I would like to take the opportunity, on my first visit to your refurbished Chamber to congratulate you on the lovely surroundings. I know the Office of Public Works must share the credit for the lovely result.
This Bill is an essential part of the process of implementing the Government's budget. It is designed to give statutory effect to the important taxation provisions which I announced on budget day as well as other significant changes in the tax area.
I am pleased to be able to circulate an up-to-date explanatory memorandum with the text of the Bill. The memorandum contains a detailed description of the individual provisions of the Bill, taking account of the amendments which were made in the course of its passage through the Dáil. I hope this will facilitate Senators in their deliberations on the Bill.
While the emphasis in our discussions today is on taxation matters, these can only be assessed in a meaningful way as part of the Government's overall budgetary and economic strategy. I would like to take this opportunity, therefore, to review for this House our recent budgetary and economic progress and the prospects as I see them at present. I will then move on to discuss the main provisions of the Bill.
The transformation which has taken place in the economy owes much to the improvement in the public finances which has been effected in the past three budgets. The budgetary difficulties had to be tackled head-on if we were to turn the economy onto the path of higher growth and increased jobs.
Exchequer borrowing has been cut from almost 13 per cent of GNP in 1986 to 5.3 per cent in this year's budget. All the indications are that we will, in fact, end the year below target for the third year in succession. This improvement has resulted in ever-growing confidence in the economy, both at home and abroad, low inflation, low interest rates and better competitiveness. These are vital ingredients for further progress.
Even more important than the actual budgetary results — dramatic though these are — is the acceptance by the business and financial community that there will be no drift back to the bad old ways of excessive spending and borrowing. The Programme for National Recovery and the National Development Plan, which together provide our strategy blueprint, make clear that borrowing will continue to be reduced. There is, in fact, no alternative to doing so, given the huge costs of servicing the overhang of borrowing and debt which soak up so much of our resources and limit our room for manoeuvre. In this context I might as well put on record that the national debt standing at £24.5 billion represents £7,000 for every man, woman and child in this country. The servicing of that debt represents £40 a week out of every taxpayer's pocket for those people at work.
A very significant component of Exchequer expenditure is, of course, public service pay. Members of the House will be aware that there have been recent significant developments on the public service pay front. I would like to refer briefly to them.
In my Budget Statement I expressed concern about the build-up of special increases in the public service and the resultant burden that was facing the Exchequer both immediately and in the short term. I announced my intention to invite the Irish Congress of Trade Unions to meet me to discuss the whole issue with a view to arriving at a mutually acceptable solution.
The meeting between Congress and myself took place on 8 March and after that Department officials met with Congress representatives on 10 occasions. These discussions resulted in a draft package designed to meet the situation.
The general effect of the package is that awards which have been around for some time and those which might come from claims that are well through the process will be paid on a phased basis over the period 1 July 1989 to 1 October 1990. Other claims will fall to be implemented on a phased basis over the period May 1991 to October 1992. The package also provides for a moratorium on the processing of further claims until 1991 and a commitment to co-operation in measures designed to enhance the efficiency and quality of the public services.
From the Government's point of view the package has the advantage that it restores order to the very difficult situation that was evolving. The effect is that the cost of these increases will now be spread over a number of years in a way which will facilitate the budgetary process in the years ahead.
From the staff side point of view the element of certainty which has been restored to the implementation of increases arising from the negotiating machinery, albeit on a phased basis, will be of considerable benefit and should result in a further period of industrial relations stability in the public service. I am hopeful that the package will be endorsed by the unions also.
As regards overall costs, I am confident that, under the package of measures negotiated, the 1989 provision for special pay increases will not be exceeded. The cost in 1990 and later years will depend on the outcome of cases which are still under negotiation or awaiting adjudication. However, I expect that the cost of special pay increases in 1990 will be broadly in line with their cost in 1989 and that the cost of public service pay up to end 1993 will be within the parameters underpinning the Government's National Development Plan.
The economic fundamentals are good and the achievements of the past two years are being consolidated. We are seeing an upswing in almost all the major indicators and the economy is set to grow rapidly this year. The pattern of development looks set to be rather different from, and more satisfactory than, that experienced earlier this decade. Whatever growth there was then came primarily from the external side, reflecting rapid growth in industrial exports. Domestic demand was weak. We are now seeing personal consumption, and investment in particular, growing strongly. These will provide the major impetus to economic progress in 1989. More importantly, the rising trend of investment provides a solid foundation for further sustainable output growth in the years ahead. Investment is the life blood of growth and jobs.
