The purpose of this Finance Bill is to give statutory effect to the taxation changes announced or foreshadowed in this year's budget. It also provides for a number of other important changes which I have drawn up since the budget.
The Bill is a lengthy and complex one. Unfortunately, there is no way of avoiding this, given the complexity to the matters with which the Bill is dealing. I hope, however, that this House's discussion on the Bill will be facilitated by the revised Explanatory Memorandum which I have now circulated and which reflects the changes made during the passage of the Bill through Dail Eireann.
The Bill contains a number of very fundamental reforms to our tax system. These build on the changes I introduced last year. The essential objective is to bring us further down the road towards a fairer and more efficient tax system and to help develop the economy by encouraging more growth and more jobs. The key changes are: the reduction in the standard rate of income tax to 30 per cent and the reduction in the top rate to 53 per cent; the reduction in the standard rate of corporation tax to 40 per cent and the associated measures to increase the corporation tax yield; the extension of the 10 per cent rate for manufacturing industry to the year 2010 so as to create greater certainty for investment planning and job creation; the extension of the urban renewal incentive package to 1993; the reduction in the standard VAT rate which has already taken effect and is helping to reduce inflation; changes in stamp duties to further encourage the development of the financial services sector; the abolition of the 60 per cent rate of capital gains tax which has been an inhibiting factor on investment; and the introduction of the current year basis of assessment for the self-employed as part of the development of the self-assessment system. Before outlining the significant provisions of the Bill in more detail, I would like to take this opportunity to review briefly the present economic position and prospects which provide the overall framework within which the measures in the Bill must be assessed.
The primary goals of Government policy are to maximise economic growth and sustainable job-creation and to achieve greater social equity. By implementing the right policies we have achieved a major turnaround in economic fortunes over the last three years. Gross National Product has risen by an average of 3½ per cent annually over this period. Real benefits are coming from the improvement in economic performance.
First, more people are at work. The most recent Labour Force Survey confirms that some 30,000 extra jobs emerged in the private sector, excluding agriculture, in the two years to April, 1989. More recent indicators suggest that employment is continuing to expand.
Second, people at work are better off. While we have had moderate pay increases under the Programme for National Recovery, there have been major income tax reliefs and low inflation. This combination of developments has been putting real money and purchasing power into workers' pockets —in contrast with the situation for most of the 1980s.
Thirdly, those outside the workforce —whether retired or unemployed—are also sharing in economic advance. Growth has made it possible to provide real increases for welfare recipients. This is only as it should be. It would be a poor form of progress if the disadvantaged were to be denied a fair share.
Finally, and most importantly, the foundation for further economic and social advance is being laid.
The overriding concern of the Government remains the creation of additional jobs. More jobs would cure many of our social as well as economic ills. Unemployment is root cause of poverty. While progress has been made on this front, I readily admit that it is not adequate and that much more remains to be done. We can, however, feel encouraged by what has been achieved in a short space of time.
Competitiveness is a factor of vital importance in all of this. It is essential that we maintain the improvement in our relative costs over the past few years. Indeed, with our employment needs we should think in terms of progressively improving our competitiveness. The aim must be to price more people back into work.
The present Programme for National Recovery represents an eminently sensible arrangement as well as a potent force for progress. It protected living standards of workers through a combination of pay increases geared to give us an edge on our competitors and reliefs in personal taxation which enhanced real take-home pay. We have got away from the ridiculous situation of former years where we had large money increases, which undermined our competitiveness but proved worthless to the majority of employees when inflation and taxation had taken their toll. Worst of all, these increases pushed a minority right out of work.
The formula in the present programme can be a model for the future. The wider terms of any new agreement must be consistent with our growth needs. It must deliver both stability and competitiveness. Our exchange rate policy is a virtual guarantee of low inflation over the medium term but we must recognise and live up to the disciplines which this policy entails. In this year's budget, the Government have made a substantial contribution to lower inflation. We are on course for a significant reduction in inflation — to a little over 3 per cent in 1990 as a whole, with the annual rate slowing down to about 2½ per cent by the end of the year.
