SELECT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Tuesday, 29 Feb 2000

Vol. 3 No. 1

Finance Bill, 2000: Committee Stage.

Chairman

I welcome the Minister for Finance, his officials and the officials from the Revenue Commissioners. The select committee will consider Committee Stage of the Finance Bill in accordance with the timetable agreed in the Dáil on Thursday 24 February. If proceedings have not concluded by the stated time, they shall be brought to a conclusion by one question which shall be put from the chair and which shall, in relation to amendments, include only those set down or accepted by the Minister for Finance or a Minister of State nominated as substitute on his behalf. When a division is claimed in the proceedings of the Finance Bill, 2000, in the Select Committee on Finance and the Public Service, other than on a question put as provided for in paragraph 1 of the order of the Dáil of 24 February, the taking of such division and the putting of any question contingent thereon shall be postponed until (a) immediately before the time next appointed for the putting of a question in accordance with paragraph 1 or (b) in the event of such question not being put when proceedings in committee on the matters which would have been decided by the putting of such question have been otherwise completed. I ask for Members' co-operation in dealing with the chapters or sections of the Bill as indicated and, with Members' agreement, the select committee will take a sos at 1 p.m. until 2.30 p.m. and shall conclude at 6 p.m. Is that agreed? Agreed.

Tomorrow, Wednesday, 1 March, we will begin at 10 a.m., take a sos between 12.30 p.m. and 2 p.m. and conclude at 6 p.m. On Thursday, 2 March, we will begin at 10 a.m. and take a sos between 12 noon and 2 p.m. The session is due to conclude at 4.30 p.m. on Thursday.

Lists of amendments have been circulated.

SECTION 1.

Question proposed: "That section 1 stand part of the Bill."

Mr. Noonan

Does the Minister intend to circulate any further amendments of consequence?

Minister for Finance (Mr. McCreevy)

Not as far as I know.

Question put and agreed to.

NEW SECTION.

Mr. McDowell

I move amendment No. 1:

In page 11, before section 2, to insert the following new section:

"2.-Where a claimant proves for a year of assessment that income received by him or her consisted of dividends paid by a credit union within the meaning of the Credit Union Act, 1997, of an amount not greater than £750, the first £375 of such income shall be disregarded for the purposes of calculating his or her liability to income tax for that year of assessment.".

This amendment is similar to an amendment which I proposed last year shortly after the publication of the working group report into the taxation of credit union savings. The Minister has been contemplating the issue for the past year and we teased it out at considerable length some weeks ago during Private Members' business. The Minister is on record as recognising the special position of credit unions in Irish society. Credit unions provide a service to people who might not otherwise be able to obtain loans or who might not be able to obtain them with the same facility. The Minister is on record as having stated on at least a dozen occasions in the past year that he is considering the report of the working group. Since the matter was debated in the Dáil, the Taoiseach met with representatives of the Irish League of Credit Unions. A certain amount of spin doctoring occurred after that which seemed to suggest that the Taoiseach, his officials and the Minister's officials gave the representatives of the credit union movement a decent hearing and that something positive might result from the meeting at some future stage. This amendment will provide the Minister with an opportunity to inform us of what happened at the meeting, whether there is any truth in the above suggestions or whether the position remains essentially unchanged from that which obtained two weeks ago which, to say the least, was unsympathetic towards the working group report and the amendments it suggested.

Mr. Noonan

I have not tabled a Committee Stage amendment but I want to indicate my intention to table and amendment on Report Stage which will probably go beyond the range of this amendment and will deal with the rate of DIRT applicable to dividends and interest on credit union deposits. I did not seek to amend the Bill on Committee Stage because I was not aware of what occurred at the meeting between the credit unions, the Taoiseach and the Tánaiste. At the end of the day, the Minister for Finance is responsible for taxation matters and I would like to hear his view on the current position before I seek to amend the Bill.

Mr. Belton

I support Deputy Noonan's comments and want to register my disappointment in the Minister who failed to meet with representatives of the credit unions. We preach the virtues of consultation in all areas yet the Minister for Finance would not meet the credit unions. I would be interested to hear his comments.

Mr. McCreevy

Deputy McDowell's amendment proposes to exempt from income tax the first £375 of dividend income from credit union shares where the total of such income is less than £750 in any year. In February 1998, I established a working group chaired by Mr. Terence Larkin to specifically examine the taxation of returns on credit union savings. At the sixth meeting of the working group, it was not possible for members to reach a consensus and, in the absence of an agreed position, the chairman made a number of recommendations, namely, that credit union surpluses should continue to be exempt from corporation tax; 20% DIRT should apply to interest on all credit union deposits; 20% DIRT should apply to all dividends from shares except where a dividend was £750 or less in any year and in such cases only the first £175 should be exempt; and that there would not be any report to the Revenue Commissioners of interest or dividends on credit union savings. Two of the group members did not support these recommendations.

Important issues must be decided on arising from this report including issues of tax equity and Exchequer cost, particularly if any tax relief given to credit union savers must be extended to savers in other financial institutions. Members will be aware that there is an important EU dimension to this issue arising from complaints made to Brussels by the Irish Mortgage and Savings Association. The Irish Bankers Federation has also lodged a complaint with the Commission which I understand relates to the position of credit unions with respect to consumer credit legislation.

On Thursday of last week, the Irish League of Credit Unions accepted the Government's position that complaints about taxation made to the European Commission must be resolved before any further moves are made in regard to the taxation of credit union savings' income. Any change in the tax law at this point could aggravate the situation in regard to the investigation by the European Commission. The matter has been referred to the Attorney General for his opinion. The recommendations will be further examined in the light of the Commission's decision on the complaints about existing tax law and, for these reasons, I cannot accept the amendment.

Mr. Noonan

Did officials from the Department of Finance and the Revenue Commissioners attend last Thursday's meeting? What communications has the Minister received from DG IV about the complaints lodged against the Irish League of Credit Unions?

Mr. McCreevy

Officials from my Department did attend the meeting between representatives of the Irish League of Credit Unions and the Taoiseach and the Tánaiste last Thursday but I do not think any Revenue Commissioner officials were in attendance.

The complaint from the Irish Mortgage and Savings Association is currently with DG IV. The association has communicated with us and we expect that the Commission will also communicate with us in due course. The Deputy should also be aware that it has come to light in the past week that the Irish Bankers Federation made a separate complaint to the Commission in regard to the position of credit unions with respect to consumer credit legislation. That matter falls under the remit of the Minister for Enterprise, Trade and Employment. Two complaints have been lodged with the Commission in regard to the position of credit unions. There may indeed be more than that but those are the only two of which we are aware.

Mr. Noonan

Can I take it that no official communication has been received by the Department from DG IV informing it of the complaint or the nature of the complaint? Will the Minister comment on information which was communicated to me to the effect that the terms of the complaint from the Irish Mortgage and Savings Association are exactly the same as those in the complaint already adjudicated upon and not upheld and that the DG IV position is that it will reject the complaints without investigation unless new grounds of complaint are established?

Mr. McCreevy

That is not correct because I understand that the complaint from the IMSA is far more extensive than the earlier complaint made by the Irish Bankers Federation. At their meeting with the Taoiseach and Tánaiste last Thursday and in their subsequent press comments and extensive interviews and briefings, representatives of the Irish League of Credit Unions accepted that complaints to Europe must be dealt with before any further consideration can be made on the taxation of credit unions. That is on record.

Mr. Noonan

I understood that the Irish League of Credit Unions had agreed that the matter would be adjudicated on by the Attorney General to ascertain whether the insistence on the official side that nothing could be done in advance of the Commission's adjudication on the complaints had a basis in law. That is different to what the Minister is saying.

Mr. McCreevy

Perhaps it would be better if I read the statement issued by the Government following the meeting.

Mr. Belton

That is spin doctoring.

Mr. McCreevy

All I can refer to is what the Irish League of Credit Unions said in reply to questions on the steps of Government Buildings. Deputy Belton is correct that its position was somewhat different from that of the day before the meeting. However, it was agreed after the meeting on Thursday——

Mr. Noonan

That it would go to the Attorney General.

Mr. McCreevy

No. I will read what was said after the meeting.

The Taoiseach, Mr. Bertie Ahern and the Tánaiste, Mary Harney, met representatives of the Irish League of Credit Unions today to discuss the League's proposal in relation to the taxation of members' savings income.

Speaking after the meeting, the Taoiseach said "the meeting provided the opportunity for the Credit Union movement to put their case to Government and the discussions had been constructive. The Government are fully appreciative of the role which credit unions play in Irish society and the contribution which they make to the wider community."

The meeting also discussed the wider EU Treaty aspects which now impinge on all taxation proposals. In particular, the current state of play was noted in regard to the investigation under way by the Commission in relation to the complaint which has been made to them. The complaint alleges that there is an unfair bias in favour of Irish credit unions under current tax law. Any additional changes in tax law to reinforce this bias could aggravate the position. The meeting agreed to seek full clarity in terms of legal advice in relation to the EU case and to attempt to deal with it expeditiously.

The Taoiseach affirmed to the League that the recommendations of the Working Group on the Taxation of the Returns on Credit Union Savings would be further examined in the light of whatever decision the EU Commission take in the matter. He also pointed out there are general equity aspects which will have to be considered at that stage as well as a need to ensure the integrity of the tax system.

Mr. McDowell

Is it right that this complaint, or one similar to it, was outstanding when the Minister made the proposals - those with which he did not proceed - in last year's Finance Bill?

Mr. McCreevy

I made no proposals in last year's Finance Bill. The Deputy is confused - it was two years ago.

Mr. McDowell

At that time, the previous complaint was outstanding.

Mr. McCreevy

No, not in 1998. The last Bill was published on Thursday 12 February. This date is memorable because the next day all hell broke loose, including my car breaking down three times.

Mr. McDowell

I remember it because of its proximity to St. Valentine's Day.

Mr. McCreevy

The horse was broken down before it got to the start. When I published the Finance Bill, as far as I am aware, no complaints had been made to the EU. When I withdrew the proposals after a few months and went back to the status quo, with some further benefits to the Irish League of Credit Unions, a case was taken by the Irish Bankers’ Federation. The working group presented the report to me on 1 October 1998. I published the report early in 1999. The Irish Bankers’ Federation complaint was made after the budget of 1998.

Mr. McDowell

There was an earlier complaint.

Mr. McCreevy

Before my time?

Mr. McDowell

No, in the past few years - I do not know exactly when. I know the Commission dealt with a complaint, I think it was some time in 1998.