Let us look briefly at the key indicators. Retail sales rose by more than 2 per cent last year. Over January and February this year the volume of retail sales was about 8 per cent higher than in the comparable months of 1988. New car registrations were up by 35 per cent on 1988. I am confident that this year will see an expansion in the volume of personal consumption at least of the order I suggested at budget-time — 3 per cent — but probably more.
At budget-time I felt that investment in plant and machinery would rise by 8 per cent. The strength of imports of capital goods over recent months certainly suggests that this is attainable. This view is supported by the CII/ESRI Business Survey which shows that industrial capacity is running at high levels.
At the same time, an important turnaround is taking place in building and construction. New private house starts in the first two months of 1989 were 26 per cent higher than last year. Employment in the building industry has begun to turn around. In the first quarter of 1989 it was 6 per cent above the comparable level a year ago. As this year progresses, the first impact of the increased EC Structural Funds, for which I made provision in the budget, should have a further positive impact on building activity.
The pick-up in domestic demand is showing itself in rising industrial output. Manufacturing output in January was 13 per cent higher than in January 1988. However, domestic demand, though important, cannot support the level of expansion of industrial output that we need. Continuing solid export performance is the way to raise growth in output and to bring about the kind of employment increase that is required. That is why we must keep our unit costs moving down. I am confident we can achieve another major expansion in industrial output this year, given recent developments in our competitive position and the outlook for demand in our export markets.
On the trade front, the seasonally adjusted surplus of exports over imports for the first quarter was £612 million, up over £100 million on the same period last year. Both exports and imports rose substantially. The rise in exports more than offset import growth, leading to a net improvement in the trade balance.
At this stage of the year, it seems another substantial trade surplus is on the cards. Even allowing for higher profit repatriations by foreign firms here, we can look forward to a further balance of payments surplus — roughly the same size as last year's surplus in nominal terms. Our balance of payments position thus continues to be in excellent shape despite the pick-up in domestic demand.
Summing up, at the time of the budget I forecast that output growth this year could be of the order of 3½ per cent. Events since then suggest that this may be on the conservative side. Indeed, a number of commentators believe that growth could reach 4 per cent this year.
This kind of progress bodes well for job prospects and for our ability to reduce unemployment, which are the priority goals of the Government and influence everything we are doing.
The initial evidence on jobs may not appear impressive — the increase of 6,000 in total employment which took place in the year to April 1988, as disclosed by the latest labour force survey. But this increase was significant. It marked an end to a long period of declining employment, a pattern which must have seemed almost irreversible at times. It was achieved, too, in a period of savings in public expenditure, and demonstrated that correcting the imbalance in the public finances is consistent with increasing employment. While we must await the next labour force survey for statistical backing, there is no disagreement among commentators and economists that the pace of employment growth has speeded up since April 1988 — and that the outlook is for a rapid pace of expansion over the immediate future. For the present year I am confident that the budget forecast of an increase of 16,000 in non-agricultural employment will be achieved.
Although other factors will have contributed, the downward trend in unemployment also reflects the success of the Government's employment policies. The seasonally adjusted live register peaked as far back as May 1987. The most recent figures show a fall of 7,600 in the month to end-April 1989. This was the biggest fall for any month since April 1971 and brought the seasonally adjusted live register total to its lowest point for three years. We anticipate that this downward trend will continue and this year the average live register is expected to fall to 232,000 compared with over 241,000 last year.
We have come a long way in a little over two years, but we have much further to go. The Government remain firmly committed to the policies of the Pro-gramme for National Recovery. The National Development Plan, as I have indicated, complements and builds on that programme.
The plan charts the course to be taken in gearing up the economic infrastructure and the productive capacity of the economy with the increased assistance of the Community' Structural Funds. The development programmes set out in the plan will give a stimulus to the economy in the immediate years ahead but their ultimate, and more significant, contribution lies in the longer term improvement they will make to the ability of the economy to compete and grow and produce jobs.
