The objective of this Finance Bill is to provide a legislative basis for the taxation measures which I announced, or foreshadowed, in my Financial Statement on 30 January. It also provides for a number of other important changes which I have drawn up since the budget. These are all within the philosophy of balanced economic and social development underlying the Programme for Economic and Social Progress. This year's Bill is again a lengthy and complex one. Unfortunately, there is no way of avoiding this, given the complexity of 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 Dáil Éireann.
Despite the constraints imposed by difficult external conditions, the Government are making further significant steps in taxation reform again in 1991. The provisions of this Bill, taken with those of the 1990 Finance Act, represent major progress towards gearing our tax system to the needs of the economy and to the requirements of the EC Single Market. In a little more than one year, we will have achieved: a reduction of 3 percentage points in the standard and top rates of income tax; a cut of 4 percentage points in the standard VAT rate; a considerable narrowing of the difference in excises between this country and the UK; a reduction in the standard rate of corporation tax to 40 per cent from 1 April this year, and significant reductions in the top rates of capital taxes.
This progress in reducing rates does not, however, represent the full extent of the Government's commitment to tax reform. It has to be seen in conjunction with: our determination to improve tax collection and enforcement, so that taxes due are paid promptly and fairly; our commitment to broadening the tax base generally, to making the tax system more equitable, and to ensuring that special reliefs and incentives are better targeted; our firm intention to build on the progress already made, especially in relation to personal income tax, which is so important for the attainment of our employment goals; our commitment to disciplined management of the public finances which, in the final analysis, is crucial to sustainable lower tax rates.
Before turning to the specific provisions of this Bill, I will outline our broad economic and budgetary strategy and comment briefly on the immediate prospects for the economy and on budgetary developments.
A key consideration in framing the 1991 budget was, of course, to maintain, despite the uncertainties in the international situation, the consistent and disciplined fiscal stance which has contributed so much to the improvement in our economy over the past few years. Through firm management of the public finances the EBR has been brought down to a level which compares very favourably with the EC average, and conforms with the general level in the other narrow band EMS countries. This progress gave us the sound base we needed to develop a stable exchange rate and a low inflation economy. On account of the reduction in annual borrowing, the heavy burden of debt and debt-service costs has begun to shrink; the debt-GNP ratio has already fallen from 131 per cent at end-1988 to 111 per cent last year. The target EBR, of 1.9 per cent of GNP, and the overall thrust of the budget, were directed at achieving a further significant reduction in this key ratio in 1991 and at facilitating the attainment of our medium-term objective in that regard.
The budgetary and taxation progress of the past few years has helped improve our competitiveness in the broadest sense. It has enabled us to face into this more testing year with a confidence that could not have been envisaged two or three years ago. We are well placed, on this account, to compete in export markets and to take advantage of the expected upturn in the world economy. My confident view on our economic progress is mirrored in articles which appeared only this week in both the Financial Times and The Guardian. These are not sources where one would normally expect to read complimentary features on Ireland's economic progress.
Let me now turn to the overall economic situation. The budget, as I indicated last January, was framed against a particularly clouded international background. Some of the uncertainties have since resolved themselves, in particular the then ongoing conflict in the Gulf, but others remain. When will the anticipated upturn in the UK and US economies materialise? More important, to what extent will that resurgence — still expected to begin later this year — underpin growth here during 1991? How will the path of interest rates evolve in Germany, given the continuing heavy budgetary costs of transforming the former East German economy? How quickly will domestic confidence react to an international recovery?
These considerations clearly leave considerable doubt about the pace of economic progress later this year here in Ireland but they should not obscure the improvements which have been achieved. Those remain to our credit. We face into the future with the benefits of:
improved competitiveness achieved under the Programme for National Recovery, and the ability, through the Programme for Economic and Social Progress, to retain this. A measure of our success in this area can be seen from the fact that compared with its main trading partners, Ireland's labour cost competitiveness improved by 18 per cent in common currency terms. Also, OECD forecasts expect Ireland to have the lowest unit wage cost increases in the business sector of all OECD countries over the 1991-92 period;
a falling ratio of debt to GNP and a consequently declining burden of debt-service costs;
domestic and international conviction in our firm commitment to maintaining the exchange rate value of the Irish pound;
major reductions, relative to key European rates, in our domestic interest rates;
a structure of taxation which is more favourable to initiative and effort;
and a major programme of infrastructural improvement aimed at enhancing our capacity to capture market share in a rapidly-integrating Community economy.
These features are all standing to us now in the midst of an international slowdown which, in the UK, is much deeper than had been anticipated and is prompting steep employment losses there. They are limiting its impact on Ireland and they will help us still more as recovery gets under way abroad.
This is the background against which we should consider what the various economic indicators tell us. Of course, they indicate a parallel slowing of activity here. There is no denying that. Indeed, I had foreshadowed a pattern of weaker activity as recession abroad flowed over to affect us; and an expectation of gathering strength as international conditions improved.
The retail sales indices to end-February show clearly that there has been a major fall-off in garage sales; but also that there was significant growth in demand for other goods at the consumer level even at the height of the Gulf crisis and in advance of the further 2 per cent reduction in VAT which I introduced this year. It would be premature to infer a bleak 1991 for consumption growth but it would be wrong, too, to suggest that the ground lost during the crisis period will be fully made up in the event that the mooted international recovery is delayed.
