a limited distances in generating employment. Ultimately, the crucial factors are the determination to find new markets, to be more efficient and to be more competitive.
Too many mistakes have been made in recent years in response to demands from pressure groups from all walks of life. The tendency has been to incur expenditures which we could not afford or to allow excessive tax benefits in order to pacify these groups. Pay norms have been set by those in the strongest position to press for increases. We should appreciate by now that this approach has increased our problems. It has to be reversed as a precondition for a more vigorous economy which can provide the jobs we need.
I would not like to refer to some of the more important sections of the Bill, concentrating on the areas of greatest significance. The Bill is a long one and it would be impractical to go through it section by section on this Stage. The early sections implement the budget decisions on income tax, including the changes in allowances, rate bands and exemption limits, the renewal of the PRSI allowance and the increase in the specified amount of tax payable by the self-employed. There are no changes of significance from the budget proposals. In relation to the increase in the relief for an incapacitated person, in section 8, the maximum deduction will be determined by the net cost incurred, subject to a ceiling of £2,000.
In order to shut off a tax avoidance loophole, I am providing in section 9 that, where there is doubt as to the bona fides of a sports club, income tax exemption will be subject to the approval of the Revenue Commissioners. Genuine sports clubs which apply their income for the sole purpose of promoting sports will not be affected by this change. The income levy is being renewed, with an exemption for those on low incomes, in section 10.
One of the items in the Bill that has generated greatest interest is the relief of up to £25,000 a year over a three-year period for long-term risk capital investment. This is the subject of Chapter III.
In the Budget Statement I indicated that the relief would apply in respect of investment in new manufacturing enterprises. This restriction was imposed in order to ensure that investment would be directed towards areas of greatest initiative and highest risk. If, however, the relief were confined to new enterprises, it is unlikely that the scheme would have a significant impact. Consequently, the area of eligibility is being extended, in section 16, to include new and existing trades in manufacturing and certain services, provided that the investment is used to create or maintain employment and fulfils a number of other criteria related in a very direct way to development.
This new incentive should encourage investment in manufacturing and international services. These are priority sectors because of their potential for employment and exports. In the past they have had little appeal for individual investors because they offered no special rewards and investors naturally preferred safer areas of the economy where they were guaranteed a substantial and regular return. This order of things is wrong. The greater rewards must be for those who take the greater risk and provide the best opportunities for development of the economy.
It would be entirely wrong to conclude that the risk capital scheme will be the concern only of the better off. I would expect to see many small scale investments by people of modest means. Indeed, during Committee Stage debate in the Dáil, I agreed to reduce to £200 the minimum level of investment qualifying for the relief where an individual makes an investment in a qualifying company. There is no prescribed minimum where the investment is made through a designated fund. The scheme could be particularly attractive to groups of workers who get together to develop or rescue a manufacturing operation and in this context it could be a useful element in the development of industrial democracy.
Too many incentive schemes have been exploited for tax avoidance purposes and we must ensure that the present scheme is not abused. It is for this reason that the legislation is very detailed in many respects and contains a number of anti-avoidance provisions. Relief will not be available under the scheme to partners of the company or their close relatives or to persons holding more than 30 per cent of the share capital of the company. The shares must be held for a minimum of five years. To be eligible, the shares must be new ordinary shares in an unquoted company.
It has been suggested that this new incentive be extended to other areas of the economy. Further extension would defeat the whole purpose of the scheme. Investment would then be channelled into more secure projects and, as before, industry which carries the greatest risk would be left out in the cold. The unique feature of this scheme is that it carries an equivalent risk for promoters and outside investors. There are no charges on assets or guarantees of refund if something goes wrong. It is a totally new attempt to encourage local investment in industry and I am confident that it will be successful.
Section 29 of the Bill implements the Budget provision to counter the practice of bond washing whereby securities changed hands in such a way as to ensure that the interest accrued to the holder as a tax-exempt capital gain rather than as income. The budget provision gave rise to an immediate furore and the Government were accused of destroying the securities market. What the Government did was to close a tax loophole which had led to blatant abuse. The market quickly settled down again, as was to be expected. There had been adequate forewarning of action against tax abuses and the move against bond washing can hardly have come as a major surprise to those involved in this activity.
Sections 30 to 39 contain various tax provisions which have for the most part already been announced in the budget. In section 31 the scope of profit-sharing schemes is being extended. Interest in these schemes to date has been rather disappointing and I hope that the extensions in this Bill will generate a bigger response. Profit sharing can contribute to the improvement of industrial relations and I would like to see both employees and the trade union movement taking a more active involvement in its development. We appear to be well behind other European countries generally in this respect and this is regrettable.