The EC provision of increased Structural Funds to help strengthen the economy is one of three vital elements underpinning our potential for progress. Pursuit by Government of the policies I have outlined, in order to provide a stable, growth-oriented policy framework, is a second. There is a third key ingredient on which the long-term performance of our economy depends. This is the commitment of all, whether in industry, agriculture, the trade unions or elsewhere, to actions which will ensure a growing ability to compete on international markets and to maintain — if not recapture — market share here at home.
In this context I want to refer briefly to some issues which have been the subject of considerable comment recently.
In relation to inflation, there have been a number of unfavourable external developments over recent months. The price of oil has risen sharply, in part because of production restrictions brought about by unfortunate accidents in different parts of the world; also the dollar has strengthened in recent months against most world currencies; most significantly, world inflation generally has increased somewhat. We live in a small open economy. We cannot isolate ourselves from these global developments. What matters most is not the rate of inflation itself, but, rather our performance relative to our trading partners. Despite some increase, it is worth stating again that the latest inflation figure here, 3.3 per cent in the year to mid-February, is low by the standards of other countries and especially by comparison with the UK, where price increases, on the most recent figures, are running little short of 8 per cent. We must ensure that we retain our relative position as a low inflation economy, in which category we are now grouped with some of the strongest economies in Europe. This requires that we do not add to imported inflation by unwarranted domestic cost increases.
There has been much comment also about interest rates and credit. As Senators will be aware, the Central Bank has statutory responsibility for interest rates. Under the Central Bank's arrangements, the Associated Banks recently increased their rates. This increase reflected the recent increases in international interest rates.
The increase here must be viewed against a background that our interest rates have dropped dramatically from their level of early 1987. Even after the recent increase, Irish interest rates remain at a relatively low level, both in comparison with their level in nearly 1987 and with the level of rates in our most important trading partner, the UK. For instance, the prime lending rate of our Associated Banks is still a full 5 percentrage points below the corresponding rate in the UK. The Government will continue with their policy of ensuring that the domestic environment permits rates to be kept at the lowest possible level consistent with the international situation and with our membership of the EMS.
It was only to be expected that the growth in consumer spending would give rise to some increase in the underlying rate of growth of personal credit. The important point is that this increase in growth should not be excessive and should not begin to fuel inflation. The Government's and the Central Bank's expectation would be that, following recent meetings with the main credit agencies — the banks and the building societies — those agencies would exercise the required prudence in their lending operations. Also, the interest rate increase should assist in ensuring that moderation prevails. The evidence available so far on personal sector credit growth does not indicate a need for further remedial action, but the Government and the Central Bank will continue to monitor the situation closely.
Overall I remain very confident about the economy for this year and for the medium-term. We have set the right framework. Our partnership with Europe is working, both to provide wider markets and to assist us in developing our economy so that we can better tackle those markets, and the response of all sectors, which has been so important to the resumption of economic progress over the past two years, augurs well for future advance.
Despite the constraints imposed by the overriding need to put the public finances in order, the Government have given high priority to tax reform. The high rates of personal taxation in this country have reflected the sins of the past. They are the inescapable mirror image of excessive spending and borrowing. The very real danger existed in 1986 that, far from coming down, income tax rates would have to go still higher as the public finances careered out of control. High income tax rates are the enemy of personal incentive and motivation and of job creation and they lead to the emigration of many skilled young people.
The Government have made a resolute start in tackling this problem over the past two years. Our approach, which is reflected in the Bill now before the House, has been: to devote as much resources as possible to relieving the burden of personal taxation; for this purpose, to broaden the tax base by tightening up on collection and enforcement and cutting back on certain reliefs and incentives, while introducing new incentives to help develop certain sectors; to overhaul the system of corporation tax so as to make it more conducive to job creation; and generally to simplify the tax system, in particular by the progressive extension of self-assessment. Our aim is to get a simpler and fairer system in which everybody will pay a fair share of tax and where there will be effective sanctions against tax evasion and avoidance.
Considerable progress has been made in the past two years in reducing the burden of personal taxation. Following the changes in the present Bill, the Government will have provided more than £700 million of income tax relief on a cumulative basis over the period of the Programme for National Recovery. This compares with the programme commitment of £225 million. We have, in short, given more than three times the amount we undertook to provide in the programme.