As to investment, I understand that the IDA are holding firmly to their target for 13,000 new jobs in 1991. This is encouraging. Nonetheless, the slowing trend of imports of capital goods through 1990 would point to some weakening in plant and equipment investment and available motor vehicle registration data — including goods and other vehicles as well as cars — tend to confirm this. Of course, there are unknowns: to what extent might special factors — the uncertainty prevailing in the latter months of 1990, the threat to tourism posed by actual hostilities in the Gulf — have caused deferral of investment rather than cancellation? I have no doubt that we can anticipate renewed momentum as international activity quickens. The improved fundamentals which I have already mentioned will stand to us.
As to construction activity, the domestic effects of high interest rates in Europe are scarcely helpful. However, the limited indicators available seem somewhat divergent. On the one hand there are estimates of a 10 per cent-plus fall-off in total cement sales during the first quarter but the trend in numbers employed in the larger construction firms, while less buoyant than I would have hoped at a year-on-year increase of about 1 per cent over the quarter, scarcely points in the same direction. It would be wrong not to acknowledge that the sector is facing a more difficult climate but, taking account of higher public outlays on construction, I remain of the view that the sector can grow this year.
As to unemployment, there is no doubt in my mind that the increases we have witnessed this year in large measure reflect altered migration patterns — for the most part a consequence of the UK recession. Income tax and related receipts to date would not support a contention that aggregate earnings are out of line with expectations; and, since it seems clear that there is continued adherence to pay moderation, neither would they support a view that net employment losses are the culprit.
Taken together, the various indicators point to a slowing-down from the very rapid growth we achieved over the past few years. The recent OECD and ESRI reports forecast a slowdown but not the drastic slowdown forecast by certain commentators. We should be temperate in our interpretation of the slowdown.
It is not a sign of failure of domestic policies. It is not a signal for a change in course. Instead, it confirms our dependence on international trade for economic progress and underlines the need to continue with policies which are designed to enable Ireland to succeed on international markets.
The weakened pace of advance raises two key questions. First, will the anticipated recovery on the international scene get underway to a worthwhile extent before the end of this year? And, second, will we here in Ireland continue to act in a fashion which enables the country to take full advantage of the upturn when it comes? We cannot, as a small country, make an international recovery "happen" but we can through our behaviour over coming months determine in large measure how much benefit Ireland can gain from that recovery.
We can continue to work together in accord with the spirit of the PESP, and reap the gains it was designed to deliver, as the UK and US economies turn the corner but we must keep to its spirit in full. If we are to merit, and obtain, its rewards we must all exercise the restraint it demands, chiefly in terms of pay developments, of contributing to industrial peace and of supporting a responsible evolution of the budgetary balance. Failure in any key respect would threaten progress; and with it, the employment prospects of many and the aspiration to higher living standards of all.
Any such failure would magnify the adverse effects of the current international sluggishness. It would hinder already damaged investment confidence. It would undermine the prospect that later economic strength could compensate for initially weaker activity in 1991. It would contribute to a slowing of tax yields and would add to budgetary outlays and in the longer term it would both undermine prospects for employment growth and make reduction in unemployment that much more difficult.
I would like to turn at this point to the speculation about whether the budget is on course or not. There is nothing new in that, nor nothing harmful in itself; the reality is that no forecast can claim infallibility. But the matter must be kept in perspective. Charting a disciplined course and sticking to it is the real test of budgetary management. What is far more important than any figures is whether the policy thrust defined in the budget is adhered to. The Government have not been found wanting in this respect. We have over the past few years kept our sights consistently on where we were going, resisting the temptation to exploit the apparent latitude given by more favourable economic trends and their repercussions in the headline budget figures.
I made clear in presenting this year's budget that the prospective economic environment in 1991 was both less favourable than had been the case in earlier years and subject to an unusual degree of uncertainty because of events on the wider international stage. I made no secret of the fact that the budgetary arithmetic was based in the premise that growth would slow significantly, albeit for reasons outside our control.
The indicators I quoted earlier broadly accord with that expectation — though it must be borne in mind that, even adding everything together, there is not a great deal of hard information at this stage. In some cases they suggest a more pronounced weakening than postulated at budget time: this is certainly the position for car sales and for activity in the secondhand housing market, both of which are significant for revenue, though not for economic growth. In other cases, however, the picture is quite positive: mainstream consumer spending, leaving cars aside, and total employment seem well in line with expectations. To the extent that revenues in the overall are running a little behind what I might have hoped for, this does not support the view that there is general weakness. A few specific cyclical influences are the primary cause and, to an extent, the same can be said of the pressure on social spending arising from the unexpected migratory pattern.
While it will be difficult to retrieve the losses in these areas, a conclusion that the budget targets are beyond reach would be quite premature, given the exceptional circumstances of the first few months of this year and the fact that the figures are still reflecting the major tax reliefs in the budget of 1990. To infer that revenue slippage, especially of the kind emerging so far — or, even more so, the impact on the welfare cost of unemployment of external conditions — represents a relaxation of policy let alone a loss of control over the public finances, is simply untenable. If such unavoidable shortfalls in revenue or overruns in expenditure do threaten, these do not mean that the central thrust of the Government's fiscal discipline has been impaired, the important thing, I would repeat, is that we remain well placed to achieve our medium-term budgetary objectives and that underlying slippage is contained. As I stressed in my budget speech, the emerging evidence will be carefully evaluated. If action is considered necessary to safeguard our hard-won budgetary stability and our medium-term goals, we will do what we believe to be appropriate.