There is a provision in section 32 for tax relief on donations to certain bodies for the advancement of subjects related to the arts. The intention here is to encourage donations for schools of architecture, art and design, music, theatre and film.
In section 33, provision is made for the continuation of the existing stock relief scheme for farmers. The requirements of stock relief in agriculture are different from those in the construction industry, which gave rise to the new temporary scheme set out in Chapter VIII of the Bill. For this reason, it is preferable to retain the essential features of the existing scheme for agriculture. The unlimited clawback in the scheme up to now has discouraged many farmers from claiming stock relief. The section provides that the period of liability for clawback will be limited to ten years following the year in which the relief is given. The Bill also provides that transfers of family farms to spouses or children will no longer give rise to stock relief clawback. I intend to introduce measures to deal with stock relief in the special circumstances of farm leasing in due course.
A number of capital allowances which were due to expire at the end of March this year are being renewed for further periods. These include certain allowances for plant and machinery, industrial buildings, multistorey car parks and toll roads and bridges. I am also extending the scope of the industrial buildings allowances to included expenditure on laboratories used for analysis work connected with mineral and oil exploration. It must not be assumed from these extensions that these allowances will be continued indefinitely. They will be reviewed as part of the overall review of allowances and exemptions.
The Bill provides in section 40 that, with effect from budget day or 1 March where appropriate, capital allowances on leased machinery or plant may be written off against leasing income only. It provides also that the allowances will not be available for group relief purposes. These restrictions will not apply where machinery or plant is leased as part of a grant-aided incentive package by one of the State industrial promotion agencies specified in the section. Leasing allowances have been used on a large scale by financial institutions to reduce their tax liability. The allowances were never intended for this purpose and a restriction is now being imposed on their use. For the same reason, changes are being made in the treatment of new section 84 loans and artificial preference share arrangements. The provisions in Chapter VI are based on the terms of the budget announcement subject to certain exceptions from the withdrawal of tax advantages on section 84 loans subsequently decided upon by Government. These exceptions comprise manufacturing companies, certain service activities and subsidiary companies of agricultural or fishery cooperatives.
The loss of the tax advantages under section 84 lending in these sectors would have meant a substantial additional cost burden for many businesses which are seriously affected by the present recession. In recognition of the difficulties facing industry at present, the Government reviewed the budget proposal and decided on the modifications which I have mentioned. These are contained in section 41 of the Bill.
In section 47 the transitional period in respect of which advance corporation tax will be payable at 50 per cent of the full rate is being extended to distributions made up to the end of this year. This concession will cost the Exchequer about £5 million in 1985. The case has been made that, for companies which had substantial accumulated capital allowances when advance corporation tax was introduced, the tax should effectively be set aside until these allowances are used up.
These companies, and all other companies liable to advance corporation tax, are simply being required to pay tax to match the credits granted by the Exchequer to their shareholders against the tax on their dividends. If any companies were, in effect, to be exempt, we would continue a situation where the Revenue Commissioners in certain circumstances refund to shareholders tax which has not and might never be collected from the company. In protecting the Exchequer against such losses the introduction of advance corporation tax has brought our system into line with practice in other countries which have an imputation system similar to our own.
In particular, I would like to refute the allegation that ACT, by taxing distributions made out of profits previously charged to tax, involves double taxation. The effect of ACT, in the case of companies with commercial profits out of which dividends are paid with a reduced or zero current tax liability due to the fact that capital allowances have deferred the payment of tax, is to bring forward the payment of a portion of that deferred tax sufficient to cover the tax credit. ACT is thus not additional to the earlier tax charge but simply an advancement of its payment.
Chapters VIII and IX contain the provisions for 1984-85 for stock relief for qualifying traders other than farmers. The new system will broadly relate relief to price changes only and relief once granted, in general, will not be liable for clawback in subsequent years. In addition, relief granted under the old system which would have been liable for clawback due to decreases in stock levels in the year to 5 April 1983 or in any subsequent year will not be withdrawn. Though clawback may still arise under the old or new system in exceptional circumstances, such as on a cessation of a trade, these provisions ensure that clawback will not operate in cases where a qualifying trade changes hands as a going concern.
The amount of relief to be provided in the first year of operation of the new system will be based on 3 per cent of the value of a trader's opening stock. This gives effect to the budget decision that, in order to control cost, relief equal to 33? per cent of the price increase in the basis period will be given. The percentage to be used for calculation of relief this year will be subject to review in any subsequent year's renewal of the stock relief provisions.