Mr. McCreevy

The Deputy is referring to the complaint made by the Irish Bankers' Federation, a decision on which was not made until 1999. At the time I made the proposals in 1998, at the request of the Irish League of Credit Unions, I was not aware of any complaint made to the European Commission. We can check the records but I think the complaint was made——

Mr. McDowell

A complaint was obviously not anticipated.

Mr. McCreevy

The proposals I made should not have resulted in any complaints. Much of the discussions at the meeting attended by the Taoiseach, the Tánaiste and the Minister last week, were taken up with the European dimension of the issue. In reply to Dáil questions on the credit unions and the complaint, I have referred on a number of occasions to the EU aspect. Before a new complaint was made by the Irish Mortgage and Savings Association, I replied that it was our understanding that in deciding the complaint of the Irish Bankers' Federation, it was satisfactory for the corporation tax exemption to continue, that the EU bore in mind that surplus income was not subject to corporation tax but that the money on the way out was taxed in the hand of the recipients. That was our understanding of the basis of the decision.

Subject to my fallibility, I said in my replies that that aspect would not have been taken into account in the working group's deliberations which were reported on 30 September. I do not think there was a complaint before the EU at that stage either. We understood that the EU made a decision that the corporation tax exemption was satisfactory on the basis that the surplus income was not taxed but the money of individual members was taxed on the way out. This was how I replied to a number of questions put down by Deputy McDowell and others.

A more detailed complaint about credit union savings was made by the Irish Mortgage and Savings Association. If one applies the logic which we think the Commission applied in disposing of the last complaint, one would understand the difficulties which could arise in creating a further exemption on the way out and retaining the corporation tax exemption. In reply to questions in the Dáil, I said that if I wanted to do the credit unions some harm, I would go along with some of their proposals. It is now proposed that we continue the corporation tax exemption, which I have done, and also create an exemption on the way out. In reply to questions from Deputy Noonan recently, I said this is what I would do if I really wanted to mix it up. Deputy McDowell may be one of the few Members who appreciates this point.

Mr. McDowell

I will pass on that. The difficulty is that there is a view, which I share, that the European aspect is a stratagem to postpone a decision. It is strange that the Irish League of Credit Unions have allegedly bought into this. Effectively we are saying that those who see themselves as competitors of the credit unions can indefinitely delay a decision by lodging a complaint with the European Commission. The European aspect has taken on far greater importance in the Minister's explanation of his position in recent months. Those of us who have listened to his replies to questions know the Minister has not given this priority and has taken this view because these people behaved in a particular fashion two years ago——

Mr. McCreevy

I cannot let that go. If the Deputy looks at any of my replies in 1999, he will see that the EU had the taxation element in mind when it made its decision. Recently, there has been an addition to the European aspect because the Irish Mortgage and Savings Association has made a complaint. Before this complaint was made, I repeatedly referred to the European aspect and what we understood to be the background to the decision made by the Commission to allow for the corporation tax exemption. The record will show that. The fact that people choose to ignore that aspect of my replies is neither here or there.

Mr. McDowell

It is not fair to say it has been ignored - we have been conscious of it all along. It is fair to say we have not teased it out.

Mr. McCreevy

That is true.

Mr. McDowell

I am not sure we have done so this morning either with regard to what stage it is at. The Minister said there has been no communication with the Department on the issue.

Mr. McCreevy

On the previous occasion of the Irish Bankers' Federation complaint, the Department of Finance was not the lead Department. The Department of Enterprise, Trade and Employment had responsibility for credit unions. The Department of Finance was asked to make comments on the complaint, which were transmitted via the Department of Enterprise, Trade and Employment. Given that the complaint by the Irish Mortgage and Savings Association relates specifically to the taxation treatment, the Department of Finance will communicate directly with the Commission.

At last Thursday's meeting, the Irish League of Credit Unions was informed of a second complaint by the Irish Bankers' Federation relating to consumer credit legislation. That complaint will be dealt with by the Department of Enterprise, Trade and Employment. There was mention of a further complaint on foot of the banking directive. There are at least two complaints at present under two different directives. There is a further complaint to the EU Commission under the banking directive which is being investigated by a separate directorate.

Mr. McDowell

The Minister is saved for the next general election.

Mr. McCreevy

It is good to have an opportunity to debate this aspect further. In relation to the 30 or so written replies to Deputies in the last number of years, I explained the basis on which we thought the Commission made its decision. This aspect has not been teased out or appreciated by anyone. Perhaps the Irish League of Credit Unions chose to ignore this fact but it is quite a simple principle whereby, if I granted a corporation taxation exemption on the surplus income of credit unions, as most credit unions would want, we understood the European Commission to say we could have this special treatment for credit unions because of their special situation and because the money is taxed when in the hands of the recipients. This was long before complaints were made by anyone and it was the basis on which our decision was made, which was pointed out in the replies. If I were to create a new exemption on the money and keep the corporation taxation exemption, the last decision of the European Commission would be somewhat peculiar because we would have exempted the surplus income of the credit unions and most of the dividends, and this is what created this. The Irish League of Credit Unions admits that if they did what the chairman proposed and amended it, 98.1% of all money on the way out would have been exempted.

Mr. McDowell

We have got more detail from the Minister this morning, which is helpful.

Mr. Belton

We got a statement.

Mr. McCreevy

I have spent the last ten minutes speaking without——

Mr. McCreevy

The Minister sounded more like the case for the prosecution. If I were the Irish League of Credit Unions and I was depending on the Minister or his Department to make the case for me when the Commission comes back to them, I would not be too hopeful.

Mr. McCreevy

I must reply to that point. I do not object to political charges being made against me, but to allow that remark to stand would be a slight against the officials of the Department of Finance whom it is implied would not answer the specific questions from the European Commission. I cannot let that remark stand.

Mr. McDowell

It is not a slight against anyone. The case depends on establishing the special position of credit unions. I have not heard anything from the Minister which centres on the special position of credit unions in Irish society. Surely this is the case which should be made. What I am hearing is the case which presumably the Irish Bankers' Federation is making.

Mr. McCreevy

The special position of the Irish League of Credit Unions is already recognised. There is no corporation taxation on their profits, which is unique. Other mutual societies, including co-operatives and building societies, must pay corporation tax on their profits. The Irish League of Credit Unions do not do so. There was no reporting of dividends from the Irish League of Credit Unions until 1998. There was reporting of the interest. There was no DIRT payable on either dividends or interest, which is unique to the Irish League of Credit Unions.

Mr. McDowell

I accept that.

Mr. McCreevy

These three aspects give recognition to the role of the credit union movement. The lending and saving aspects of credit unions are being confused. Polls and surveys show that people invest in credit unions for the same reason they invest their money in banks or building societies. Interest on post office savings, where people have small accounts for their children, is subject to DIRT.

Mr. McDowell

Can I take it that the Minister sees no case for treating dividend income in the hands of savers differently from any other dividend income?

Mr. McCreevy

I see great difficulties in opposing a regime——

Mr. McDowell

It seems to me that the Minister sees no case for further favourable treatment for——

Chairman

The Deputy should allow the Minister to reply.

Mr. McCreevy

I practised at a time when there was a £70 exemption on bank interest. The banks did not have to report deposit interest if the figure was less than £70. This figures was reduced to £50 in a budget during the eighties. All hell then broke loose because by 6 April the interest had already increased to more than £50 and this was being reported. The Committee of Public Accounts' inquiry referred to multiple accounts held throughout the country. These were not bogus non-resident accounts; these were resident accounts with an average of £500 in each account. There was a recent newspaper report that 200 or so of these accounts related to one person who sued the bank because that person claims to have been given erroneous advice in relation to the tax amnesty. The Committee of Public Accounts discovered that, as a result of the £70 and £50 exemptions, there were millions of these resident accounts throughout the country. This was found to be one of the greatest sources of tax evasion. The gentleman on my right was a district inspector of taxes at the time and I was a practising accountant. Most of the back duty cases I dealt with came about as a result of one of these accounts being discovered and subsequently hundreds were discovered. The Deputy should think about this.

Mr. McDowell

I have thought about it.

Mr. McCreevy

This happened at a time when the average savings was £500. If an exemption of £375 to £750 applies to a sum of £7,500 to £10,000 in each account, it would be a recipe for encouraging people to evade tax. We should have learned this from what took place in the recent past. It is very hypocritical of some Deputies to make a special case here while at the same time talking about tax evasion in relation to other situations. One cannot have it both ways; one is either against tax evasion or not. If one is against tax evasion, one should not include in legislation provisions which will encourage this practice. Deputies should be consistent.

Mr. McDowell

What the Minister has said this morning is extremely informative because he is effectively telling us that he is not considering the working group report. He is not deferring consideration of it; he has fundamentally rejected it.

Mr. McCreevy

Following the meeting last week, the Taoiseach confirmed to the league that the recommendations of the Working Group on the Taxation of the Returns on Credit Union Savings would be further examined in the light of whatever decision the EU Commission take in the matter. He also pointed out that there are general equity aspects which would have to be considered at that stage as well as a need to ensure the integrity of the tax system.

Mr. McDowell

The Minister has given as lucid a condemnation of tax evasion as I have ever heard from him. It is bizarre that he has chosen the exemption on credit unions.

Mr. McCreevy

Is the Deputy for or against tax evasion?

(Interruptions.)

Mr. Belton

It depends on what is in the legislation.

Mr. Deenihan

On a point of clarification, the Minister will be aware that the Irish Bankers' Federation withdrew their complaint in December. Obviously they have now made another complaint.

Mr. McCreevy

I understand a complaint was made in the last two weeks under the consumer credit aspect. My Department was not aware of this but I understand the Tánaiste and the Department of Enterprise, Trade and Employment made the credit unions aware of this last Thursday. This is the first time my Department heard of this. I do not think the credit unions heard about it either.

Mr. Deenihan

Obviously they did not. It strikes me that there is a type of filibustering campaign going on in order to drag the matter out for as long as possible. I am suspicious about the way this matter is being handled because the Irish Bankers' Federation had an opportunity but it did not pursue it with DG IV. Is the Minister aware of the complaint made by the IMSA that DG IV sought further confirmation and clarification but it has not responded?

Mr. McCreevy

We have not yet dealt directly with the Commission on this matter. Our information comes via the Irish Mortgages and Savings Association which informed us of its complaint. It also wrote to us recently to request information which the Commission asked it to get from the Department. When Deputy Noonan said in the Dáil that this would not be raised, we contacted the Commission. The Minister of State referred to this in his reply.