I am confident that, despite some moderation in growth internationally and in particular the weakening in the UK, we can again achieve this year a growth performance on a par with that of the past three years. GNP should continue to expand, by 3½ per cent or better. With inflation falling — and provided we let this carry through into our costs and our prices — we can anticipate further solid export growth. Rising investment and exports, and the capacity they offer for higher personal consumption, should all have a strong positive effect on jobs. A net increase in non-agricultural employment of 16,000 can be achieved this year.
While international trends inevitably affect us, the Government are doing everything possible to promote lower interest rates. Domestic market conditions have shown considerable improvement in recent months, as evidenced by the recovery of the official external reserves from £2,282 million at end-February to £2,458 million at end-March with further improvement since. Interbank interest rates have also eased considerably from their peak levels during March. Against this background, the Central Bank is more optimistic about the general trend of domestic interest rates than was the case last February when it issued its 1990 Monetary Policy Statement.
I am not alone in the belief that we are on the right track, policy-wise, for the longer term. Last week's update by the ESRI of their July 1989 Medium-Term Review suggests that Ireland could achieve GNP growth of near enough to 4 per cent annually, through the 1990s. While I may not subscribe to all of their expectations, their broad thrust seems sound, but they also clearly indicate that this potential progress, while plausible, is conditional. The authors do not see this scenario as enabling soft options to be taken. To cut further into the overhang of Government debt, and to reduce the drag on economic activity which the debt poses, their assessment is that fiscal policy over the medium term will have to be tight. Despite economic growth at almost 4 per cent each year over the period, tax cuts or increases in public services will, in view of the ESRI, have to be on a more limited scale than this year. This is a clear message that despite the progress to date we are in no sense out of the woods in so far as the public finances are concerned.
They also indicate that even this rate of advance, if sustained for a decade, will not resolve all our problems. Encouragingly, they see unemployment and emigration declining in the next few years. However, they see both threatening to rise again from mid-decade. This is because the ESRI anticipate that growth will prompt demand for pay increases of an order which, in turn, will slow expansion in the trading sector. Unfortunately, this has too often been our experience in the past. We must not let it happen again.
There is of course a significant element of trade-off between income and jobs. As a society, we have to make choices. If we wish, we can give overriding priority to expanding employment — which is the best means for tackling poverty, and the only answer to emigration — but this will involve considerable restraint on the incomes front, or we can regard increases in living standards for those at work as the higher priority but this would, inescapably, curtail the prospects of those disadvantaged through unemployment.
In summary, I welcome the ESRI update of its view of medium term prospects for two main reasons. First, because it confirms the appropriateness of the broad economic strategy which we have adopted and, secondly, because it puts the key choices we must face in the future firmly on the agenda for discussion. That can only be in all our best interests.
A key ingredient in our improved economic performance has been the strict fiscal stance adopted by the Government over the past three years. I am pleased to report to the Seanad that the Exchequer returns to end-April indicate that the results to date this year are running broadly in line with budget expectations. The Government will continue to monitor the trends closely over the remainder of the year so as to ensure that the budget targets will be achieved.
I would emphasise to Senators that the Government are fully committed to reducing further both the level of annual borrowing and the debt/GNP ratio. Specifically, the aim now is to achieve broad balance on the current budget by 1993. By the same deadline, it is intended also to maintain a significant rate of progress in reducing the debt/GNP ratio towards 100 per cent, down from its end-1989 level of 121 per cent. Our medium-term objectives are far from being soft options. They will require that tight control is maintained on current expenditure and that borrowing for investment purposes continues to be subject to rigorous scrutiny. It is all about difficult choices and priorities but there is no going back to an era of fiscal laxity. Any attempt to do so would be self-defeating since it would undermine the basis on which all our progress has been secured.
As I have already indicated, tax reform has a major part to play in encouraging initiative and promoting more jobs. Last year was a watershed. I was able then to begin the process of reducing our high rates of personal taxation. This year's Finance Bill continues the process of major tax reform notably through the significant new reductions in personal income tax for all taxpayers to which I have referred; major further development of the self-assessment system by placing self-employed taxpayers on a current year basis; further significant reform of the corporation tax system; initial steps to reduce our indirect taxes so as to help lower inflation and to bring our rates closer to European levels in preparation for 1992, and new steps as part of the Government's determined efforts to curb tax avoidance and ensure greater equity in the system. Tax reform is, and will continue to be, a major priority with the Government.