As the House will be aware, improvements in domestic liquidity conditions and reductions in interbank interest rates resulted in a reduction of one-half per cent in retail interest rates earlier this year, providing a welcome boost for mortgage holders, business, farmers and other borrowers. Further progress on interest rates this year will, of course, be heavily dependent on the international interest rate environment. However, the continuing strength of our economic fundamentals should leave us in good position to take advantage of favourable international developments as they occur. Such favourable developments would be more than welcome.
Since the Seanad does not have a debate on the budget, I might take this opportunity to say a few words about the Government's policy in regard to public expenditure. We have since 1987 pursued a policy of controlling and reducing public expenditure. Expenditure had to be constrained because its growth was leading to unsustainable levels of both borrowing and taxation but this difficult task had to be approached in a socially acceptable manner. While all spending areas were obliged to contribute to the reductions, we took great care to ensure that there was no serious deterioration in the quality or quantity of essential public services. This involved rigorous scrutiny of all spending programmes and making them more efficient and cost effective.
Such virtue in regard to the careful management of the public finances got its due reward in greater economic growth, which allowed us to make some modest improvements in services and ease the tax burden, while still ensuring an ongoing improvement in the Exchequer's position. I might put some figures on all those words and quantify the progress we have made. In 1987, for example, the Exchequer borrowing requirement amounted to 9.9 per cent of GNP; by 1990 it had been reduced to 2 per cent and, as I said earlier, the debt to GNP ratio, which reached a high of 131 per cent in 1987, had been brought down to 111 per cent by the end of 1990.
Much still remains to be done. If deficits must continue to decline and there are constraints both internal and external on increasing the tax burden, then we cannot avoid continuing firm control of the public finances if the Government's medium-term budgetary targets are to be achieved. The recently-concluded Programme for Economic and Social Progress has established a social consensus for an integrated medium-term strategy which should see continuing growth while still firmly underpinning the process of adjustment.
I would now like to deal with the more significant elements of the Bill. The first three sections of the Bill contain the necessary legislative provisions for the budget package of income tax reliefs. These reliefs follow the pattern set over recent years in making special provision for the low-paid and extending the standard band while continuing to reduce income tax rates. This year I am also increasing the personal allowance.
To begin with the exemption limits, the Bill provides for an increase of £150 for a single person and £300 for a married couple in the general and age exemption limits. This brings the general exemption limit to £3,400 for a single person and £6,800 for a married couple. In addition, I have increased the child addition to the exemption limits from £300 to £500 in respect of third and subsequent children. I introduced the child addition in 1989, at a figure of £200 per child; last year I increased it to £300 per child, and this year it is increased to £500 for the third and subsequent children. This child addition, and indeed the exemption limit increases of recent years, were introduced to provide cost-effective and targeted help for a group which has been identified as being in special need, low-paid taxpayers with family responsibilities.
The increase for such taxpayers have been very substantial. In 1988 the exemption limit for a married couple, regardless of whether they had children, was £5,500. It is now £6,800 for a married couple with no children, an increase of nearly 24 per cent. For a married couple with two children, the increase is to £7,400, or nearly 35 per cent; for a married couple with four children, the increase is to £7,900, or nearly 44 per cent higher than the 1988 figure. When one considers the low rate of inflation which has been obtained in recent years one can see just how substantial these increases have been. In fact, the cost of living over that period was just 10 per cent, whereas there were increases in the tax exemption and child limits ranging from 24 per cent to 77 per cent, against a cost of living increase of 10 per cent, in the same period. I am also increasing the personal allowance this year by £50 for a single person and £100 for a married couple, with consequential increases in the widowed, widowed parent and single parent allowances.
The second area on which income tax policy had focused in recent years is on extending the standard band. This year I am extending this band by £200 for a single person and £400 for a married couple. This brings the £2,000 for a single person, and £4,000 for a married couple, the total extension of the standard rate band which has been implemented since 1987 — an increase of over 40 per cent.
The third area on which I have concentrated is on reducing income tax rates. The top rate of tax has already been reduced from 58 per cent to 53 per cent, and this year I am reducing it to 52 per cent. The standard rate, which stood unchanged at 35 per cent for over 20 years until I cut it in 1989, is being reduced to 29 per cent. This reduction will also apply to the withholding tax on professional fees and the deposit interest retention tax.
Of course, the Government are committed to reducing tax rates still further as budgetary circumstances allow. Our objective, social progess, is to further reduce the standard rate, to 25 per cent by 1993, and to move to a single higher rate. As I said in my budget speech, our aim is to reduce both the standard and top rates by 2 per cent in each of the next two years.
The opening sections of the Bill also contain other provisions of benefit to taxpayers. For example, section 4 provides for a new allowance I introduced this year to help widowed parents in the difficult years following the death of their spouse. The allowance applies in the three tax years following the year of bereavement, and is £1,500 in the first such year, £1,000 in the second and £500 in the third. The allowance applies with effect from the current tax year, and I introduced an amendment in the Dáil to ensure that widowed parents bereaved in 1988-89 and 1989-90 — who are still within the three-year cycle, so to speak, following bereavement-will be able to benefit this year. I am very pleased to have been able to introduce this new post-bereavement allowance for widowed parents.