Mr. Deenihan

Does the Minister know if it has responded to date? The best resolution to the debacle at this stage would be for DG IV to make a decision. It appears to be more sympathetic to the credit union cause if the feedback we are receiving from credit unions and people such as John Hume, who is very confident that DG IV will be sympathetic to credit unions, is correct. Given that the matter is dragging on and the Commission and the directorates are notoriously slow in making decisions, could the Government press them to make a decision so the matter can be clarified?

Mr. McCreevy

I wish to make it clear that the existing taxation position of credit unions is before the Commission. This position is as I outlined to Deputy McDowell earlier. There is no corporation taxation or DIRT and no reportage. The complaint is about the existing situation. A decision on this will have to be made by the various Commission directorates in time. They do not take too long to make decisions because the complaint in 1998 was dealt with relatively quickly.

In addition to the existing position about which complaints have been made, Deputy McDowell's amendment seeks to add to the concessions already available to credit unions in terms of further exemptions. The Commission is not dealing with the current proposal of the Irish League of Credit Unions but what is already available under existing tax law. If the existing position has triggered the two current complaints, which are in addition to the complaint two years ago, it would be reasonable to assume that further concessions to the credit union movement would trigger further complaints which would have to be dealt with also. However, the Commission is only dealing with the current position and not any additions to it.

As I pointed out on many occasions, aside from the Commission aspects, there are other questions of general tax equity and the integrity of the tax system regarding evasion which must be considered by the Minister for Finance. I would be entitled to be pilloried by people if I did not try to defend the integrity of the tax system. We must have learned something from the recent past.

Mr. Deenihan

The Minister is obviously defending the current position to DG IV.

Mr. McCreevy

We have not been asked anything to date, but we will respond to whatever we are asked. The complaint is about the existing taxation treatment of credit unions.

Mr. Deenihan

Obviously the Minister and the Department will defend the current position.

Mr. McCreevy

In such situations we are asked questions by the Commission and we answer them.

Mr. Deenihan

Why not be proactive? Why not tell the Commission the Department's position at present?

Mr. McCreevy

When the previous complaint was made in 1998, the lead Department was the Department of Enterprise, Trade and Employment. We had to supply comments and facts on all the relevant issues of taxation. The Department of Finance's reply and information were encompassed in the reply made by the Department of Enterprise, Trade and Employment. I am sure the Irish League of Credit Unions has a copy of those details. On this occasion, we assume we will be asked some questions about this matter and we will answer them to the best of our ability.

We will defend the existing tax position which is in law. I introduced attractive measures for the Irish League of Credit Unions and I carried over the existing corporation tax exemption. I will defend these decisions. The current complaint is about those measures but the Irish League of Credit Unions wants added concessions. The Commission has been asked to make a decision on what is available to credit unions at present.

Mr. Deenihan

Why not put in place the measures the league is seeking and then defend them as the Department is defending the current position?

Mr. McCreevy

Due to the exigencies of the political situation in Mayo west in 1996 and 1997, I and my Department have been knocked over the head about every taxation measure we have introduced in the meantime. The Deputy will note in Finance Bills introduced since I came into office the phrase "subject to EU Commission approval". I even say it in the Dáil on budget day. It has taken extraordinary time to get even the smallest matters through the Commission recently. Everything from enterprise zones to——

Mr. Belton

What about the bookies tax?

Mr. McCreevy

We had to seek Commission approval for the accelerated capital allowances introduced in relation to crèches. This was only recently received. We must seek approval even for small items.

Mr. Deenihan

That confirms what I said, that the Commission is notoriously slow in making decisions. Given that this case is so explosive, if there was a decision we could proceed and it would be better for everybody concerned.

Mr. McCreevy

I would appreciate it if we could get a decision on the complaints about the current position before the Commission is asked for its views on any further moves. Commissioner Monti is now in charge of this area. Deputies will recall that Commissioner Monti is one of the four surviving Commissioners from the previous Commission. He headed up the duty free debate and he said two years ago that the Commission would reverse its decision to abolish duty free over his dead body. At one stage almost all 15 member states were in agreement on the issue, but Commissioner Monti was immovable. The result was that duty free was abolished.

Commission Monti has gone up in the world and he is now responsible for state aids and competition matters. If the Deputy reads the international newspapers or the Financial Times he will know that the Commissioner is taking an extreme and severe line on state aids. My personal relationship with the Commissioner is very good. I have had a good relationship with him since I became Minister for Finance and we get on well on a personal level. However, he interprets the law very strictly.

He made a definitive statement last week which is causing much disquiet among my colleagues throughout Europe. His comments about state aids were mentioned during lunch on the margins of the meeting yesterday. He said on 23 February:

I have always been looking with sympathy and scope to the work of the code of conduct and I wish to congratulate Mrs. Primarolo and Commissioner Bolkestein and the members of the group for the good progress achieved. It is of course disappointing that almost four years after the informal ECOFIN Council in Verona, which marked the beginning of a concerted effort to tackle harmful tax competition in the Community, and more than two years after the agreement of 1 December 1997 on a package including the code of conduct for business taxation, considerable uncertainty still surrounds the implementation of that package in spite of the determination shown by most member states about the Commission. [The Deputy may be particularly interested in the next paragraph.]

I have instructed the Commission's competition department to examine all the relevant cases of fiscal state aids in business taxation so as to allow the Commission to comply fully and promptly with its own institutional obligations, also on the basis of the Commission notice on the application of the state aid rules to measures relating to direct business taxation of 11 November 1998. This duty of the Commission was underlined in the work that led to the Council resolution 1 December 1997 and the code of conduct, in particular under Paragraph J of the resolution - the Council notes that the Commission commits itself to the strict application of the aid rules concerned taking into account, inter alia, the negative effects of aid that are brought to light in the application of this code.

On the same occasion the Council also noted that the Commission intends to examine or re-examine existing tax arrangements and proposed new legislation by member states case by case, thus ensuring that the rules and objectives of the Treaty are applied consistently and equally to all. This matter is by no means an interference with member states competence in tax matters. The Commission has exclusive powers to control State aid in the community and the member states themselves repeatedly ask the Commission to exercise these powers also in the area of fiscal state aids.

The man in charge of state aids is the same man who was successful, from his viewpoint, in not having the question of duty free re-opened. Things have not become easier.

Mr. Deenihan

The credit unions had better watch out.

Mr. McCreevy

Everyone in the community will have to comply with the rules which are very strict and the interpretation of same which is becoming even more strict.

Mr. Noonan

It seems to me the Minister has prejudged the position completely and damaged any prospect the credit unions had of exempting a certain amount of dividend income from income tax in what he has said this morning. Clearly, what he has told us is that as far as he is concerned no change beyond his position in the 1998 Finance Bill is foreseen. While he contemplates the imposition of DIRT tax at a particular rate, perhaps 20%, on credit union dividends and interest he does not foresee the exemption of dividends, no matter how small. Any reasonable person listening to the Minister this morning would have to arrive at that conclusion.

It calls into question the bona fides of the Taoiseach and the Tánaiste in meeting the League of Credit Unions on a different premise last Thursday. In so far as I can see we are being led into this quagmire of legal advice and additional complaints being lodged in Brussels but the Minister has already made up his mind. Worse than that, we are not living in an isolation chamber. I take it anything the Minister says here will be read carefully by the people in Brussels who will be making a decision on any movement he would make towards the credit union position in future.

Effectively, the Minister has blown the issue out of the water completely. He then takes up an exaggerated position in that he, effectively, accused the credit union movement of proposing the greatest tax evasion scheme ever perpetrated in the country. That is an extremely damaging and unfair charge. The credit union movement is reputable. It is a non-profit organisation and works through volunteers. I know of no charge laid against the credit union movement that it has systematically organised tax evasion. The Minister says that if Deputy McDowell's amendment were to be agreed there would be massive tax evasion. The Minister should bear in mind what Deputy Belton has just said. If the legislation is changed there may be tax avoidance but that is not tax evasion. To accuse the Irish credit union movement of tax evasion if its members operate in accordance with the law subsequently is a false charge and he should withdraw it.

The Minister has included all these charges in his ongoing antipathy towards the Irish League of Credit Unions. Whatever good was achieved last Thursday at the meeting with the Taoiseach and the Tánaiste has been undone by the Minister this morning because he has made it clear that as far as he is concerned he is making no move whatsoever to give any level of exemption. Any reasonable person listening to his arguments would have to arrive at that conclusion. Anybody in DG IV reading this would have to say the Minister for Finance is making the case on behalf of the complainants. He has put on the record that his source of information is from the mortgage association which has lodged the complaint. He has indicated also that there is some information in the Tánaiste's Department from the Irish Bankers' Federation and that he has become party to the terms of that complaint also. He regales us with policy positions based on what the complainants have put in front of him and expects us to believe he will defend the position of the Irish League of Credit Unions in a complaint. These complaints in Brussels are trumped up and there is a certain degree of collusion in them.

Mr. Belton

The Minister is holding a steward's inquiry before the race starts.

Mr. Fleming

I disagree fundamentally with everything Deputy Noonan has said. I have listened attentively to the Minister and he has not come down on one side or the other but has pointed out, as is his duty, the difficulties in a simplistic proposal. This amendment is not in the credit unions' interest because they have said they want to await the outcome of the adjudication at European level. They have said they want to meet the Government at Easter to discuss developments. Based on the recent meetings this amendment is premature.

The Minister never accused the credit unions of facilitating tax evasion but he has highlighted the risk of it happening. He never said it would happen but has highlighted the fact that there would be risks. Based on the previous experience of the Irish people that is a real risk and it is the Minister's job to deal with it. He has not said the credit unions will do it but he has said there is a real risk. He has not chastised or slighted the credit union movement. He must take on board all the difficulties highlighted today and has not accused them of anything suggested by Deputy Noonan.

Deputy Noonan referred to the quagmire of legal advice. We have to take legal advice and we cannot say we are stepping into a quagmire when seeking it. We must await the outcome of the legal advice. It is premature to take this amendment since the credit unions are in ongoing negotiations with the Government on this issue.

Mr. McCreevy

As Deputy Fleming has said we should learn something from the experiences of the past. I would say to Deputy Noonan that it was not an offence when the exemption was £70 or £50 for a person to have an exemption for that amount but it was an offence that the interest was not returned. A further offence was that the underlying capital in that account had not been subject to taxation. The interest could be exempt but from where did the underlying money come. I find it difficult to believe that worldly Deputies who know where the grass grows best in the constituencies seem to be unaware of these facts over the past 20 years and that nobody seems to be involved in evasion in any of the towns of Ireland. I know that is not correct. Everybody knew about it but nobody seems to know about it now.