I would now like to turn to describe in more detail the more significant elements of the Bill.
Chapter I of the Bill deals with the important income tax changes. I am pleased that we have been able to make further progress this year in reducing the burden of income tax.
I have again extended the standard rate band by £400 for a single person and £800 for a married couple, in order to keep at 63 per cent the proportion of taxpayers on the standard rate. I have again reduced the standard rate itself to 30 per cent and the top rate to 53 per cent. I have also further improved the exemption limits which are of particular benefit to those on low incomes: I have increased the general exemption limit for a single person by £250 and for a married couple by £500 and I have increased to £300 the special child addition to the exemption limits which I introduced last year. I addition, I have reduced to 53 per cent the marginal relief rate which applies where income does not greatly exceed the relevant exemption limit.
The reduction in tax rates — which means that five percentage points have been taken off both the standard and top rates over the past two years — will be of benefit to all taxpayers.
The increases in exemption limits will be of a substantial benefit to low-paid taxpayers generally, not just low-income PAYE workers but also small farmers and low-income self-employed taxpayers. Overall, the package of measures for the low-paid should exempt an estimated 31,000 taxpayers with 58,000 children from tax altogether, while a further 65,000 taxpayers with 123,000 children will benefit from marginal relief. The Revenue Commissioners, at my request, have taken practical measures to bring these changes to the notice of low-paid taxpayers: they have conducted a publicity campaign about them, and have also sent an information leaflet, incorporating a short application form, with the tax-free allowance certificates issued to low-paid taxpayers in recent months. I will be circulating to Members of both Houses of the Oireachtas as soon as possible leaflets giving details of the income tax exemption scheme, so that Members can send them to low-income taxpayers who should be benefiting from the scheme.
Overall, the income tax changes introduced in recent years have, on a cumulative basis, cost over £800 million, compared with the £225 million commitment contained in the 1987Programme for National Recovery.
The Government are, of course, committed to further progress on income tax by way of further reducing the standard rate to 25 per cent by 1993 and by moving towards a single higher rate of tax.
In addition to the main changes in income tax, Chapter I of the Bill contains a number of other provisions. There are three new provisions which were added to the Bill in the course of the discussion in the Dáil. Section 4 doubles, from £2,500 to £5,000 the allowance granted to a taxpayer where he or his wife is totally incapacitated and he employs someone to take care of the incapacitated person. Section 5 exempts from income tax the investment income arising to a totally and permanently incapacitated taxpayer from a court award or out-of-court settlement of his personal injury case. While the actual awards or settlements themselves in such cases are already tax-free, the investment income arising from them has been liable to income tax up to now; this section will exempt such income from now on. The exemption applies where the investment income is the sole or main income of the taxpayer; in other words, where he or she is mainly or completely dependent on such income. Section 7 exempts from income tax, payments made by the Haemophiliacs HIV Trust. Senators will be aware of the sort of circumstances which these sections are designed to deal with and I am sure they will receive wholehearted support.
Section 6 deals with life assurance relief. Senators will recall that last year I restricted this relief to 80 per cent of the amount which previously qualified as a means of obtaining a small contribution from the income tax code to the substantial measures of relief provided by the 1989 budget. This year, I am reducing this figure further to 50 per cent. This restriction, which will yield about £13 million in the 1990-91 tax year, must be seen in the context of the overall budget package of income tax measures. Even taking account of the restriction of life assurance relief, these measures will cost in total £200 million in the current tax year. The restriction of life assurance relief also reduces distortion in financial investment.
Section 10 extends the business expansion scheme to the construction and leasing of advance factories in areas which are in particular need of development and of the creation of employment opportunities and where the construction is promoted by a local community group.
Section 10 has two other purposes. It removes an anomaly under which the BES applies to certain international services in respect of which an IDA employment grant has been made but does not include such services for which the financial assistance was received from the Shannon Free Airport Industrial Development Company or from Údarás na Gaeltachta. The section ensures as well that activities being retained in the 10 per cent corporation tax scheme by section 41 of the Bill are also retained in the business expansion scheme.