Another provision I am glad to be associated with is section 8, which increases the ceilings on rent relief available to taxpayers aged 55 years and over. The ceilings are being increased from £750 to £1,000 for single persons and from £1,500 to £2,000 for married couples. In addition, I am introducing a special ceiling of £1,500 for widowed taxpayers.
Two new sections stand at the end of Chapter I. The first provides that the superannuation arrangements agreed for doctors participating in the revised general medical services scheme contract will have the same status for tax purposes as an occupational pension scheme. This was recommended by the chairman of the negotiations which led to the conclusion of the revised contract. The second exempts from income tax the income of the Great Book of Ireland Trust arising from the sale of the Great Book of Ireland, and establishes that payments made by the Trust to Clashganna Mills Trust Limited and Poetry Ireland Limited will not be subject to deduction of tax at the standard rate.
Finally in this area, I would draw Senators' attention particularly to section 126. I introduced this section as an amendment in the Dáil, to give some help to the parents of incapacitated children. As Senators may be aware, at present the £600 incapacitated child tax allowance is reduced pound for pound with any income of the child in excess of £720 a year. Section 126 increases this £720 figure to £2,100 a year. I am very pleased to be able to implement this improvement.
Section 27 deals with a new form of the tax avoidance practice known as bondwashing. Essentially, bondwashing means converting taxable interest income into a tax-free capital gain. Section 29 of the Finance Act, 1984, countered the device then being employed under which securities were sold "cum-dividend" so that, effectively, the accured interest on the security was received by the vendor in the form of a tax-exempt capital gain rather than as income which would be taxable. Section 29 dealt with this practice by deeming interest to accure on a day-to-day basis and charging the seller to tax on the interest accrued from the last interest payment date or, if later, the date on which he acquired the security, up to the date of sale. However, the 1984 Act does not deal with the ex-dividend period, normally about a month long, between the date on which a security goes ex-dividend and the date on which the dividend is paid. It has recently come to my attention that bondwashing is being engaged in in respect of this period, resulting effectively in tax-free interest income. Basically what happens is that there is an ex-dividend period of about a month when people get interest tax-free because it is translated into capital gains and, of course, Government bonds do not incur capital gains tax. Section 27 deals with these transactions based on the ex-dividend period. The section applies to transactions which take place on or after 18 May 1991.
Chapter II of the Bill deals with the business expansion scheme. It provides for the changes set out in the budget day Financial Resolution on the scheme, and for the transitional arrangements and other measures relating to it which I announced in my statement of 12 March.
The changes are as follows. The scheme itself is being extended for two years, until 5 April 1993. Secondly, shipping, hotels, guesthouses and self-catering accommodation are being excluded. Thirdly, the amount of BES funding an individual company can raise under the scheme is being reduced from £2.5 million to £500,000. Fourthly, a lifetime cap of £75,000 is being imposed on the amount on which an individual taxpayer can claim relief. Subject to transitional arrangements which I will describe in a moment, these measures relate to shares issued on or after 30 January.
On 12 March I issued a statement setting out transitional arrangements to apply to companies which, in the period between 1 January 1990 and 30 January 1991, had entered into binding contracts in writing to purchase or lease land or buildings, or plant or machinery, or to construct or refurbish a building, in the case of manufacturing, international services, or tourism companies; or to purchase a ship in the case of shipping companies. Companies which had entered into such contractual commitments by that date would, subject to meeting certain conditions, be permitted to raise up to £1 million in BES funding — less, of course, any BES funding already raised. To qualify under those arrangements, shares must be issued by 31 August, 1991. Section 16 of the Bill provides accordingly. My 12 March statement also dealt with multiple companies and loans to subsidiaries, and section 17 includes provision for those. Section 17 also ends the facility for a company to on-lend to a qualifying subsidiary funds raised under the BES; such funds can, in future, only be used to acquire shares in rather than on-lend to the subsidiary.
These two provisions will apply in respect of eligible shares issued on or after 12 March, except for companies qualifying under the transitional arrangements, or where a company had applied to Revenue for outline BES approval, or issued a BES prospectus, before that date.
I should like at this point to make some general remarks about the business expansion scheme and the purpose of the changes I am making to it. The first thing I want to say is that the intention is to refocus the BES on its proper course of generating capital for smaller, riskier companies. Hence the exclusion of asset-backed sectors and the reduction of the company limit from £2.5 million to £500,000. Without these changes, the cost of renewing the scheme would have been prohibitive and small operators who are seeking allocations from the limited funds available for BES would most likely miss out.
The second thing I want to do is to nail the accusation that the BES is dead as far as tourism is concerned. It is not. There is still a large number of non-accommodation tourist facilities which qualify for investment under the scheme; for example, marina services, cruiser hire, equestrian centre services and tour coach services. In fact, the exclusion of asset-backed sectors should improve the chances that such ventures will, in fact, be able to raise funds under the scheme.
The third point concerns the transitional arrangements I made in March. They were a recognition that there were cases where binding contracts in writing had been entered into on or before budget day in anticipation of BES funds. It was to deal with the difficulties that would arise for companies, especially smaller companies, where such contracts existed that I announced these transitional arrangements. They are, however, transitional only; only a limited number of companies will be able to benefit from them, and only to the extent of £1 million per company less any BES funds already raised, and only where the shares are issued by 31 August. The Government do not wish to put small operators out of business, which is why I introduced these transitional arrangements on 12 March. However, the budget measures remain; a lifetime cap has been imposed on investors, the company limit has been reduced from £2.5 million to £500,000, and shipping, hotels, guesthouses and self-catering accommodation are excluded. So it will remain.