When the exemption was low it encouraged people to have multiple accounts and it was perfectly legal to do so but where did the money come from? If a new form of exemption is created, surely that is an invitation to people to place their money in those accounts. The interest will certainly be exempt and it will not be reported, but one could have many of these accounts and the interest would not be returned. That is an invitation for further tax evasion. I am not saying the credit union movement or any other financial institution will be selling that as a tax evasion mechanism but if people want to attract savings their literature will state that the first £375 will be exempt. It is then up to the customer to decide because it is the customer who is evading the tax, not the relevant institution, credit union or otherwise.

Mr. McDowell

Is that for reporting purposes?

Mr. McCreevy

I put that in my initial proposal on 12 February 1998 and the credit union movement went berserk about it.

Mr. McDowell

That is why I find it interesting——

Mr. McCreevy

The existing position, in so far as the credit unions are concerned, is very good for them. They have no obligation of reportage or liability for DIRT. They have more advantages than other institutions and the credit unions are pursuing this exemption mechanism. I am not an adviser to the credit unions. However, by seeking an additional advantage they are drawing upon themselves a scrutiny of their existing position. It is probable that anything they request in future will also come under scrutiny.

The complaint is a matter of fact. The Irish League of Credit Unions was told last Thursday about the further complaint from the Irish Bankers' Federation on foot of a consumer directive, something the Department of Finance was not aware of until last Thursday because it had been received in the Department of Enterprise, Trade and Employment only the day before. The Department made the Irish League of Credit Unions aware of the directive last Thursday. I learned from my officials who were at the meeting that the Taoiseach read from Mr. Monti's missive of 23 February. The league can be in no doubt about the EU aspects of this matter. To be fair to the league, after the meeting it accepted——

Mr. Noonan

This is all hearsay.

Mr. McCreevy

The Irish League of Credit Unions said it accepted that "the EU dimension of this must be disposed of".

Mr. Noonan

No court would listen to the Minister because he was not present at the meeting. This is all hearsay.

Mr. McCreevy

It is what the Irish League of Credit Unions said.

Mr. Noonan

Hearsay evidence.

Mr. McCreevy

Reference has been made to tax evasion in the credit union movement. I do not claim there is tax evasion in the credit union movement. However, let me just put it like this. The population of Ireland is approximately 3.7 million and there are 1.8 million account holders in credit unions - that is one in every two people in the country, including babies. There are 23 people in this corner of the room. I ask them to raise their hands if they have a credit union account.

Mr. Belton

I am watching the Minister's hand.

Mr. McCreevy

I do not have one.

Mr. Noonan

What is the Minister saying?

Mr. McCreevy

The figures show that approximately 50% of the population have credit union accounts. I will wager my house against Deputy Belton's and Deputy Noonan's houses that the credit union membership figure for these 23 people is less than one in two.

Mr. Noonan

What point is the Minister making?

Mr. McCreevy

My point is that Deputy Noonan must draw his own conclusions.

Mr. Noonan

If the Minister is laying a charge he should lay the charge.

Mr. Belton

Does the Minister have an account?

Mr. McCreevy

No.

Mr. Belton

Does the Taoiseach have one?

Mr. McCreevy

No. There are two people and neither of them have an account.

Mr. Belton

The Taoiseach must have one. He went to meet the credit unions.

Mr. McDowell

I will not pursue the matter further. I intend to press the amendment. The discussion has been useful to the extent that we now know the reality of this situation. I have done the Minister an injustice in saying that he was refusing to meet the credit unions because of a fit of pique on his part. It is now clear that he did not meet them because he has no intention on implementing the report. He is now defending the position in the Bill he published in 1998 and even seems to be regretting some of the favourable aspects of that Bill. Anyone waiting for the European complaint to be dismissed in order to see progress in this matter is deluding himself. If the Taoiseach told the credit unions that progress would be made when the Commission decides he was trying to delude them.

Mr. McCreevy

There will be progress when the Commission decides. Last Thursday's statement, in the last paragraph, says that when the decision is made, further consideration will be given to the recommendations of the working group, taking into account the general equity aspects which will be considered at that stage and also ensuring the integrity of the tax system. I appreciate the opportunity of participating in this debate but I have pointed these facts out on a number of occasions. Unfortunately, when people do not wish to hear something they do not hear it.

Mr. McDowell

The amendment includes only some of the proposals. The remaining proposals would have been out of order.

Amendment put.

A division being demanded, the taking of the division was postponed in accordance with an order of the Dáil of 24 February 2000.

SECTION 2.

Chairman

Amendments No. 2 and 3 are related and may be discussed together, by agreement.

Mr. Noonan

I move amendment No. 2:

In page 11, line 27, to delete "£15,000" and substitute "£16,000".

Section 2 seeks to increase the income tax exemption limit for persons aged 65 and over. Amendment No. 2 refers to a married couple, one of whom is aged over 65 and amendment No. 3 refers to a single person aged over 65.

I have had many representations from pensioners, as have other Deputies. Some pensioners make a strong case for complete exemption from income tax. The burden on pensioners can be onerous. Even for those in receipt of generous public service pensions, the pension is half their salary. The reduction of a modest salary by half is severe, and further subjecting this modest income to tax places an onerous burden on pensioners.

The Minister has made some improvements this year and last year. I propose that the £15,000 exemption proposed by the Minister for a married couple be raised to £16,000 and that the single person's exemption be raised from £7,500 to £8,000.

Mr. McCreevy

The Bill proposes to increase the age exemption limits, that is for a person aged 65 years or over, by £2,000, from £13,000 to £15,000 for a married couple and by £1,000, from £6,500 to £7,500, for a single taxpayer. The amendments proposed by Deputy Noonan and Deputy Deenihan seek an additional increase for a single person of £500 to £8,000 and for a married couple of £1,000 to £16,000. The cost of this amendment is estimated to be £3.1 million for a full year. This would be in addition to the cost of £8.5 million for the changes I am making.

The increase in the age exemption limits already provided for in the Bill represents a substantial increase of 15% on the current exempt limits and will remove approximately 10,000 elderly persons from the tax net. These increases are in keeping with the Government's commitment to reduce the tax burden on the elderly. I remind the committee that taking into account the increases proposed this year, I will have increased the exemption limits for the elderly by up to two thirds, a very significant increase by any standard, over the past three budgets. While one would like to do more, one must keep a sense of proportion in these matters and I am satisfied that the increased proposed is an equitable, fair and just increase. However, in line with the Government programme, I will keep the limits under constant review over the coming years. In these circumstances I must reject the amendments.

When I was in Deputy Noonan's position I tried to persuade the then Minister for Finance, Deputy Quinn, to increase the age exemption limits. They were not significantly increased and very good arguments were made against their being increased. In three budgets I have taken large steps to increase the exemption limits, notwithstanding the excellent arguments put forward by the Department of Finance and put on record by Deputy Quinn. In my first three budgets I have increased exemption limits by almost two thirds, an enormous increase which far outstrips anything done in other areas. This is as it should be and I intend to make further increases in future budgets.

Mr. Deenihan

Tax concessions must be targeted and we will, no doubt, debate the position of the low paid later. The Minister must accept that the tax concessions in the budget favour the higher paid.

Mr. McCreevy

I do not accept that.

Mr. Deenihan

My figures suggest that they do. The Minister can clarify the figures later. The two most vulnerable sections of society are the low paid and the elderly, to whom we pay much lip-service. The Minister has an opportunity to provide some assistance to them. Accepting this amendment would be seen as a magnanimous gesture.

What is the total tax take from married and single persons over the age of 65? The Minister should continue to accord this issue high priority. On reaching the age of 65 there should be an opportunity to continue in farming or running a small shop, for example, to keep oneself occupied, to make life more meaningful and to ensure one does not vegetate. There are individuals who find themselves caught in this net. Even though the amount involved may be small it places a major imposition on them resulting in life being made more difficult for them. It does not give them an incentive to keep going but they should be encouraged to do so, whether farming or running a small shop. This is desirable, particularly in rural areas.

Mr. McCreevy

Unfortunately, I have been informed that the relevant tax take statistics are not available. It is not possible to extrapolate them from the overall figures.

I have sympathy for what the Deputy said and, more than any previous Minister for Finance, have done something it. I have, for example, streamlined the reliefs available. As Deputies might have gathered by now I do not like all these boxes in the Finance Bill and wish to make the system as simple as possible. As promised I have streamlined the exemption limits applying to those between the ages of 65 and 74 and 75 and over. There is now one exemption limit applying to those over the age of 65.

Let me give some examples. In the case of those between the ages of 65 and 74 the exemption limits in the 1994-95 tax year were £4,100 for a single person and double that amount for a married couple. These figures were increased by £200 in the 1995-96 tax year and by a further £200 in the 1996-97 tax year. I increased these figures to £6,500 for a single person and £13,000 for a married couple and will further increase them to £7,500 for a single person and £15,000 for a married couple. I have, therefore, increased the figures by two thirds in three years. In the three tax years prior to my elevation to this wonderful office the figures for a single person were increased from £4,100 to £4,500. I think I can claim some credit, therefore, for recognising the problems to which the Deputy referred.

The programme for Government states under the heading "Older People" that in accordance with the commitments given in Partnership 2000 the Government will continue to review the income tax allowance and exemption limits for those over 65 years with a view to further assisting the position of the aged. The Deputy can take it——

Mr. Deenihan

That the Minister will go further.

Mr. McCreevy

——that I will fulfil those commitments.

Mr. Deenihan

While I accept that the Minister has shown good faith, he is not comparing like with like. The previous Administration did not have the same flexibility. At least the Minister is recognising the principle.

Mr. McCreevy

I cannot agree with that comment. In his final Finance Act my predecessor did try to burst his boiler when he increased the figure by £100 from £4,500 to £4,600. The previous Administration, therefore, did not believe in increasing the exemption limits in this area. From where Deputy Noonan is sitting I argued that they should be substantially increased but this was rejected by the then Minister. When I had an opportunity to do so I did what I said I would do.

Mr. Deenihan

Is the Minister giving us a commitment for next year?

Mr. McCreevy

I am.

Mr. Noonan

Does the Minister have a figure for the additional number of elderly persons who would be exempt from paying tax if the amendments were accepted? He mentioned a figure of 10,000 in respect of his own proposal. As he is probably aware in the case of those in receipt of a modest occupational pension and a contributory old age pension the manner in which the joint pension is taxed is onerous and not fully understood by the recipient. This is a major problem in the sense that the full social welfare pension is offset against the credits allowed. As a consequence the persons concerned think that they are being taxed at the high marginal tax rate once they pass the joint figure of £14,000. There is a communication problem which should probably be addressed by the Revenue.