Of course, while anxious that the business expansion scheme should be available in respect of these important economic activities, I am conscious that the scheme has been the subject of substantial abuse in recent months, despite the measure I took last year to try to preserve the scheme as a scheme for providing real risk capital. Accordingly, I am taking new measures in section 34 of the Bill. Under this provision BES relief will not be available where arrangements exist to guarantee the investor's share-holding regardless of whether or not the company he has invested in is successful. BES relief will not be available where an arrangement exists which can reasonably be considered to eliminate the risk that shareholders might be unable to recover an agreed amount in respect of their investment within an agreed period. In other words, no longer will guaranteed investments qualify for BES relief. This section also counters similar type tax avoidance investment schemes in other areas which were devised last year.
Section 11 is also concerned with the BES, and is aimed at preventing the possibility of investors getting interest relief on loans taken out by BES shares, as well as the BES relief itself on the capital invested under the scheme. Such interest relief could be available where the investor is an employee or director of the BES company. However, I see no reason why an investor, having obtained tax relief on the capital he has invested through the BES, should also be able to obtain tax relief on the interest he pays on a loan taken out to enable him to acquire the BES shares. In short, he should not be able to get relief on both the capital and the interest.
Chapter II of the Bill gives effect to the change in the basis of assessment for self-employed taxpayers. This represents an important new step in the development of the self assessment system which has proved such a success since it was introduced in 1988.
As a result of these provisions self-employed taxpayers will, with effect from the present tax year, have their liability for tax based on the profits of the current rather than the preceding year. This major change is necessary if the momentum of progress under self-assessment is to be maintained. A pre-requisite for further progress is that all sources of income — trading income, investment income and so on — should be assessed for tax on the same basis: at present some income is assessed on a preceding year basis and other income is assessed on a current year basis. This gives rise to considerable confusion and, in effect, necessitates the submission of two years' returns before the liability for a particular year can be finalised.
The switch to a current year basis of assessment for all income is, therefore, the next logical step in the progress towards a full obligatory self-assessment system where taxpayers would be required, in due course, to compute and pay their tax themselves. The switch will bring greater certainty and efficiency to the system and in particular will result in: a lower compliance burden for taxpayers and their advisers; better service from tax offices and the intensified pursuit of tax evasion through better use of resources.
Details of the legislative arrangements for the new assessment regime are set out in the explanatory memorandum to the Bill. The main features are as follows: For the 1990-91 and subsequent tax years all income will be charged to tax on the basis of the income in the year of assessment. In the case of trading profits of the self-employed, which are computed by reference to annual accounts, the charge to tax will, as I indicated previously, be based on the profits of the accounting period ending in the current tax year. Preliminary tax will now be due on 1 November in the tax year and, to avoid an interest charge for underpayments, the taxpayer must pay not less than 90 per cent of the current year ultimate liability or not less than 100 per cent of the preceding year's actual tax liability. As a result of the switch to a current year basis this year, accounting periods ending in 1989-90 will not now form the basis for an assessment. A transitional measure is included so as to reduce any hardship that might arise, as a result of a significant fluctuation in income between 1989-90 and 1990-91. The Bill provides that where the profits for 1990-91 exceed the profits for 1989-90 by 50 per cent or more, the assessment for 1990-91 will be reduced to the average profits of the two periods. Marginal relief will be available where the profit increase is between 25 and 50 per cent. Farmers will, of course, continue to have their general averaging option available. Transitional provisions are also included to deal with the treatment of capital allowances in the changeover year 1990-91 in the case of unincorporated business. Notwithstanding that 1989-90 will not form a basis for an assessment, a return of income for the period will still be required. This is necessary to settle outstanding matters relating to 1989-90 tax liability and to ensure that no one is taking unfair advantage of the changeover to transfer income into the period which would not form a basis of assessment. The tax return filing date is being changed from 31 December in the year of assessment to 31 January in the year following the year of assessment. Provision is made to retain the existing arrangements as regards crediting of tax deducted in the preceding year and the operation of the interim refund procedures under the scheme of withholding tax on professional fees. There are certain other mainly technical consequential provisions.