I also want to mention the review of the scheme carried out by my Department, in conjunction with the Departments of Industry and Commerce, Tourism and Transport, and the Marine and the Office of the Revenue Commissioners. This review makes clear that whatever the cause and effect, additional jobs were arising in companies which raised BES funds. It also threw light on the question of where the BES was most cost-effective which, in the final analysis, is the key question about any incentive scheme.
The review covered 347 companies and identified some 4,250 additional jobs in those companies. It identified State aid in respect of those companies of some £74 million, between tax foregone under the BES and direct State aid in the form of IDA grants. Of course, it is not possible to establish objectively and to the exclusion of the element of judgment, that State support — including low-cost finance under the BES — was directly the cause of the additional jobs identified. Employment growth is very likely to have reflected other influences as well, not least the favourable economic climate which has existed in recent years. In addition, account was not taken of possible effects on non-BES companies, in the relevant sectors or otherwise. Nevertheless, it is reasonable to assume that BES funding played some part. It will also be noted that there were significant variations across sectors in the level of additional jobs identified. These considerations underpinned, although were not the only factors in, the budget decisions on the BES.
There are three sections in the Bill with particular reference to income tax on farming. The existing income tax exemption for certain lessors of farmland is being increased from £2,000 to £3,000 where leases are for at least five years, and to £4,000 where leases are for seven or more years. This is provided for in section 10. Stock relief, which is confined to the farming sector, is being renewed for a further two-year period in section 18.
As a measure to assist in the control of farmyard pollution, section 25 extends accelerated capital allowances to farmers at a rate of 50 per cent for capital expenditure incurred on works which have been grant-aided under either the farm improvement programme or the scheme of investment aid for the control of farmyard pollution. I introduced a technical amendment on Committee Stage in the Dáil in order to clarify that only expenditure on grant-aided works can qualify, on the usual net-of-grant basis. This will target the relief on anti-pollution works which are satisfactorily undertaken to technical specifications.
To date, some 160 projects have been approved for the International Financial Services Centre and companies there have entered into definite employment commitments for almost 2,600 new jobs. The centre has been a great success and the Bill contains a number of provisions which will help ensure that it will continue to thrive.
In the case of investment companies which have been designated by the Central Bank, section 19 provides for "tax transparency", that is foreign investors will only be liable in their home countries for any tax due in respect of their shares in the income or gains of the company, this brings them into line with similar investment vehicles such as UCITS. Undertakings for Collective Investment in Transferable Securities, and Unit Trusts.
Although insurance was one of the financial services listed for the IFSC in the Finance Act, 1987, life assurance business has not yet been attracted into the centre. I have included provisions in section 30 which will, I hope, ease the way for the entry of life assurance business, which has very significant employment potential, to the IFSC. The 10 per cent rate of corporation tax is a vital part of the package which has been designed to attract business to the IFSC. Originally, that incentive was due to expire on 31 December 2000. Following agreement with the EC Commission, that date is now being extended under section 34 to 31 December 2005. The period during which new projects may be approved for the IFSC has also been extended, from 31 December 1990 to 31 December 1994. This is a major boost to the centre and will, I hope, help to attract many more companies to it. There is no doubt in my mind that the centre has an important part to play in the worldwide financial services industry and it is the Government's intention to ensure that it can continue to do so.
As with the IFSC, the Bill also extends the expiry date for the Shannon 10 per cent tax rate from 31 December 2000 to 31 December 2005. In addition, the provisions in sections 19 and 110, in relation to investment companies, will apply to the Shannon Zone.
The Bill contains a series of measures which will assist business and promote investment. I should like to draw particular attention to Chapter VIII of Part I which will facilitate non-quoted companies to buy back their own shares-a concept introduced by the Companies Act, 1990. Subject to certain anti-avoidance safeguards the shareholder's gain on the buy back of shares of unquoted companies will now be liable to capital gains tax rather than income tax. This will result in a substantial reduction in the shareholder's tax liability in such situations. The new tax treatment will facilitate shareholders in non-quoted companies who wish to sell their shares and end their association with the company. Effectively, up to now there has been no market in unquoted shares and the changes will greatly increase the liquidity of these shares.
The 1989 Insurance Act allowed the amalgamation of ordinary and industrial branch funds of life assurance companies into a common fund for life assurance policies, and section 30 brings the tax legislation into line with this assurance law change.
Section 29 permits a life assurance company to purchase the shares of their quoted parent company without incurring an advance corporation tax charge. This section is being introduced as a result of section 9 of the 1990 Insurance Act which specifically provided for such a transaction under assurance company law. It is considered desirable that a life assurance company be allowed to invest in the shares of their quoted parent so that they can offer their policyholders a comprehensive Irish equity portfolio. For example, if after the flotation of Irish Life, the existing company were not allowed to purchase shares in the new holding company, this would deprive policyholders of Irish Life of a share in their new equity portfolio.
Taxation provisions aimed at facilitating the securitisation of mortgages are contained in section 31. Securitisation is an arrangement whereby a bank or a building society, with the consent of the borrower, sells off a package of its mortgages through an intermediary to investors such as pension funds and life assurance companies. Securitisation will create a new investment outlet in the State for pension funds and life assurance companies as well as providing the scope for extra mortgage finance for the banks and building societies.