Despite the fact that at long last we have started to reduce the actual rates of tax, I am in no sense complacent. The burden is still far too high for so many people. We are determined to make further progress in reducing income tax as quickly as possible.
EC developments will also influence the shape of our tax system in the future. The proposals for harmonisation of indirect taxes have been the subject of much discussion in the Community. These proposals raised major problems for nearly all member States, Ireland included. The proposals have been undergoing a rethink in the Commission and the clear indications are that revised proposals will be forthcoming shortly. We have taken a constructive role in the discussions, since we attach such importance to the success of the internal market project. We have had, necessarily, to draw attention to the budgetary implications of the proposals and their potential impact on our efforts to reduce our direct taxes burden, if we had to suffer a huge loss of revenue.
The EC is also discussing some aspects of taxes on savings and of corporation tax but the implications of these proposals are less clear at present.
I would now like to turn to the approach underlying individual sections of the Bill and to draw the attention of the House to the more significant items.
As is the usual practice, the early sections of the Bill make provision for the income tax reliefs announced in the budget. Section 1 increases the income levels at which tax liability commences. The general tax exemption limit is being increased from £2,750 to £3,000 for a single person and from £5,500 to £6,000 for a married couple. The age exemption limits are also increased, to £3,400 for single persons aged 65 years or over and £4,000 for single persons aged 75 years or over. Qualifying married couples will of course, have their age exemption limits increased to double these amounts.
The section also augments these basic exemption limits by an addition of £200 for each dependent child. This addition is a new feature of our income tax code and is targeted at low-income families. Its impact can be dramatic and will mean, to take just one example, that a married couple with three children, who are taxed under PAYE on one income of £6,600 per annum, will now be entirely exempt from income tax and thus save up to £495 on their 1988-89 tax bill.
Section 2 provides for the changes in income tax rates and bands. The top rate of tax is being reduced to 56 per cent and the standard rate to 32 per cent. This deduction in the standard rate, which is the first for over 20 years, also applies to the deposit interest retention tax and to the withholding tax on professional fees. The income tax bands are also being widened: the 48 per cent band is being extended to £3,100 for a single person and £6,200 for a married couple, while the standard rate band is being extended to £6,100 for a single person and £12,200 for a married couple.
Sections 7 and 8 deal with the restrictions on life assurance and mortgage interest relief which I announced in the budget. Life assurance relief is being confined to 80 per cent of its previous levels, while the percentage of mortgage interest within the relevant ceilings which qualify for relief is being reduced to 80 per cent from 90 per cent, at which it has stood since 1987. The yield from these measures is £16.8 million in 1989 and £27.9 million in a full year. This has met a small part of the gross cost of the major package of personal reliefs announced in the budget.
I want to refer now to two new provisions which I know will be of particular interest to this House. Section 4 provides for the introduction of a special income tax relief to encourage people to come and live in inner city areas and renovate houses there that are historically or architecturally significant.
Section 19 of the Finance Act, 1982, already allows relief for expenditure on the maintenance, repair, etc. of heritage houses provided public access is allowed on at least 30 days per year. In addition, section 44 of the Finance Act, 1986 provides for relief, spread over ten years, on half the net cost of construction or refurbishment of grant-sized houses in the designated inner-city areas.
During the Finance Bill debate in this House last year, it was argued very strongly by Senator Norris and others that, while these existing reliefs were valuable incentives within their particular contexts, they were not available to those individuals who sought to maintain the architectural heritage and social fabric of our cities by purchasing and restoring Georgian and other large old houses and making them their own homes.
The new relief combines many of the features of section 19 of the Finance Act 1982 — such as the determination by the Office of Public Works of scientific, historical, architectural, or aesthetic merit — and of section 44 of the Finance Act 1986 — in that the Houses will have to be in a designated area and relief will be confined to 50 per cent of the cost of repairs. However, there will be no public access requirement and the upper size limit set by section 44 will not apply. In order to meet the high initial repair bills likely to be faced by claimants under the new schemes, the ten year-spread of relief which operates under section 44 is reduced, with half of the allowable relief claimable in the first year and the balance over the following five years.