Section 67 of the Bill provides for a restriction of the relief from capital gains tax which is available on the disposal of a principal private residence. Where such property is disposed of at development land prices, the relief will be confined to the gain on its existing use value as a residence and any development land gain will be taxed at the appropriate rate. The relief for a private residence is a recognition of the special nature of this property. When, however, the property is traded for development purposes, there is no longer a case for allowing full relief.
I now turn to indirect taxation. There are no major changes under the heading of customs and excise from those already announced in the budget. I would draw special attention to sections 76 and 77, which deal with evasion of betting duty. More effective measures to deal with arrears of duty and further penalties for illegal bookmaking are being introduced, as well as penalties for fraudulent involvement of bookmakers' assistants. Additional grounds for refusal of certificates of suitability of bookmakers' premises are also proposed. While some bookmakers have expressed dissatisfaction that the legislation does not go for enough to penalise those who engage in illegal bookmaking, the principal difficulty is to identify and get adequate evidence against those acting illegally. Once the evidence is there, the statutory penalties are, in my view, adequate. I gave an assurance in Dáil Éireann and I repeat it here that the Revenue Commissioners will in future adopt a more aggressive approach to the pursuit of offenders under the new powers.
The main item in the Bill under the heading of value-added tax is the imposition of the 8 per cent rate on clothing which has taken effect from 1 May. Representatives of the clothing industry have informed me that seasonal factors in their business create a situation in which the application of payment at point of importation on clothing materials from 1 May would cause cash flow difficulties. These difficulties can be avoided without significant loss of revenue and regulations are being made to enable materials, previously benefiting from the zero rate, to continue to be imported by registered persons up to 1 September without payment of VAT at point of entry. They will still be liable to 8 per cent VAT, as will domestic supplies of raw materials, but the importers will account for this VAT in their normal VAT returns at the end of the VAT period rather than making the payment at the time of import.
The continued zero-rating of certain children's clothes will be operated on the basis of appropriate sizes of clothes, not on the age of the particular child involved. It is intended that children's clothes in sizes up those for children of average build under age 11 years will be zero-rated. Following discussions between the Revenue Commissioners and the clothing industry, details of the appropriate sizes have already been published and regulations to give statutory effect to these arrangements will be made soon.
Section 86 contains two changes to tighten up the application of annual turnover limits for VAT registration purposes and in sections 89 and 90 the powers of VAT inspectors are being extended to enable them to carry out their duties adequately in the course of their periodic visits to traders' premises.
Section 96 provides for the reduction of the VAT rate from 23 to 18 per cent in the case of short-term hire of cars, caravans and boats. This reduction is being made to benefit the tourism industry. In Dáil Éireann amendments were tabled to reduce the VAT rate for a number of other items. In principle, this would of course be very welcome but the reality is that we could not afford the change. It is wrong to suggest that VAT reductions would be self-sustaining in terms of revenue. Any revenue loss must be made good elsewhere and this is the essential problem.
Part IV of the Bill deals with stamp duties, including the bank and insurance levies. The provisions for the calculation of the levy on banks are broadly similar to those used in previous years and are designed to yield £25 million in as fair a manner as possible. The basis on which the levy is charged in the case of life insurance business is being altered. This change was requested by the insurance industry and it will have no effect on the yield. I am providing in section 99 for the extension for a further year of the stamp duty relief in respect of the transfer of land to young trained farmers. This relief would otherwise have ceased in July.
The changes in capital acquisitions tax and the new tax on discretionary trusts, which I announced in the budget, are the main items in the final sections of the Bill. The case for taxing discretionary trusts is that otherwise these trusts can be used to avoid or delay payment of tax over a long period. At the same time, trusts can serve a very important social function in certain circumstances and it is for this reason that I have aimed for a scheme which will avoid taxing trusts set up for genuine purposes while minimising the opportunities for avoidance or evasion. This legislation secures a reasonable balance and will not cause hardship. The reorganisation of the capital acquisitions tax is overdue. The spread of tax rates was confusing to say the least and the complete aggregation of benefits is a sensible and fair arrangement.
This Bill provides for substantial changes in our tax code. As well as implementing budget policy, it includes provisions which are intended to make the operation of this code more effective and equitable. We must move gradually towards a more simple and, at the same time, a more equitable system of taxation. Apart from other considerations, the sheer complexity of the present system is a barrier to efficient operation. Taxation is becoming more and more the domain of experts. We cannot continue indefinitely piling more upon more legislation without thought for the understanding and effective implementation of the tax code. This is something to which I am giving close attention and I am satisfied that substantial progress can be made on a gradual basis.
I commend the Finance Bill to the House.