While these measures will bring the tax treatment of the self-employed closer to that of PAYE taxpayers, I would emphasise that important differences still remain and the chage does not provide any justification for extending the PAYE allowance to the taxpayers affected.
I would like to underline once again the importance I attach to this change in our continuing efforts to have a simpler and more effective tax system. Much has been done in this regard in recent years and we can now go further. The proposals were, in general, well received in the Dáil and I commend them to this House. A simpler and more efficient tax system will bring considerable benefits to all concerned.
Sections 30 and 31 in Chapter III give effect to the budget decision to extend, from 31 May 1991 to 31 May 1993, the time limit for incurring expenditure which qualifies for the urban renewal tax reliefs in the designated areas. This measure will enable many pipeline projects to be completed and will give a major boost to the pace of development and renewal in those areas. In tandem with this extension, sections 32 and 33 are directed at removing the opportunity for certain abuses and unintended uses of these urban renewal tax incentives.
The Bill continues the process of reform of the corporation tax system with a significant new package of measures. The aims are: to broaden the corporation tax base; to encourage more employment — especially in the services sector, which is such an important source of new jobs — by reducing the standard rate of corporation tax, and to refine and extend certain important incentives. The changes are in line with the approach of the Commission on Taxation, which recommended a lower tax rate on a wider tax base. They are also in line with international trends.
Turning to the individual elements, the reduction in accelerated capital allowances which is provided for in Chapter VIII will remove the excessive bias which has existed in the tax system in favour of capital intensity rather than extra jobs. The current level of 50 per cent accelerated capital allowances will be maintained up to 1 April 1991 and will then be reduced to 25 per cent for a further year, before being eliminated on 1 April 1992. This gives adequate notice of the change to taxpayers and will enable them to plan accordingly. I would point out that the normal annual capital allowances are not affected and can be applied to the balance of any expenditure not written off under the accelerated allowances. As was the case in 1988, the 100 per cent accelerated capital allowances are being maintained for qualifying service companies in the Custom House Docks area, Shannon customs-free airport and in the tax incentives package for the urban renewal areas.
Specific provision is being made to cater for two categories of pipeline projects. These are projects which are approved for grant aid by the industrial development agencies on or before 31 December 1990, and hotel and other tourist accommodation projects where the construction contract is signed before the same date and where Bord Fáilte registration is subsequently obtained. The current 50 per cent level of accelerated allowances will continue to be available to these pipeline projects.
Section 46 in Chapter IV implements the budget proposal to reduce the volume of domestic-sourced section 84 loans. The effect of this is to disallow all new loans of this type from budget day except where the total loan volume of the lender does not exceed 75 per cent of his loan volume as of 12 April last. I have introduced a special transitional arrangement for certain loans for new manufacturing projects which were under negotiation with the industrial promotion agencies as of budget day. This will enable up to £170 million to be given in section 84 loans to such projects in the period 31 January 1990 to 31 December 1991 where the relevant qualifying conditions are met.
Another important change is the restriction in section 41 of the definition of manufacturing for the purposes of the special 10 per cent tax rate. As Senators will no doubt recall, I announced in my Budget Statement that I was concerned about the fact that the 10 per cent rate for manufacturing now applies to a wider range of activities than was originally intended when it was introduced in 1980. As a result of a series of court and appeal commissioner decisions within the last ten years, the concept of manufacturing has now been extended well beyond the ordinary everyday meaning of the term so as to include activities which are not really manufacturing operations at all. This is obviously quite costly to the Exchequer because the profits in question are charged to tax at only 10 per cent instead of 43 per cent. This situation has to be remedied and section 41 accordingly introduces new provisions to restrict the definition of manufacturing to what was originally envisaged. These provisions will achieve their effect by excluding certain categories of activities from the scope of the 10 per cent rate.