Section 2 of the Finance Act, 1969 provides for an income tax exemption for certain earnings of creative writers, composers and artists. To qualify for the relief, claimants seek a determination from the Revenue Commissioners that their work is original and creative, and has cultural or artistic merit. However, there is no provision in section 2 for appeal against the refusal of the Revenue Commissioners to make the necessary determination.
Section 5 seeks to meet that criticism by making provision for an appeal mechanism in cases where the Commissioners fail to make a determination within six months of the claimant applying for the relief. Such appeals must be lodged within 30 days of the expiry of the six-month period allowed for Revenue's consideration of the case, and the claimant must have co-operated with the Commissioners by providing samples of his or her work, or such other evidence to back up the claim as may have been requested by Revenue.
Section 9 makes significant changes in the business expansion scheme. The original intention of this scheme was to encourage the provision of equity capital for high-risk companies which offered the prospect of substantial gains to the economy in terms of output and jobs. In return for the provision of risk capital to these companies the general body of taxpayers made available an attractive relief for investors.
Recent well-publicised developments in the use of the scheme had been diverting it away from this very desirable objective. The Government were left with no alternative but to act to prevent these abuses. We were determined to do so, however, in a way that would not interfere with BES funding for deserving projects. The whole point of section 9 is, in fact, precisely to ensure that funds will be targeted as originally envisaged and that the available funds will not be earmarked for safe projects for which BES was not intended.
Under the section the new measures will apply in respect of shares issued on or after 12 April 1989, which was the date of publication of the Finance Bill. The section introduces five measures, as follows: it provides that, where BES money is being used for the purchase of a ship, that ship must represent a beneficial addition to the Irish shipping register; it imposes a limit of £2.5 million on the amount of money a company or group of companies can raise under the scheme; it excludes from the scheme international leasing and related financial services; it also excludes self-catering accommodation in the city or county of Dublin and the urban areas of Cork, Waterford, Limerick and Galway; and, finally, it provides that BES relief will not be available on shares in relation to which options for guarantees are held which provide for sale at other than market value at the end of the five-year period for which shares must be retained under the scheme.
The introduction of the option for a trader to have annual accounting for PAYE/PRSI, as announced in the budget, has been given effect through regulations already made by the Revenue Commissioners on 23 March last under existing legislation. The change in relation to VAT is provided for in section 58 of the Bill.
I want to stress that the purpose of the annual accounting facility is to ease the administrative burden on small traders and to release resources in the Office of the Collector General for other purposes. As a further measure to ease the compliance burden on small traders, section 55 provides for an increase in the VAT registration thresholds from £12,000 to £15,000 in the case of traders providing services and from £25,000 to £32,000 in the case of traders supplying goods. It is some years since these limits were last adjusted and it is now timely to increase them so as to take smaller traders out of the VAT net.
Sections 18 and 19 introduce new taxation arrangements for unit trusts and similar investment funds. As a result of the EC directive on undertakings for collective investment in transferable securities, fund management represents an area of great opportunity for this country, since funds coming within the scope of the directive can be freely marketed out of Ireland to the residents of other EC member states. This opportunity, and the job creation potential which goes with it, will be focused in the International Financial Services Centre in the Custom House Docks area.
Section 18 introduces a new tax regime for funds locating in the centre so as bring our tax treatment into line with the position in certain other countries competing for the business. In short, the funds will not be subject to taxation on their income or capital gains provided that they are under management by a company in the centre, are established for the benefit exclusively of persons resident outside the State and are subject to the new regulatory regime for such funds which has now been put in place by my colleague, the Minister for Industry and Commerce, on foot of the UCITS Directive. The same tax arrangements are being made for funds which locate in the Shannon Airport zone.
Section 18 also deals with funds outside the financial centre and the Shannon zone which are subject to the new regulatory regime. Such funds similarly will not now be liable to tax in their own right. However, the Irish-resident unit holders in the fund will be taxed on the income and the gains and a withholding tax will apply in order to facilitate collection of this tax. This revised tax treatment will be broadly consistent with the tax treatment of funds in other EC countries.
The changes proposed in section 18 will help Irish funds to maintain a competitive position vis-à-vis foreign funds selling into the Irish market. This is an important consideration since, as a result of the EC directive and of progress in liberalising exchange controls on Irish residents, funds can be marketed to Irish residents, from other EC countries just as funds can now be marketed out of Ireland to the residents of all EC member states. I will be keeping the question of the competitive position of Irish funds under close scrutiny in the coming months.