Once the exemption limits are exceeded there is marginal relief. Will the figure be the same as last year and, if so, will the clawback percentage also be the same? Again, there is a presentation problem in the sense that elderly persons just above the exemption limits think that the clawback rather than standard tax rate applies to them. Generally taxpayers are familiar with the idea of two tax rates and know what the rates are but there is less familiarity with a clawback rate. There is huge misunderstanding among the elderly as to how they are taxed. I am seeking a communication initiative to ensure taxpayers know the basis on which they are taxed. They should not be under the illusion that they are being taxed at a far more onerous rate.

Mr. McCreevy

If I was to go further with the amendment it would result in an additional 4,000 exemptions approximately on top of the 10,000 already provided for. One of the reasons underpinning my desire to increase the exemption limits for the aged is, as Deputy Noonan said, there is confusion in this area. Everyone is influenced by what happens in their area. Bord na Móna and the ESB have maintained a presence in my county since the 1930s and 1940s. As a consequence there are many people in receipt of small occupational and social welfare pensions. The form filling involved was disproportionate to the amount of money collected and resulted in confusion. I was always of the view that the problem could be resolved by increasing the exemption limits to a realistic amount. The Government is committed to increasing the old age pension to £100 per week. This will also entail a substantial increase in the limits.

There is confusion about how those in receipt of occupational and State pensions are taxed for the reasons outlined by the Deputy. What happens is that the social welfare pension is deducted from the allowances payable and taken in one go from the occupational pension. The Department of Social, Community and Family Affairs also operates a PAYE system in so far as the State pension is concerned. Successive Ministers for Social Welfare have been reluctant to make that Department an employer also. If one did so, there would be an even spread of the deductions there and the deduction from the occupational pension. When I was Minister for Social Welfare, I rejected that idea and subsequent Ministers have done likewise.

It is a problem of communication. No matter how well designed the Revenue's leaflets, which have improved enormously over the past ten years or so, people do not appreciate that point. The only way I can see this achieved is by increasing the exemption limits, which means fewer people will be affected.

The last question the Deputy asked related to marginal relief. The marginal relief rate is still 40%, not alone for this particular category of taxpayers but for other categories also. As we have increased the exemption limits and as we have made other changes in the tax code, fewer people are paying tax at the marginal rate. It is one of the benefits of what we have been doing in recent times.

However, people who are just outside the exemption limit are hit immediately at 40%, and that creates difficulties also. With the tax rates reducing, I will be considering what the marginal rate should be in future.

Mr. McDowell

I tabled an amendment, which is scheduled for discussion this morning but which we may not reach, which is pertinent to this issue. I attempt in amendment No. 16——

Mr. McCreevy

Chairman, may we go into private session for a moment?

Chairman

Is that agreed? Agreed.

Sitting suspended at 11.52 a.m. and resumed at 11.53 a.m.

Mr. McDowell

This may save the committee time later. I want briefly to address this issue since I have not done so heretofore. Amendment No. 16 attempts to identify specifically pension income and to exempt from tax the first £5,000 for a single person or £10,000 for a married person. It is coming from the same angle except that it is targeted exclusively at pension incomes. The Minister may want to address that at this stage.

I agree that, in terms of the income tax exemption limits for single people and married people below the age of 65, by virtue of other reforms the marginal rate is becoming less relevant, but is there not a case for simply making the age allowance an additional tax credit or an additional personal allowance and doing away altogether with the marginal rate? I cannot imagine that there would be that much of a loss to the Exchequer if the Minister did so.

Mr. McCreevy

As we progress further down the road, the end of which we have practically reached now, towards tax credits, those questions of how we could address these particular problems can be further considered. On Deputy McDowell's amendment, to start differentiating between different classes of income would raise all kinds of problems for me and I will be opposing his amendment there also.

Mr. McDowell

The Minister understands the reasoning behind the amendment, which is quite simple. It causes a great deal of resentment when somebody has a small occupational pension. There is a particular difficulty, by virtue of the fact that the Minister is increasing the contributory old age pension, that the more the old age pension is increased the more the occupational pension is likely to be subject to taxation and therefore there is a clawback from the occupational pension. It is impossible to explain the equity of that to older people. The case there is a good one. I will leave the rest of my comments in that regard until we get to that amendment.

Mr. Noonan

I am not pressing the amendment.

Mr. Deenihan

Based on the commitment by the Minister that we will have it next year, we will accept that. We will claim full credit for it.

Amendment, by leave, withdrawn.

Amendment No. 3 not moved.

Chairman

The question, "That section 2 stand part of the Bill", is postponed until 1 o'clock.

SECTION 3.

Chairman

Amendment No. 4 in the name of Deputy McDowell is deemed out of order as it involves a potential charge on the Exchequer.

Mr. McDowell

I accept that this is in accordance with precedent. When the Minister is making tax reductions to the value of £1.2 billion and the Opposition believes this is too generous, it is not in a position to table appropriate amendments because it is deemed to be a charge on the Exchequer. The Opposition is therefore left in the perverse situation where it cannot propose an increase in tax or a less generous tax reduction than that which has been proposed by the Minister. This removes one potential source of debate from the committee's deliberations.

Amendment No. 4 not moved.

Chairman

Amendment No. 5 is in the names of Deputies Noonan and Deenihan. Amendments Nos. 5, 6 and 7 form a composite proposal and one decision should be taken on the three amendments. Therefore, amendments Nos. 5, 6 and 7 may be discussed together by agreement. Is that agreed? Agreed.

Mr. Noonan

I move amendment No. 5:

In page 12, to delete lines 27 to 48, and in page 13, to delete lines 1 to 9.

This is an alternative section 3. The Minister got it wrong in the manner in which he intends to restructure income tax for the next tax year. There is a better way of doing it. In proposing the new table in amendment No. 6 and making the necessary deletions to insert it, we are drawing on Fine Gael's published tax proposals. To see the full impact of them, there are other amendments which are relevant also, those which would increase personal allowances and those which would increase the PAYE allowance.

After all the hoo-ha and controversy about individualisation, it seems the only reason the Minister opted for individualisation was that it costs less than simply having double the tax allowance which applies to single persons apply to married couples. It was not based on idealogical, philosophical or financial reasons. It was simply that when the Minister did the sums and decided to extend the standard rate band from £14,000 to £17,000, he found that if he was to double that for married couples it would increase to £34,000. He then decided to claw back something by saying that it will increase to £34,000 if both spouses are working, but if only one is working it will increase to £28,000. After all the fog has cleared away, I cannot see any other justification for the manner in which the Minister proceeded. I cannot see why he would have drawn upon himself the rage of so many couples where there is only one spouse working. It seems to have been dictated by financial considerations. What is the difference in cost to the Exchequer of increasing the £14,000 to £28,000 and the £17,000 to £34,000, as against the manner in which the Minister did it?

When the Minister looked at the £1 billion or so which he had available to him for tax reductions this year, he should have weighted it more towards the low paid. Last year we acknowledged the progress the Minister made when he changed the provisions so that a person entered the tax net only when he or she earned £100 per week rather than £70 per week, but on this occasion the Minister has moved it simply from £100 to £110. I would have thought that the primary purpose of the tax relief package in the budget on this occasion was to bring about a situation where the trade union movement, at social partnership negotiations, would have traded low nominal rates of wage increases for extensive tax relief. Perhaps the Minister will again recall the controversy the week after the budget. Much of it came from persons like myself but also from such people as spokespersons from ICTU and, particularly, people like Des Geraghty of SIPTU, who stated very strongly that it was skewed away from relief to the lower paid and that it did not do enough for them. Whatever one's philosophic position, the facts proved that. It was a reversal of what the Minister did last year. He moved from £70 to £100 last year but this time he only moved from £100 to £110.

The Minister did that in the year in which the minimum wage is being introduced. There are various definitions of the minimum wage but if one takes a 39 or 40 hour week at £4.40 per hour, one is talking about £170 per week. I do not mean to personalise this but what the Government is saying on this occasion is that on the one hand, it has made a policy decision, it has adjudicated weekly income and that if one is not earning around £170 per week, one does not have enough money to live on. That is basically what the Government is saying as it introduces a basic minimum income. On the other hand, it is saying that now that it has conceded that one needs £170 per week to live on, it will only exempt the first £110 of it from tax and that one will be taxed on the next £60. That makes no sense. It certainly made no negotiation sense in going into a wage agreement where the headline rate of wages was going to be crucial to the competitiveness of the economy.

It was the first objection I made to the budget and, in retrospect, I would be even more reinforced in the view that the catastrophic flaw in the budget was the fact that it did not give enough to persons on low pay and that the level of exemption at the low pay level was very little. To see the impact of the difference of approach, the provisions in subsequent amendments to increase the personal allowances would be relevant as well.

It was interesting to see what happened subsequently. The social partners, particularly the trade unions, applied much pressure at negotiation level. While the result of their pressure is not reflected in the Finance Bill, it is certainly reflected in the Social Welfare Bill given the adjustments which had to be made on PRSI and so on. It is also reflected in the fact that, although the new Programme for Prosperity and Fairness is lifting the minimum wage to a fiver an hour so that someone working a 40 hour week will earn £200, there is a commitment from the Minister to exempt all that from income tax. That is written into the terms of the agreement.

It is clear that at a minimum the Minister positioned himself incorrectly. He may think that in spite of that he has an agreement. He has an agreement all right which will go through. The vote will be carried, although marginally, by the trade union movement but it will not stick. He will have frightful difficulty holding the line for 33 months. The rate of inflation on the consumer price index is about 4% and, on the adjusted European measure, it is about 4.5%. We are measuring 4.5% against at a 5.5% wage increase every 12 months. Low paid people have a valid point in saying they are not getting much out of this and that of the 5.5% they are getting, which is high in nominal or headline terms, 4.5% of it is being taken away in inflation.

Do not be surprised if trade unions try to increase this amount. We have seen it already with the NBRU and, to a lesser extent, with SIPTU in so far as it also represents Dublin Bus drivers. Look at the negotiating position taken by CIE where, to get people to the table to negotiate in the first instance, it put £15 on the table. We have a fair idea what bus drivers actually get at the end of the week but the quoted basic was £207. What they get is more than that amount, but £15 on the table on the quoted basic is about 7%. To get people around the table in one month's time to negotiate, 7% has to be put on the table. Does anyone think it will be taken off it in the first round of the negotiations?