However, I would like to emphasise that the changes will not impact on genuine manufacturing activities. The vast bulk of activities which now qualify for the 10 per cent rate for manufacturing will not be affected. In order to provide further reassurance on this point, I introduced a number of drafting amendments on Committee Stage in the Dáil. These amendments made clear the intention that for an activity to be excluded from the definition of manufacturing, it must primarily fall into one of the five excluded categories specified in the section. In addition, the industrial buildings test was deleted because it had given rise to considerable uncertainties about the status of some genuine manufacturing activities. Also, fish-processing and certain computer equipment activities are not specifically mentioned as qualifying for the 10 per cent rate. These amendments give greater clarity regarding the application of the section without undermining the basic objective.
All these provisions — in respect of accelerated capital allowances, section 84 lending and the qualifying manufacturing activities for the purposes of the 10 per cent rate — will broaden the tax base.
poration tax package is the reduction in the standard rate of corporation tax from 43 per cent to 40 per cent. This will take effect from 1 April 1991 and will mean that in the period since 1988 the rate will have been reduced by 10 percentage points.
As I mentioned earlier, a number of specially targeted incentives are being extended or introduced. The major incentive being extended is the special 10 per cent rate for manufacturing which was scheduled to expire on 31 December 1990. The termination date is now being extended by ten years up to 31 December 2010. This special low rate of tax is the key incentive for attracting mobile international manufacturing investment, which has provided very large numbers of new jobs throughout the country. The fact that the incentive is now guaranteed for the next 20 years will be a tremendous help to the IDA and the other industrial promotion agencies in continuing to attract vital new foreign manufacturing investment. The decision to extend the date follows a study by an international consultancy group which compared Ireland's competitiveness for internationally mobile investments with that of other regions in the EC. At a time of increasing competition for investment funds from all over Europe it is vital that we have an effective incentive package.
The business community was invited in my 1989 budget speech to launch an initiative aimed at creating jobs and alleviating poverty in areas of particular need. The business sector has responded to that invitation by creating a trust for community initiatives, which will receive corporate donations and use these to assist suitable projects. Section 45 provides for tax relief on donations made to the trust in the period 20 April 1990 to 31 March 1991. This will encourage companies to contribute to the trust, and will enable the trust's work to commence at an early date.
The idea here is that in blackspots, in very poor areas or areas of diminishing economic activity, companies could make donations into a trust fund that will be allowed as a write-off against tax at the corporate tax rate applicable and at the same time be non-refundable to the companies. It would serve as a revolving fund, where they will provide and seve capital for projects that are short of it and cannot get off the ground, thus providing a back-up to the enterpreneurial scheme for new projects I introduced in last year's budget or indeed for any community-based project that would increase economic activity and help in alleviating poverty and deprivation.
The special incentives being introduced include the extension of the 10 per cent rate of corporation tax for shipping to offshore supply vessels which are engaged in taking supplies and personnel to and from drilling rigs and production platforms at sea. This measure will assist Irish vessels to compete successfully in this area and to develop their potential for further business in the spin-off expenditure associated with exploration activity offshore. We have not got any slice of the whole North Sea servicing area. We should be in a position to do a particularly good job on our own and this gives an opportunity to the very small number of Irish-owned companies to put them in a position to compete for a slice of that business.
A brand new incentive is being introduced under section 39 to encourage scheduled mineral exploration activity. In future, Irish prospecting companies will be able to set off their exploration expenditure in Ireland against their other income or gains with the exception of income which is subject to deposit interest retention tax. The ten year time limit which formerly applied to the carrying forward of abortive exploration expenditure is also being removed. These changes in the taxation treatment of exploration expenditure of scheduled minerals will help to boost the current momentum in that sector.
Chapter IX of Part I of the Bill deals with capital gains tax. In addition to providing for the abolition of the 60 per cent rate, I am making further amendments in relation to certain areas of the tax. Included among these are provisions which extend the relief available on disposals of certain business assets by individuals aged 55 years or over to disposals of shares in holding companies of trading groups.
Parts II and III of the Bill implement the budget reductions in excise duty and VAT, as well as certain technical changes aimed especially at bringing our law more into line with European requirements. The reduction of two percentage points in the standard rate of VAT from 25 to 23 per cent will make a significant contribution to lower inflation this year.