Section 21 introduces a number of measures to restrict the cost to the Exchequer of domestic-sourced section 84 loans. This cost has gone up considerably in recent years. The main reasons for this escalation in cost are the 60 per cent increase in the volume of these loans since February 1986 and the development of what are known as high-coupon section 84 loans. These new style loans are taken out in high-interest rate foreign currencies and are much more costly to the Exchequer than section 84 loans taken out in Irish pounds.
The measures in section 21 curtail the Exchequer cost by imposing restrictions on the categories of borrowers, on the total volume of the loans and on the number of lenders.
New rules were introduced last year for the distribution by companies of dividends from different types of profits for tax purposes. Following discussions with a number of representative bodies and companies a number of amendments are now being made to these rules, as provided in sections 24 and 25. The main change is that, instead of being confined in the first instance to the mix of profits of the immediately preceding year, a company can now pay dividends out of the mix of profits of any one or more previous year in the past nine years. Where such profits no longer exist, the company can go back earlier than nine years. This change gives companies much more flexibility in regard to dividend distribution.
While we are cutting back in the Bill on a number of incentives, to which I have already referred, we are taking new incentive measures to help build up certain sectors.
The previous capital allowance tax relief for toll roads expired on 31 March 1989 and is being replaced, in section 17, by a significantly improved incentive measure. This new provision will be available countrywide for a period of three years and will encourage the private sector to get involved in major investment in toll road development.
Section 22 extends the categories of computer services which qualify for the 10 per cent rate of corporation tax. This extension is being introduced in response to recent developments in the computer industry, which is a very important sector of the economy.
Section 23 amends section 39a of the Finance Act, 1980, to give effect to the recent decision of the EC Commission agreeing to the removal of the 50-jobs ceiling for Shannon non-manufacturing companies wishing to qualify for the 10 per cent rate of corporation tax.
Section 28 amends the existing provisions giving relief for corporate investment in films. The current limit on tax-relieved investment of £100,000 each year for three years is being replaced with a new limit of £600,000 which can be availed of in either of two ways; an investor company will have the option of putting £600,000 in one year into a single film production, or investing up to £200,000 each year for up to three years in one or more film projects.
Section 30 extends for a further three years the special rate of capital gains tax which applies in respect of certain shares including those dealt with on the Smaller Companies Market of the Stock Exchange.
Section 34 to 52 provide for the confirmation of the budget day increases in excise duties and for a number of other measures in the area of customs and excise. Excise licences are being rationalised and updated, generally in line with inflation, relief of duty is being provided in respect of wine and cider used in the production of certain beverages; there are also provisions to terminate the practice of tax-free betting and to introduce a ten-year driving licence at a charge of £20.
Part III of the Bill covers VAT. The main changes relate to the measures announced on budget day and provide for: an increase in VAT rate on livestock from 1.4 to 2 per cent; an identical increase in the farmers' flat-rate VAT refund; the VAT element of the annual accounting option which I referred to earlier; that is the small traders one, where instead of making monthly or bimonthly returns they only have to make one in the year; the reduction from 25 to 10 per cent in the rate on works of art. I am also extending this provision to cover literary manuscripts and certain other works of craftmanship over 100 years old. The precise extent of this latter concession will be set out in the regulations.
In addition to the foregoing there are a number of other measures. Section 54 restores a position that applied in VAT law until a recent High Court judgment. Under the section legal services supplied in insurance-related court cases will be regarded as being supplied to the policyholders who, being VAT-registered in most instances, can recover the VAT charged on them.
The change in section 56A is also necessitated by a court decision. Last year the 5 per cent rate of VAT was applied to electricity supplies. In a case involving an appeal against a Revenue VAT estimate, a Circuit Court judge decided that the activities of a cable television company constitute the supply of electricity and if no legislative action were taken the result would be that the supply of cable TV would be liable at the 5 per cent rate of tax rather than the standard rate of 25 per cent. As this is totally contrary to the intention underlying the law, and as a considerable loss of tax over time would result from the court decision, I am specifically excluding the supply of communications signals from the 5 per cent.