Under section 35 the termination date for the special 10 per cent rate of corporation tax is being extended from 2000 to 2010 for certain limited activities.
The EC directive on a common system of taxation for the distribution of profits from a subsidiary company in one EC country to its parent located in another member state is converted into domestic tax law in section 36. This directive is part of a package of three measures on which agreement was achieved during Ireland's EC Presidency after a delay of 21 years. The other two measures deal with mergers, divisions, transfers of assets and exchanges of shares involving companies in different member states and with an arbitration procedure where there is disagreement between the Revenue authorities in different EC countries on a particular double taxation question. Due to technical difficulties at EC level, the provisions in the Mergers Directive will not be enacted until next year with retrospective effect to 1 January 1992. The new arbitration convention will be dealt with by way of a Government order in accordance with the normal practice for double taxation treaties.
Section 39 extends until 31 March 1992 the tax relief for corporate donations to the Trust for Community Initiatives. This trust was established by the business community as a result of my invitation to them in the 1989 budget for an initiative to promote a wide range of community development projects throughout the country aimed at alleviating poverty and increasing employment.
In section 23 I have relaxed the present condition that buildings must be unused when acquired in order for initial capital allowances to be available to the purchaser. As current commercial practice is usually to sell tenanted buildings, this section will assist property developments, especially in designated areas.
I mentioned on Committee Stage in the Dáil that there is to be a review of the annual wear and tear allowances for plant and machinery. The Finance Acts of 1988 and 1990 reduced the standard rate of corporation tax from 50 per cent to 40 per cent in three stages. To fund the rate reduction, the accelerated capital allowances, which were available for plant and machinery other than motor vehicles, where phased-out progressively. From 1 April this year, from when the 40 per cent tax rate applies, the accelerated allowances are limited to 25 per cent, and they will terminate altogether from 1 April 1992. Consequently, from 1 April next year, the tax depreciation rules that will apply to plant and machinery generally will be the annual wear and tear capital allowances. They involve depreciation rates ranging from 10 per cent to 25 per cent, calculated on a reducing balance basis, with a rate of 20 per cent for motor vehicles to which accelerated allowances never applied.
In view of the greater significance that will attach to the annual allowances in the absence of accelerated write-offs, it has been decided that they should now be reviewed. The review will examine whether, in the light of developments since the present structure was put in place, changes are warranted, either in the various rates or in their scope. Obviously, an important consideration must be the implications for the Exchequer, bearing in mind that the standard rate of corporation tax has already been reduced, and that the Government have reaffirmed, in the Programme for Economic and Social Progress, the objective of an increased yield from the corporate sector. Since it is desirable that the business community should be able to plan on the basis of certainty, I intend to announce the Government's response to the findings of the review before the end of the summer. Legislative provision for any changes that the Government may decide to make will be contained in the 1992 Finance Bill.
Section 28 is concerned with domestic-sourced section 84 loans and it reduces the cost to the Exchequer of these loans by the implementation of two measures. First, the ceiling for new loans is being lowered from 75 per cent to 40 per cent of the loan volume of each lender as at 12 April 1989. This reduction will take general effect from 31 December next, which is the date that about £500 million in loans to Shannon financial service companies will be repaid.
The second measure is aimed at high coupon loans. These are section 84 loans in certain foreign currencies which have high interest rates and which consequently are much more costly to the Exchequer than IR£ section 84 loans. With effect from budget day 1991, the section 84 loan interest will be taxed in the hands of the lender where the interest rate involved exceeds 80 per cent of the three month IR£ DIBOR rate. Sterling loans are being specifically excluded from the scope of this measure in view of the fact that the UK is still our major trading partner. In the case of both the above measures, transitional arrangements will apply in the case of loans for certain new manufacturing projects.
Section 21 and 24 are designed to combat abuses of certain tax reliefs for property investment. Section 21 ensures that lessees in the urban renewal designated areas obtain the double rent allowance for no more than ten years on the same property. Section 24 is directed against the unacceptable and unintended use of capital allowances on buildings in the designated areas in the case of certain property investment schemes. This would have led to a substantial front-loading tax losses to the Exchequer in 1991 and subsequent years. I announced in the budget that the scope of the capital allowances in question would be restricted in the case of such schemes and, accordingly, section 24 implements my budget announcement.
Over the last few years, I have been gradually introducing self-assessment for various taxes. Income tax, corporation tax and capital acquisitions tax have already been changed to a self-assessment system. This year, as announced in the budget, I am introducing self-assessment for capital gains tax. The provisions which give effect to this decision are in Chapter VI. Capital gains tax will continue to be due in the year following that in which the disposal of the assets occurs. An explanatory booklet has been produced by the Revenue Commissioners to help taxpayers and their agents in the changeover to the new system. This has been posted to taxpayers and their agents and is available on request from tax offices.
Chapter VI also contains special provision relieving capital gains tax under certain circumstances. In order to make it easier for a person to retire from a family business or farm, two changes in the operation of capital gains tax are made. The first increases the threshold for relief on disposal of a business or farm outside the family from £50,000 to £200,000. The second eases the working requirement for a director of a family firm on retirement. The requirement that the director have worked full-time for ten years with the firm is eased to ten years working with the firm, of which five years must have been full-time. In addition, to relieve hardship, particularly in cases where a person was ill prior to retirement, the ten years will no longer have to be immediately before the disposal of the shares. These measures will facilitate those who wish to retire from a family business or farm and enable businesses and farms pass on to younger management.