Look at the trade union of which I was a member, the ACI. I am not too sure if I am still a member of it. It was not noted for its militancy yet it has broken from congress and has gone in with a claim for 30%. Its meeting during the week has clarified that the 30% is not a top up from the 15.5% but is on top of it. These issues have arisen before the wage agreement has even been signed. The Minister has made a very serious mistake in this budget in his treatment of the low paid. He played a very good bunker shot in the wage negotiations to agree that over the next three budgets the minimum wage will be completely exempt from income tax. I strongly support that position because I advocated it when Fine Gael published it tax document at the beginning of the year.

The third element of what we are saying is that there was scope to introduce a middle rate of income tax. At the time we proposed 35% but given that the Minister has proposed alterations to the two rates, we now propose 33%. Again, the middle point is being established. The Minister and I have agreed for a long time that people are paying the higher rate of tax at too low a rate of income. However, there is less agreement between us on the second proposition I made that the jump between the standard rate and the higher rate is far too high. From 24% to 46% is a 22% jump and from 22% to 44% is still a 22% jump, which is too high. If a person is offered a better job which takes them into the higher rate of tax, they will look at the jump. The young bright person in Boston, who looks at the package he is being offered in Dublin, will ask how it nets out. Immediately, it is the jump between the standard rate and the level of the higher rate which becomes an issue on top of the price of houses or the cost of rent.

As the Minister reforms the income tax code - he is a reforming but wrong headed Minister and we would not take that away from him——

Mr. McCreevy

Like Luther maybe.

Mr. Noonan

At least he has not nailed anything to anybody's door.

Mr. McCreevy

Not yet.

Mr. Belton

The Minister has a role model.

Mr. McCreevy

I wonder on what street I would start.

Mr. Noonan

We could make a suggestion, if the Minister could find the house. Not everyone knows the address.

We are saying the jump is too high and that the Minister should consider a middle rate of tax. I know why a middle rate or an alternative rate of tax has been rejected by the Department of Finance for a long time. We all agree there were too many rates historically. There was a point in the 1980s when there were five rates. The Department and the Revenue Commissioners eventually simplified it and I can see they will not throw away the cards or move from the two rates lightly.

However, the situation has changed. While it was very complicated to have a third rate of tax, because one needed an additional table allowance, that complication is not as acute now because everybody's tax affairs are computerised. It seems that the additional piece of software which would apply the type of table allowance which would arise from a 33% rate of tax would not be onerous on the Department or on the Revenue Commissioners. It is, in effect, only an administrative detail. While the additionality of another table allowance would have been a very persuasive argument even three or four years ago, it is not a very persuasive one now. As the Minister looks to the future and the reform of taxation, I would like him to look at the idea of the 33% rate also.

The Minister might clarify his position. He tried to do so last week in the Dáil on Second Stage but it did not ring too clear to me. His position now seems to be that he is going to proceed until 80% of taxpayers' pay tax at the standard rate of tax only. That was the commitment in his party's programme at election time and it is reflected in the Programme for Government. What the Minister announced on budget day was different. Through a series of moves, he intended to ensure the breakdown would be 83% and 17%. That was the ultimate breakdown he envisaged.

In his reply on Second Stage he argued that not only would he keep the individual bands in line with wages over the 33 months of the wage agreement, but at the end of that period he would proceed to ensure the breakdown would be 28% and 56%, whereby the family with one spouse working would pay tax at the higher rate after earning 28% of his income and the family with two spouses working would go on the higher rate after earning 56% of their income. The Minister went on to say this needed to be done to reach the target of 80%. However, if he considers his other commitment, to exempt from income tax people on the minimum wage, the knock-on effect of that would be that between 75% and 80% would pay tax at the standard rate.

He does not seem to have recognised that by accepting the exemption from income tax of people on the minimum wage, he would very nearly achieve his other objective and he would not need secondary mechanisms to reach that target figure. I asked Revenue and the Department of Finance to cost our proposition that people on the minimum wage of £170 should be exempt from tax. I was advised that the knock-on effect of that would be that 75% would pay tax at the standard rate and 25% would pay tax at the higher rate without the need to make any other moves.

The public should not underestimate the cost of this proposal. It involves a major cost but account must be taken of its knock-on effect. I would be interested to hear the Minister's view on the position it would bring about. If the first £200 of all income was exempt from income tax, what effect would that have in terms of the percentage of people who would pay tax at the standard rate? I suspect the figure in percentage terms would be in the high 70s, if not middle 70s. That is the alternative approach my party would put forward. We have not cross-costed every part of this proposal because it is a modification of what we proposed originally and it is open to debate. The Minister should not say this cannot be done because it would cost so many billion pounds. That is not the purpose of it.

Mr. McDowell

The section deals with the individualisation proposal and the amendment is Fine Gael's response to that. It is worth recalling the two justifications the Minister gave on budget day for the individualisation proposal. As Deputy Noonan said, the Minister's arguments were that it would take 83% of taxpayers out of the higher tax net and it would increase the incentive to work. We must consider carefully those two justifications.

As regards the argument that it would increase the incentive to work, since budget day I have had an opportunity to examine at leisure the statistics on the participation rate of married women in particular in the workforce. I am not persuaded that there are major grounds for increasing their participation rate. As the Minister will be aware, the participation rate of younger women in our workforce is at the European average. However, the major deficit in terms of participation is among middle age and older people. I am not persuaded by the Minister's argument in this regard and he might explain why he believes such a measure will increase the incentive to work. I am not persuaded that the changes he has made will incentivise women aged 35 and older to return to the workforce. I do not see that happening. Even if we assume it would happen, the scope for it is relatively limited. I am not sure the motivation behind the change the Minister made stands up.

His other justification for the measure was that it would reduce the percentage of people paying tax at the higher rate. There are difficulties in the use of terminology in this area. I am particularly conscious of this because, as the Minister will be aware, I advocated we should proceed along the lines of increasing the tax credit, which would exempt more and more people from paying tax altogether. Each time I asked the Department to cost this measure, officials gave me figures that were impressive but they were usually accompanied with a rider that such a measure would considerably increase the number of taxpayers who will pay at the higher rate. It would not increase the number of income earners who would pay tax at the higher rate but it would increase the percentage of people in the tax net who pay tax at the higher rate. We must be careful of the terminology we use in this regard.

The primary focus of Labour Party policy is to exempt a considerably increased number of people from paying tax altogether. The proposal we made this year would have exempted another 150,000 to 180,000 from paying tax. While the effect of that would appear to increase the percentage of people paying tax, it would really increase the percentage of tax payers paying tax at the higher rate. There is a misleading view on the impact of such a measure and we need to refine our terminology on that score.

Amendment No. 6 repeats Fine Gael's commitment to introduce a third rate of tax or a middle rate of tax. I have some difficulty with that. I do not wish to open up another area of debate, but I will briefly give my view on the effect of such a measure. It would reduce the percentage of people paying tax at the higher rate to 6% or 7% - that was the figure from the Department when I last inquired about the impact of such a measure. Such a percentage is too low. The benefit would accrue not only to middle income earners but to higher middle income earners and I am not sure that should be the priority objective.

In terms of there being a case for introducing a third rate of income tax, an introductory rate of income tax is worth considering, although I am not fully persuaded by that case, but in so far as I would consider a third rate, I would be more inclined to consider an introductory rate of income tax on the first £2,000 or £2,500 of income at a rate of 10% or 12%. The Labour Party's view is that we should build on measures in last year's budget. We should take the tax credit route and exempt more and more people from tax. The Minister is well aware of the effects that would have. It would give the same benefit in cash terms to everybody who pays tax but, proportionately, it would give far more to those who are on a relatively low income.

I think it is agreed that a problem with the thrust of the Fine Gael amendment is in regard to single people earning approximately £20,000 to £24,000. We must examine specifically the position of single people who pay the higher marginal rate of tax but who are still under the PRSI threshold. Those people pay a marginal rate of tax of 48%, whereas people earning above the PRSI threshold pay a marginal rate of tax of 44%. The gap has narrowed to an extent where it would be possible to eliminate it and peer inequity without too much expense.

Mr. Deenihan

I stressed the importance of targeting the lower paid during the debate on the budget and on Second Stage of this Bill. I am aware of a number of local companies and small businesses that cannot afford to pay their employees higher wages to maintain their living standards and motivate them to work rather than go on social welfare. The only way their employees can get more money is through the tax system. Many companies in rural Ireland are under pressure from internal and external competition. They cannot survive by giving their employees wage increases in excess of those provided for in the wage agreements, which would help improve their standard of living. The Minister realises that the only flexibility that can be introduced to ensure those employees earn more money is through the tax system.

Businesses in the tourism industry in rural Ireland, especially in the catering sector, have a high turnover but they are not making a profit. Those businesses are labour intensive and the people employed in them have been driving our economy for years and deserve a break. From the rural point of view it is important to target the low paid through the tax system.

The Minister introduced three rates of VRT in last year's budget.

Mr. McCreevy

There were three in existence.

Mr. Deenihan

Yes and based on that principle or argument we suggested there should be a similar arrangement for income tax. It was based on that argument last year when we suggested there should be a similar arrangement for income tax. We argued that very strongly last year and now Deputy Noonan has made it part of Fine Gael's tax policy. I discussed this matter with a number of accountants and others who are involved in making tax returns every day and the idea found much favour with them. It would affect people on lower to middle incomes. It would certainly affect many of the people who work in industry. The average industrial wage is about £16,000 but it is increasing. Administrative and technical staff on higher earnings would benefit from this proposal which would keep workers in a large number of plants below the higher rate. There is much merit in it.

The Minister obviously wants to simplify the tax code and have the least possible number of boxes. I agree with that because the system has been too complex and the Minister has simplified it a lot. However, this middle tax rate would not make it any more complicated. That is where the philosophy and reasoning behind the proposal comes from.

Mr. McCreevy

The amendments proposed by Deputies Noonan and Deenihan envisage a structure which would contain a standard rate band of £17,000 for single persons and £34,000 for all married couples; introduce a new third intermediate rate of 33% which would apply to a tranche of taxable income of £8,000 for single persons and £16,000 for married persons, above the standard rate band; retain the standard and higher rates as proposed in the Bill with the higher rate applying to taxable incomes of £25,000 for single persons and £50,000 for married couples. The overall effect of these amendments would be to set aside the radical change which I am introducing this year - that is a movement to individualisation of the standard rate band.