Sections 61 to 63 provide for a change in the VAT treatment of optical services. Since the inception of the VAT system in 1972 the professional services of opticians, including supplies of spectacles and lenses by them, have been exempt from the tax. In 1987 the European Court of Justice decided that this was a misapplication of EC VAT law and that, while the professional service of eyesight testing could be exempt, the supply of goods in the course of the service must be liable to VAT. As the court's ruling is binding, I am levying the 10 per cent VAT rate on spectacles and contact lenses. I am making arrangements that low vision aids used by the partially sighted will be relieved from VAT. Despite the application of tax to spectacles, there should be no corresponding increase in their price as opticians will in future be able to recover input VAT on their business purchases. The change will be postponed until 1 November to allow opticians time to make the necessary arrangements.
In response to representations from Threshold, and following the Dáil debate on Committee Stage, I have decided to remove the stamp duty charge on leases of residential property where the annual rent payable under such leases does not exceed £6,000 per annum. The point had been made that the existing rates of duty militate against longer leases and greater security of tenure. Section 72 of the Bill accordingly provides that leases of residential property for a term not exceeding 35 years and at an annual rent not exceeding £6,000 per annum will be exempt from stamp duty.
Part V of the Bill deals with capital acquisitions tax. It provides for the new arrangements for self-assessment. Since the middle of 1987 the Revenue Commissioners have operated a pilot scheme for the voluntary self-assessment of this tax. This pilot scheme has been a success due in no small measure to the co-operation and assistance of the legal profession. The Government welcome this kind of co-operation which is in the interests of all concerned, taxpayers and practitioners included. As a result, self-assessment can now be put on a statutory basis and this represents a further development of tax administration.
If a self-assessment system is to work properly it is critical that taxpayers disclose fully the assets which are subject to tax and compute their liabilities correctly. The Bill, therefore, provides for increased penalties and powers of enforcement. One innovation is the introduction of a surcharge for the significant undervaluation of property. Without a provision of this type, systematic undervaluation of property could become a serious problem and could diminish the benefits of self-assessment. It has, however, been pointed out that in the case of certain types of property — such as, for example, works of art — a valuation made in good faith could turn out to be very wide of the mark. In such a case the surcharge would be due in law notwithstanding the fact that the person submitting the valuation had acted in good faith. The Revenue Commissioners could, of course, waive the surcharge in such cases. Nevertheless, in response to points raised in the Dáil, the Government have decided to introduce a statutory right of appeal against the surcharge in circumstances such as those I have just mentioned and this is incorporated in section 79 of the Bill.
The present Bill contains a number of provisions to counter the avoidance of tax. Let me say at the outset that there is nothing new about that. Every Finance Bill has introduced a number of specific anti-avoidance measures aimed at particular abuses. The specific measures in this year's Bill are in sections 86 to 90. The problem about specific measures is that, by definition, they can be introduced only after a particular loophole or abuse has come to light. In the meantime there may be a substantial loss of revenue to the detriment of the general body of taxpayers.
This brings me to the novel element of this year's Bill — the general anti-avoidance provision contained in section 86. This provision is analogous to similar provisions in other countries who have reached a similar conclusion to ours: that such a provision is needed to protect the interests of the Exchequer and the general body of taxpayers.
The purpose of the new general provision is to enable the Revenue Commissioners to counteract certain transactions which have little or no commercial reality but are entered into primarily for tax avoidance purposes. The intention is to enable the Revenue Commissioners, subject to specified procedures and safeguards for taxpayers, to disallow the tax benefits of such transactions.
Before any action can be taken by them to disallow a benefit, the Revenue must first of all form an opinion that a transaction is a tax avoidance transaction. Having formed such an opinion, they must then notify the taxpayer concerned who has 30 days in which to contest it by appealing to the Appeals Commissioners. There is provision too for the rehearing of an appeal by the Circuit Court and the stating of a case for the High Court on a point of law.
There is, therefore, no question of giving an unfettered general power to the Revenue Commissioners. At the end of the day, an appeal to the courts is available and, in the case of a dispute, it will be the judgment of the courts and not the opinion of tax officials which will finally determine the outcome.