Due to the high cost of arts works, it has become more difficult for Irish galleries to acquire significant works of art. I have introduced a special provision to encourage private owners of art works to lend them to galleries for display to the public. Any work of art, worth over £25,000, which is on loan to an approved gallery for a six year period, will be exempt from capital gains tax on its subsequent disposal.
Certain general urban renewal measures are contained in Chapter VII, together with a specific set of incentives for the Temple Bar area. The renewal and refurbishment of this area is intended as the Government's flagship project to market the choice of Dublin as European City of Culture in 1991. The unique streetscape and fabric of buildings in the area required the devising of special tax reliefs which would encourage their sensitive refurbishment and conservation, and also that the activities associated with them should be in keeping with the character of the area. An important supervisory role will be exercised by Temple Bar Renewal Limited in ensuring that appropriate standards are maintained in refurbishment and construction works. These works will only qualify for the special tax reliefs if they have the approval of that company. The reliefs themselves, which will be available for a five year period to 5 April 1996 are inclusive of those available in designated areas but with an emphasis on a new broad definition of "refurbishment" which will also cover the cost or value of refurbished buildings.
The definition of the Temple Bar area is set out in the Second Schedule to the Bill. The details of the tax reliefs for the area are in section 55. Broadly, these relate to expenditure on two categories of building — existing and new. A 100 per cent allowance is being given to owner-occupiers for capital expenditure on refurbishment of their premises, whether commercial or industrial. "Expenditure" will be taken to include the cost of the building or its value as at 1 January 1991, provided that the amount spent on refurbishment is at least equal to the cost or value. In the case of a lessor, a 50 per cent initial and 4 per cent annual allowance will be given. For owner-occupiers who refurbish their residential properties, a 100 per cent allowance will also be available, given as 10 per cent per annum for ten years.
For new commercial or industrial buildings, owner-occupiers can get a 50 per cent capital allowance or, in the case of lessors, a 25 per cent initial and 2 per cent annual allowance. New residential buildings will attract a 50 per cent owner-occupier allowance, at 5 per cent per annum for ten years. Section 23 reliefs will apply to both refurbished and converted existing residential buildings, and to newly-constructed residential premises. Double-rent allowance will be available to lessees of commercial or industrial premises.
Finally, in order to assist the development of multi-storey car parks in the Temple Bar area, a 100 per cent capital allowance will be provided. It will not be necessary that these car parks should be free-standing, as is the usual requirement. They can be integrated with a commercial development in order to blend in sympathetically with the architecture of Temple Bar.
The general urban renewal measures are continued in the remaining sections of Chapter VII. The extension of the section 23 reliefs for construction and conversion for a final year, up until 31 March 1992 in the non-designated areas is provided for in section 56, together with specific extensions in the designated areas up until 31 May 1993 and in the Custom House Docks area until 24 January 1993. In the case of the Temple Bar area, the section 23 reliefs will be available until 5 April 1996. This section also removes the "ring-fence" on conversion expenditure under section 23 which is incurred in the designated areas and in the Temple Bar area, to allow offset against all rental income. Section 57 similarly extends the timescales for section 23 refurbishment expenditure and also similarly removes the "ring-fence" for such expenditure.
Finally, section 58 parallels sections 56 and 57 where expenditure under section 23 in the case of converting a nonresidential building into a single dwelling is concerned.
Part II of the Bill deals with Customs and Excise provisions. In the main, it implements budget changes regarding: tobacco taxation, the concessions for liquified petroleum gas, including that for the horticulture industry, and road tax restructuring and rationalisation. It also provides for special low rates of road tax for veteran and vintage vehicles which will take effect from 1 July 1991.
Section 74, which deals with hydrocarbon oils was amended on its passage through the Dáil in order to provide a basis for the Revenue Commissioners to make regulations prohibiting the importation of kerosene containing a UK marker, once kerosene for consumption in the State is distinctively marked, as has been agreed with the trade. This amendment also has the effect of reinforcing the basis for regulations relating to marked gas oil already made and is another instrument with which Customs and Excise staff may combat smuggling from the North of Ireland.
Section 124 provides for a reduction in the level of adaptation required from 30 per cent to 20 per cent of the tax exclusive cost of the vehicle for qualification under the disabled passenger provisions of the disabled driver scheme. A general review of the scheme of tax concessions available to disabled drivers and passengers is under way at present; as part of this review I will be consulting with Opposition spokespersons in due course. However, I consider it desirable to make this change before completing the review, otherwise, as this particular change requires specific amending legislation it would have to wait until next year's Finance Bill.
Part III of the Bill gives effect to the VAT changes announced in the budget, as well as a number of further measures, some which were adopted on Committee Stage in the Dáil. The budget measures comprise the reduction of two percentage points in the standard rate to 21 per cent, the increase from 10 to 12.5 per cent on certain low-rated goods and services, the placing of all tourist-related accommodation on an equal footing for VAT purposes and the taxation of veterinary services and of certain non-postal services of An Post. As I announced on budget day, the net current year effect of the rates changes, which took effect on 1 March last, is to return £37 million to consumers and represents further progress towards the likely post-1992 completed EC Single Market rating structure. The VAT reductions in the past two years have significantly eased the fiscal incentive for cross-Border shopping and have facilitated the recent liberalisation of the travellers' allowances regime and has reversed the trend in cross-Border shopping for practically all items at this stage except for a small number.