As I have explained previously, one of the main difficulties with the present band structure - a structure which these amendments envisage should be retained - is that the single person's standard rate band is doubled for all married couples, whether one or two incomes are involved. Nobody on this committee needs to be reminded that the pattern of work in Ireland has undergone a remarkable change in the last decade. The proportion of households in which both spouses work outside the home is now above the European Union average. An increasing number of these households find themselves liable to pay income tax at the higher rate on what are modest incomes. In An Action Programme for the Millennium, the Government is committed to work towards having 80% of taxpayers taxed at the standard rate. The Government believes that the introduction of a single standard rate band for each individual taxpayer is essential in order to meet that commitment.

Now that allowances are effectively converted to tax credits, the only way to get the numbers on the top tax rate down is to widen the standard rate tax band. The most effective way to widen that tax band is to put it on an individual basis and tax persons on what they earn as individuals, whether single or married. This is what the Government has set out to do and the first step in this direction is contained in section 3 of the Bill.

If it is to be meaningful, tax reform must mean more than tinkering with the system. It must involve making radical change and that is what I am proposing in section 3. I know the Deputies opposite, particularly those from the main Opposition party, will say that what they are proposing is also radical. At the end of the day it boils down to one's judgment.

I have often said that I will be happy to be judged on the combined effect of the five budgets which I will have brought forward by the time of the next election. My guiding principle is to give the electorate what they voted for at the last election. Each of my budgets must be taken as part of a sequence and not assessed as if it were a stand-alone measure. The tax strategy I have pursued will bear fruit in terms of higher take-home pay and increased incentives to work. I am confident that the considered judgment of the electorate on this record will be favourable at the next election.

I am also happy to say that the policy of individualisation has been supported by people outside the political spectrum. Representatives of the social partners endorsed the proposals in the recently published Programme for Prosperity and Fairness, which contained the following statement:

The social partners support the policy of establishing a single standard rate income tax band for all individual taxpayers. They also agree that the standard rate income tax band should be kept under review in the light of increases in income levels and the objective of ensuring that, over time, at least 80% of taxpayers are not subject to the higher rate of income tax.

The results of an MRBI opinion poll last month indicated that the proposal was generally well received by the public, including a high proportion of those who would normally support the parties opposite.

A report in yesterday's edition of The Examiner quoted the chief economist of Goodbody stockbrokers as emphasising that economic growth is dependent on the implementation of the Government’s current tax policy, “especially the tax individualisation scheme”.

Mr. Noonan

Is it as good as the one this morning?

Mr. McCreevy

No. I am sorry to correct the Deputy but that is a different one. Just in case anyone takes the Deputy up on that, I will correct it for him here and now.

I remind the committee that in An Action Programme for the Millennium the Government highlighted the need to reduce the burden of personal taxation and to reward effort. The Government's answer to those needs is to retain the two-rate income tax system coupled with substantially reduced rates over the life of the Government. The Government's commitment to the attainment of these specific aims was reiterated in the review of the programme that was carried out late last year.

Apart from granting an effective cut of 11 percentage points for those taxpayers who will be paying at the top rate of 44%, the introduction of a further tax rate, as suggested in the amendments, would be a retrograde step in that it would reverse the direction of Government policy in recent years of simplifying the income tax system through the reduction of the number of tax rates and bands. It would introduce an unwelcome complication to the tax code when taxpayers and employers demand simplicity in the administration of income tax. In the circumstances, I have no alternative but to reject these amendments.

I am sure Deputies will come back on some of the specific questions they have asked, but Deputy Noonan is racing towards the question of an intermediate tax rate band. In principle I have no great objection to it, but when I was the Opposition spokesperson on finance I decided - and I had come to this view over a long period - that messing around and doing little bits to the taxation system gets nobody anywhere. It was the system that previous Ministers for Finance and previous Governments adopted - doing a little bit all over the place and nothing too substantial. However, I came to the conclusion a long time ago that if we were ever to change the taxation system to a new solid foundation, with a simple and effective system, one would have to do pretty dramatic things and concentrate on a few issues.

I have said this at each press conference following each budget. That being the case, I have nothing in principle against having an intermediate tax rate when I get the standard rate down to 20% and the top rate down to 42% as per the commitment in the programme for Government, and if possible to 40%.

The next Administration - and hopefully I might be the Minister for Finance then as well - can consider the question of having an intermediate rate. To try to do all those things at once would be counterproductive, however, because one would then do less at other ends and less on the tax credits. If I had adopted the principle of doing a little bit of everything I would never have moved to tax credits. The principle of tax credits has been around for nearly as long as I have been a Member of Dáil Éireann, but nobody got around to doing it. All kinds of reasons were put forward for not doing it, and there are a thousand other reasons as well. I also decided on the individualisation proposals, that the top rate will come down to 42% and the standard rate to20%. I will fulfil those commitments in my period as Minister for Finance.

I do not disagree with Deputy Noonan that a jump from 22% to 44% - or from 20% to 40%, if we get to that particular stage - is too much in one go. When the individualisation aspect is fulfilled only 12% of all income earners will pay at the new top rate, or 17% of taxpayers. The breakdown is 83% and 17% or 88% and 12%, however one likes to call it. It is more correct to refer to them as income earners and that gives a percentage of only 12% paying the new top rate.

Allowances are now standard rated and increasing them would have no effect on those people entering the high rate. We discussed this matter so often and I have repeated myself on many occasion. I have done so many interviews, press conferences and answered parliamentary questions on this matter. The debate on the budget concentrated on the individualisation issue until recently. When this Bill is passed and in place - I said this in the Seanad the week after the budget - people will wonder what all the fuss was about in December 1999. People will wonder why this measure was not introduced many years ago. The combination of tax credits with measures to streamline the income tax code, to make it simpler and more effective, and lower rates will mean that when I have finished my term as Minister for Finance the system will be far better and people will wonder why this was not done many years previously.

Mr. Noonan

It is true that if one wants to dramatically reform income tax dramatic measures are necessary. However, it is invidious for the Minister to compare his position to that of his predecessors because most of them realised that dramatic initiatives were necessary but they did not have the resources to be dramatic. It is unfair to make——

Mr. McCreevy

They could have introduced tax credits.

Mr. Noonan

Yes, but the Minister's party opposed them when my party advocated them. It was a reversal of positions. The year before the Minister implemented tax credits I published a statement on income tax and he advocated them.

Mr. McCreevy

Yes, I did.

Mr. Noonan

We would not be far apart on that issue.

I want to move on to the argument underpinning the Minister's individualisation proposal. He is arguing and drawing on the great and the good of economic commentators to say that unless he did this the economy would not prosper. I do not believe that. It is a fact that working people pay too much tax and they pay the higher rate of tax at too low a level. Now that there are resources available, for reasons of equity and fairness people should pay less tax. Due to the manner in which couples have been traditionally taxed the incidence of taxation hits the second spouse at work, who is usually the woman, rather than the first spouse at work. Therefore, we would all agree that for reasons of equity and fairness huge tax relief is necessary, now that we have the resources. We are ad idem on that.

Labour force considerations was the second reason for changing things around. The Minister and I have argued that we would have higher work participation rates among women if fewer women paid tax at the higher rate. We are ad idem on that as well. The Minister said that female participation in Ireland is higher than the European average.

Mr. McCreevy

Only in a certain category.

Mr. Noonan

Yes, that is not the full picture. There is an 80% participation rate among women ranging from 25 to 45 years but it quickly tapers off after the age of 45.

Mr. McCreevy

That is correct.

Mr. Noonan

The participation rates in comparative countries, for example the United Kingdom, the percentage in the lower 90s. That percentage would be common in Scandinavian countries. Whereas countries such as Portugal there are lower participation rates for historic reasons as well. Nothing hinges on these statistics either.

However, the country is running out of workers. We can only look for additional workers in four groups. They are immigrants and social welfare recipients, who are declining in number, particularly in terms of skilled people. We can also examine bringing in foreign nationals with skills or seek higher participation rates by women. Again, we are ad idem on that. The ideological argument underpinning Fine Gael’s tax proposals would have pushed for extra participation by women in the labour force by removing many people from the higher rate of tax and by giving them greater take home pay.

The issue is how much money the second spouse can take home, not the ways and means to deliver that. Whether it is done by dramatically increasing the range of the bands as they the apply at present to both spouses or by individualisation does not matter in terms of labour force effect, as long as one can deliver enough. The only reason the Minister has done it in this way is because it costs less.

If he had moved the range of tax band from £14,000 to £17,000 and doubled it in the traditional fashion it would have cost more money. However, in terms of fairness, equity and giving an incentive for labour force participation he would have had as good an effect as he is having now.

It is incorrect to say that the Minister's way is the only way that it could have been done. I agree with him that his way costs less, but unless he is maintaining a position that the incentive is a stick rather than a carrot then what he says is illogical. On the other hand, if he is saying that he can incentivise by using the stick rather than the carrot and, in effect, that women will be forced out to work to avail of the additional range of tax band and that the group dynamics within the family or marriage will ensure that additional women join the labour force because of the difference between £28,000 and £34,000 in terms of the standard rate band then I would agree with him. I do not think he has said that. In fairness to the Minister, he has been talking about incentivising women to return to work because they would have greater take home pay. That is the basis of his argument. He has not said at any stage that he will beat them out the door with a taxation stick.

Mr. McCreevy

My critics have said that I said that.

Mr. Noonan

I know they have but that was due to the position the Minister put himself in. There is no other conclusion one can arrive at. As long as he maintains his position that from an ideological position his way is best then we must come to the conclusion that he is talking about the stick rather than the carrot. On the other hand, if he admitted to us that the only reason he took this route was cost and that he can move faster up the road because it costs less, then there would be a logic to what he is doing.

The unfairness of this scheme outweighs the benefits of reaching the goal faster. We could have an argument about that. It is not true that the economy and Ireland's future prosperity depends on individualisation. It is not true that individualisation is equitable and fair between couples because it is not. It is true that there must be a fairer taxation system and that second spouses at work must have a greater take home pay than at present. It is also true that the labour force needs additional workers. These statements are true and I agree with the Minister when he repeats them. However, it is not true that he needed to individualise the tax bands to achieve those policy objectives. He has been motivated by cost and by being so motivated he has brought about a position which is intrinsically unfair and alters what people expected from the tax code.