In the Dáil concern was expressed about the grounds for appeal under the general anti-avoidance provision. In particular there was concern that an impossible burden of proof was being placed on taxpayers. While that was not the case, in the spirit of reassuring taxpayers the approach to appealing against an opinion formed under the section has been changed from one of "reasonableness" to one of "correctness". The Appeal Commissioners and the courts will uphold an opinion of the Revenue Commissioners only if they consider it to be correct and they can look at all the facts of the case in arriving at their decision.
Much has been made about the alleged uncertainty for business and investment in the anti-avoidance provisions. Some of this is hard to take coming as it does from those who were involved in the very lucrative tax avoidance industry. I would like to assure Senators that genuine business transactions, even if carried out in a tax efficient manner, have nothing to fear from the new legislation. There is no need for any uncertainty in the mind of the genuine businessman or the person making legitimate use of a tax relief provided by the Oireachtas.
Apart from the general safeguards to which I have referred, a specific limiting provision on the actions of the Revenue Commissioners has been inserted in subsection (3) of section 86. This is designed to give comfort to the genuine taxpayer and to protect the efficacy of tax incentives and reliefs provided by the Oireachtas for the benefit of businesses and private individuals. In relation to incentive reliefs, I should say too that the Revenue Commissioners already provide an advance opinion service to reassure investors that they will qualify for the reliefs.
There are, therefore, no grounds for the assertion that the general provision will create uncertainties for genuine business, personal or family transactions. The only transactions that are affected are those that set out purely and simply to engage in artificial tax avoidance. In other words, so long as a transaction is arranged primarily for a trading, professional, vocational, domestic, personal or any other purpose which is not the avoidance of tax, it will not be affected by the new provision.
I want to make it absolutely clear that the fact that a transaction is carried out in a tax efficient manner does not bring it within the scope of the new provision. The legislation does not make tax efficiency illegal, whether for business or family purposes. The target of the provision is, as I have said, those types of artificial transactions that are undertaken primarily for tax avoidance purposes.
The general anti-avoidance provision will apply to transactions carried out on or after budget day, when I indicated that new legislation was proposed. It will apply to transactions completed before budget day only where the tax which it is sought to avoid arises as a result of activities which took place wholly after budget day. To make this abundantly clear, I introduced an amendment to the general provision, which was being interpreted more widely in a retrospective sense, in the course of Committee Stage in the Dáil.
Section 92 provides for a revised scheme of VAT and excise remissions or refunds to disabled people, as drivers and as passengers. The existing scheme, based on section 43 of the Finance Act, 1968, has proved to be unsatisfactory in a number of respects, not least in that the present medical criterion, that a person must be "wholly or almost wholly without the use of each of his legs" has excluded otherwise deserving cases. From an administrative point of view, there is also a need to bring together the different elements of the existing arrangements so that uniform and more equitable conditions apply.
The provision I have introduced in the Bill seeks to make good these deficiencies. It would enable the Minister for Finance to make regulations for remissions of road tax, refunds of VAT and excise duty on vehicles, and refund of excise duty on petrol or diesel. The main criterion of disability will be that a person must be "severely and permanently" disabled, with the result that he or she would be unable to drive a car unless it is specially constructed or adapted. The scheme will also apply to disabled persons as passengers, where significant car adaptation is needed. It would be my intention to specify, as necessary, in more detail what medical conditions might be covered by this. This would be done in the regulations. Let me stress, however, that this definition is intended to cover a wider range of disability than that in use at present. The whole point is to broaden eligibility to cover cases at present excluded. For example, I envisage that persons of small stature who have mobility problems will be included, as will amputees of foot or leg and amputees of both hands.
In addition to this important broadening of the scope of eligibility, it is proposed that in future all medical certification will be provided by the director of community care of the health board in whose area the applicant normally resides. There will be provision for appeal against a refusal to allow eligibility. The regulations will also specify a number of controls and limits, the chief of which will relate to the maximum size of vehicle to be assisted — 2,000 c.c. — and to the maximum total amount of VAT and excise duty to be refunded: £7,500 in respect of a car and this will be indexed to the increase in car prices.
Finally, let me say to all those who are at present in receipt of a remission or refund of tax under the existing scheme that they will not have to undergo any further process of medical certification to retain eligibility for the particular form of tax refund they enjoy at present.
These are the main provisions in the Bill to which I wished to draw attention. We will have an opportunity to discuss them in more detail in Committee. I commend the Bill to the House.