I am postponing, at no cost to the Exchequer, the introduction of VAT on telephones until 1 January next to allow Telecom Éireann time to complete the installation of their new billing system. There will be no additional cost to the consumer. It is purely an administrative function that has to be carried out by Telecom Éireann and we are facilitating an amendment in this situation.
All the measures I am taking are consistent with what is required of us in the context of 1992 tax approximation. While developments on this front are moving slowly, progress is being made, especially in regard to the elaboration of the VAT system to be put in place when frontier controls are taken away. Detailed proposals as to how the new system will work are now emerging from the Commission and the Irish Presidency intend to commence work on these as soon as they have been presented formally to the Council of Finance Ministers at our next meeting in June. It is important that early decisions are taken so that businesses have time to plan for the major changes ahead.
I would also mention specifically the question of increasing the VAT on ESB up to 10 per cent, again at no cost to the consumer, as I said at budget time.
The basic questions of the precise rates of VAT and excise to apply after 1992 and the goods which will qualify for the different rates of VAT have still to be settled. The timetable set last year does not envisage decisions in these sensitive areas until next year but we are trying to make as much progress as possible during our Presidency.
By reducing our standard VAT rate this year we have shown that we are willing to play our part in advancing tax approximation, despite the very serious financial implications for this country. Following the request which I made last year, the EC Commission are at present studying our problems. I hope that this study, which I expect to be completed shortly, will help to indicate solutions to some of our difficulties in this area.
Part IV of the Bill deals with stamp duty. Sections 108 and 109 deal with two stamp duty levies. The bank levy is being renewed for 1990 and will yield £36 million, the same amount as last year. The 3 per cent levy on investment in life assurance linked funds is being extended to investment in unit trusts and similar investment funds, so as to remove a tax distortion between these two categories of investment media.
What is happening at the moment is that unit trust funds were being marketed into this country out of Luxembourg. They enjoyed a competitive edge here and would seriously damage the sale of our own unit-linked funds. This is basically a balancing factor. I, therefore, introduced amendments in Part IV of this Bill which rationalised rate bands under various headings. These changes would clarify and simplify the way stamp duties are applied.
The Stamp Duty Act is almost 100 years in existence and the types and methods of transactions, especially in the financial services sector, have changed over the years. I have, therefore, introduced amendments in Part IV of the Bill which rationalise the rates bands under various headings. These changes will clarify and simplify the way stamp duties are applied.
I have also made provision for an exemption from companies capital duty for collective investment undertakings which come under the UCITs directive. This measure is at section 115.
As I announced in my budget speech, provision has been made, at section 112, for the charging of full stamp duty on certain expensive new houses which could previously avoid duty. This measure will not become operative until 1 September next in order that persons who signed contracts prior to my announcement may complete their transactions. Basically, what is involved there is two separate contracts — one for the site and one for the house — and you pay stamp duty on the site and nothing else. It was an abuse of the stamp duty and was certainly totally inequitable when compared with the sale of a second-hand house in the same bracket or category where stamp duty would have to be paid at the full rate.
Part V of the Bill deals with residential property tax. In addition to a number of technical amendments which will facilitate self-assessment of this tax, I have made provision at section 125 for the restoration of child relief in respect of the tax. Which had been taken away some years ago.
Part VI of the Bill deals with capital acquisitions tax. Since capital acquisitions tax was introduced in 1976 it has undergone a number of amendments which impinge on the exposure to this tax. This exposure arises roughly once every generation and unless provision is made to meet it the resources of a taxpayer can be diminished. Special insurance policies can be taken out to cover inheritance tax liabilities. The amendment at section 130 of this Bill will enhance their popularity. Section 127 of the Bill provides for an exemption from tax for gifts taken by one spouse from the other.
The Bill also provides for the indexation of the capital acquisition tax thresholds which have remained unchanged since 1978. These thresholds will, in future, be indexed in value each year and this should give useful relief in certain cases. The revised thresholds will apply to all gifts and inheritances taken on or after 1 january 1990.
In this opening address I have concentrated on the key provisions of the Bill as well as outlining general Government policy on the economy and on tax reform. The Bill also contains additional measures to counter tax avoidance as well as other provisions of a mainly technical nature and these items can be discussed on Committee Stage.
I commend the Bill to the House.