The other VAT measures are mainly technical in nature. The VAT liability at 12.5 per cent attaching to contract cleaning is clarified in section 87 which also provides that, in recognition of their effective movement from exempt to taxable status, jockeys' fees will be made liable to VAT at the 12.5 per cent rate, subject to the usual registration thresholds.
Finally, I propose, in section 131, to defer the commencement date for the extension of VAT to tourist-related accommodation until 1 January 1992. This is in response to representations which said that the new VAT rate could be coming in in the middle of the tourist season when most people had their prices already struck with tour operators. Small operators engaged only in seasonal business where the turnover is less than £15,000 will not be affected by the proposed new arrangements.
The law under which stamp duty operates is out of date; much of it has not been revised since 1891. The main provisions on stamp duty in this Bill are designed to bring this law into line with that pertaining to other taxes. Stamp duty is made compulsory. The Revenue Commissioners are given power to assess stamp duty liability and the penalties for non-payment or under payment are increased to realistic amounts for 1991. A new offence of negligence is introduced, a concept imported from the CAT legislation. These changes are to ensure the proper compliance with stamp duty regulations and enable the Revenue Commissioners to take action in cases of evasion, such as where so called "under-the-counter-payments" are made in property deals. These measures will, therefore, safeguard the £271 million collected each year in stamp duty and ensure that the tax is no longer "avoidable" but falls equally on everyone.
Since the publication of the Bill, a number of issues have been raised concerning the possible liability of certain types of financial transactions to tax. There is considerable uncertainty at present as to whether tax is liable on some documents and, if so, at what rate. To avoid this uncertainty, a practice of executing and stamping documents abroad has become widespread. This practice undermines the growing Irish financial services industry. The competition between countries for this type of business is very intense, and competing countries do not charge stamp duty on financial instruments. Therefore, I propose to exempt the financial services industry from paying duty on financial instruments. The Bill was amended on Committee Stage to allow for this exemption.
Unfortunately, the instruments which I wish to exempt are not neatly defined in the Stamp Act. Indeed, innovation is a major feature of the financial services industry and this means that any list of such instruments would need frequent up-dating. Therefore, to ensure sufficient flexibility to meet the needs of industry, I have included a section to allow the exemption of financial instruments by ministerial order. The orders made under this section may not include any of the major revenue earning items of stamp duty, land and houses, stocks and shares, cheques, mortgages on property, or insurance policies. The instruments which can be subject to ministerial order yielded less than £2 million in 1991. In addition, all ministerial orders will have to be laid before this House. So as to further safeguard the role of the Oireachtas in legislative matters, orders made must be ratified by the Oireachtas — effectively in the next Finance Act. Otherwise they will cease to have effect.
To allow time for consultation with the industry and the drawing up of the orders, the new collection and enforcement provisions of the Bill in the stamp duty area will not take effect until 1 November 1991. In amending the Bill to give this start date, I have also clarified the position of instruments executed before that date. The new provision will not apply to instruments executed and stamped before 1 November 1991. They will apply to all instruments executed and stamped after that date. Instruments executed before that date and stamped after it will pay the old late stamping penalty charges for the period up to that date and the new late penalty charges after that date. The new powers of inquiry will not apply to such instruments except to allow the Revenue Commissioners establish to their satisfaction the actual date of execution. This latter measure is to eliminate the possibility of fraud being perpetrated by back-dating documents to avoid the new law.
In keeping with Government policy to encourage oil exploration, an exemption is also introduced for petroleum exploration licences and leases. This exemption, again, has no cost as up to this any deals in such leases were executed and kept abroad.
The changes in capital acquisitions tax announced in the budget are put into effect by Part VI of the Bill. The top rate of tax is reduced from 55 per cent to 40 per cent. The conditions under which agricultural relief is given are amended in a way which will focus the relief on situations where a farm is being transferred to a working farmer. The relief is also increased to 55 per cent of the market value of the property while the maximum of £200,000 is retained.
Additional relief from inheritance tax is also allowed in two situations where difficulties have arisen for taxpayers as a result of the present law.
The first situation allows for a small number of tragic cases where an inheritance has passed from a child to a parent. This amendment will allow the class A threshold to apply to these cases. To allow the exemption to all known cases, it has been backdated to 1982. Last year, a farmer passed a farm to his son, who was later killed in an accident. When the farm reverted back to the father, he was liable for full taxes. This provision will ensure that this would no longer happen.
The second situation is when an elderly person inherits a house or part of a house in which he has been living from a brother or sister. Section 117 allows that if the successor is aged 55 or over and has lived in the house for at least five years then the value of the house may be reduced by £50,000 or 50 per cent, whichever is the lesser, for tax purposes.
Sections 118 and 119 are to extend to gift tax the type of insurance arrangement which currently apply to inheritance tax. This measure is to encourage people to make provision for the lifetime transfer of a farm or business to the succeeding generation. The tax amnesty for CAT and death duties which was announced in the budget is given effect by sections 120 and 122. The new enforcement measures, including the extension of the Revenue Commissioner's powers of attachment and enabling the Revenue sheriffs collect outstanding CAT liabilities are given effect in sections 128 and 129. These enforcement measures will come into effect after the amnesty.
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.