The Minister's bunker shot or £3,000 allowance he provided for to get him out of trouble has been welcome in many families. It would not have been necessary if he had proceeded in the way this amendment proposes by simply doubling the allowances. He would not have needed an extra allowance because he would not have required a balancing act. The trouble about it is that in terms of his arguments for the participation of women in the labour force it has the opposite policy effect. A lot of the merit behind his argument, even if we were to give him merit for it, has been taken away because he was forced to introduce the £3,000 allowance which, apart from its merits of equity or fairness, removes the incentive for many families to have a second spouse working. The first thing that happens when they go back to work is that they lose £3,000 in tax credits or 22 points. I presume the Minister has the figures for what the cost would be. What I am looking for - leave the 33% out of it, that is a different argument - is the difference in cost between 17-34 as opposed 17-28.

Mr. McCreevy

It is £130.6 million.

Mr. Noonan

And what is the cost of the allowance? The Minister told me the last day——

Mr. McCreevy

It is £125 million.

Mr. Noonan

It is £125 million, so the Minister gained £5 million with this rigmarole; he gained £5 million by bringing this down on top of himself.

Mr. McCreevy

The £3,000 standard rate allowance was decided upon by the Irish people in June 1997 when that was put before them. It is a funny thing, but we have elections here every few years and this was put before them. Deputy Noonan is correct. I did not intend to introduce the additional stay at home allowance in this year's budget or Finance Bill, but as we move forward with individualisation it was the intention to have it in next year's Finance Bill or the one after. The Chairman would have more knowledge of this than most as he was a member, with me, of the Fianna Fáil taxation group before 1997. It was recognised at the time that we would have difficulty in not recognising the position of the stay at home spouse. That is why the Fianna Fáil tax document put forward the idea of a £2,000 standard rate allowance for stay at home spouses with children. During the campaign, under the joint document issued by Fianna Fáil and the Progressive Democrats on 4 June, that was extended to the handicapped and the aged. I did not intend to bring it forward in this year's budget because, in my view, there is an imperative in what individualisation of the tax code will do - it will create fairness between the same categories of persons. I do not accept there is anything unfair about it.

I never said I was forcing people out to work, but my critics said that would be the effect of this measure. Some of this may be my own fault, though we must let people judge it in years to come, but there is no forcing anyone out to work. However, there is desperate unfairness in the present tax code arising from my party's decision in Government after the Murphy judgment of the early 1980s. When that judgment was made and when, during the subsequent Finance Bill, the decision was made to keep doubling the whole time, Deputy O'Kennedy, as Minister, read into the official record of the Dáil and Seanad that he was not compelled to do what he was doing under the Murphy judgment. However, nobody took it up, even the newspapers, because the Opposition successfully said he was only doing so because of the Murphy judgment. Deputy O'Kennedy read into the Dáil official record - and into the Seanad official record in particular - exactly why he was doing that and there was no need to do so. He did it for the reasons of the time and at considerable cost - to implement the Murphy judgment would have cost approximately £30 million at the time, while what he was doing cost approximately £130 million, though there was no need to do so. However, he was drowned out.

Since that time the tax situation has been desperately unfair, particularly to the single worker. Earlier today Deputy Noonan and others referred to taxpayers hitting the top rate so quickly. This can never be corrected unless one goes to individualisation in my view.

Mr. Noonan

That is not so.

Mr. McCreevy

I accept everyone has a different view on taxation, but I have no hesitation in saying it is fundamentally unfair that, where two people are working and have all the trauma and additional expense of having two working, they are not compensated for what is treated in the same light as single income.

Questions were asked about what is fair and equitable. I feel my proposals are fair and equitable and will be seen as such in time. Deputy Noonan is not correct in saying the only arguments for introducing individualisation relates to the labour force economic argument.

Mr. Noonan

No, there is fairness as well.

Mr. McCreevy

There have been many comments in the interim, but there were also such comments before the budget. However, they were drowned out after the budget in the same way the Combat Poverty Agency was drowned out on individualisation. I have not been known in the past to be especially appreciative of the efforts of the Combat Poverty Agency, but Members will note that that body said I should stick with the individualisation proposals. Whatever about Deputy Noonan, who made legitimate criticisms of individualisation as Opposition spokesman, I was amazed with some of the utterances from the left wing, not only from Deputy McDowell but from his other comrades there. For as long as I have been a politician, they have been screaming at conferences that this is the way to go. To be fair to the trade union movement and the equality officer of the largest union, she also said immediately after the budget that I should stick with individualisation but one would not have heard that from Labour Deputies.

Mr. Noonan

The Minister knows why - the objective is the individualisation of social welfare, which will put a big bill on his table. That is what it is about. All the demands for individualisation are being driven by the individualisation of social welfare.

Mr. McCreevy

As Minister for Social Welfare and subsequently as Minister for Finance I have recognised that this is the way social welfare is going to go. I have said so inside and outside the House. It is inevitable and it will come. I am on the record as having said so as far back as my time as Minister for Social Welfare. There is nothing new in what Deputy Noonan is saying. However, Deputy Noonan's was a fair political comment, but the hypocrisy from the far left after the budget was mind boggling.

Mr. Noonan

Deputy McDowell is sitting to my right.

Mr. McCreevy

In certain aspects Deputy Noonan is correct. Whatever about Deputy McDowell, some of his colleagues' comments were amazing, particularly those of Deputy Rabbitte given that he was an eminent trade union official in a past life. However, nothing surprises me any more.

Mr. McDowell

Time is getting on.

Mr. McCreevy

Deputy Noonan raised the matter of the low paid in the budget, but whatever people think of Mr. Geraghty's comments about the low paid on the Sunday after the budget, people forget that he said he had nothing against individualisation - that he was for individualisation - but that his problem was with the low paid. With all the shouting about individualisation he was also drowned out, particularly when people started calling radio programmes.

I will not embarrass Deputies opposite by quoting the figures from the MRBI poll which show what the views of supporters of their parties are on individualisation, despite the hostile coverage in the interim. There was a big silent majority out there for it and come the next election my Deputies will have me on a pedestal.

Mr. Noonan

The Minister will be one of the few moving statues left.

Mr. McCreevy

However, I will not hold my breath.

Mr. Noonan

I will return to some of the Minister's comments later, but he said earlier that there was a danger of doing too much and that is the nub of the problem here. The Minister, at least in theory, is committed to a range of matters at this stage and it is just about possible that he could do all of them in the next two budgets, though I doubt it. He certainly could not do so without enormous cost.

Mr. McCreevy

I will do them.

Mr. McDowell

Let us tease out whether he will do them. By my reckoning - and the Minister's comments emphasise it - he is committed to completing the individualisation as he outlined on 1 December last. The stated objective of the Minister and the social partners as set out in the programme is to exempt those on the minimum wage, namely people earning less than £200 per week.

Mr. McCreevy

Not just over two budgets, there are three budgets involved in that.

Mr. McDowell

There are 33 months——

Mr. McCreevy

We are working towards that.

Mr. McDowell

That is the proposal I want to tease out because I feel it is the one which will fall by the wayside. The third proposal relates to the commitment to reduce the tax rates to 40% and 20%, respectively.

Mr. McCreevy

We are committed to reducing the rates to 42% and 20% - 40% if possible.

Mr. McDowell

If we do all of those things, we are talking about at least £2.7 billion at a rough calculation. That is a lot of money and I cannot see the Minister implementing those proposals. If he were to do that, it would be grotesquely inflationary and would stoke up demand in the Irish economy to an unsustainable level which would leave us open to a very hard landing. I am on record as having said that previously. The Minister should examine some of the comments he made in the past about the inflationary effects of very mild tax packages by comparison to what he has done.

I cannot see the Minister following through on all his proposals and I would be interested to know which of them will fall by the wayside. I suspect that, given the Minister's instincts and what we have seen of his record, it will be the commitment to take the minimum wage out of the tax net.

Mr. McCreevy

What political party announced its intention to introduce a minimum wage at the last election?

Mr. McDowell

I accept the Minister's point.

Mr. McCreevy

I, on behalf of the Fianna Fáil Party, announced that at a function in the Royal Hospital Kilmainham, although it did not receive many headlines the following day.

Mr. McDowell

I congratulate the Minister on that without equivocation.

Mr. McCreevy

That is the first time I have drawn attention to the fact that I introduced the proposal.

Mr. McDowell

I accept that is the case. I have always argued in favour of a minimum wage and am aware of where the argument against it came from. The Minister is probably also aware of that. I believe the Minister is committed to achieving more than he can achieve and that if he does achieve his commitments, they will be too much. We must have some regard to what level of tax reduction is appropriate to the Irish economy in terms of stimulating demand and allowing us to pay for services which we all agree need to be improved. That aspect of the debate has been completely lost in the rush to reduce taxes on a variety of fronts.

The Minister quoted earlier from a section of the programme which deals with individualisation. I do not understand the second sentence of that. The Minister restated his intention to move towards individualisation——

Mr. McCreevy

May I explain that sentence to the Deputy? Deputy Noonan tries to be fair on most occasions although he does not always succeed. Following the publication of this document, he wrote a few pages about its implications. Deputy Rabbitte also took up the issue last week and proved that he had not read the document at all but had heard Deputy Noonan speaking about it a few times and took his comments to be correct. The sentence means that the current £28,000 band will be increased upwards in line with the wage agreement; it does not have anything to do with the £17,000. Deputy Noonan stated that I had watered down my comments in the budget and that I was only committed to increasing the £17,000 by 15.5% over 33 months.

Mr. Noonan

Not until after the 33 months.

Mr. McCreevy

No, the sentence to which Deputy McDowell referred means that the current £28,000, which would be the single standard rate band, will be increased over the period in line with wages.

Mr. Noonan

Is the Minister saying that in addition to increasing the figure to £23,500 next year and £28,000 the following year, we must add wages to that or is he referring to a further period after the 33 months?

Mr. McCreevy

The document states that these changes will occur "over time".

Mr. Noonan

It is a long time. Can the Minister pin down the time frame?

Mr. McCreevy

I will. On Deputy McDowell's point about inflation——

Mr. Noonan

What about the time frame?

Mr. McCreevy

——other considerations in regard to the economy must be taken into account when budgets are being framed. I am not currently in a position to say that I will definitely take specific actions in the next budget as other considerations may come into play. For example, if world economic conditions were to change, all Finance Ministers would have to make appropriate adjustments to meet that. The entire programme is predicated upon the belief that the economy will grow by an average 5.6% over the coming years. If that occurs and we do not encounter any economic disasters, I will fulfil my promises in regard to the individualisation of the standard rate band over the course of the next two budgets.

Mr. McDowell

Will the Minister fulfill all three commitments in regard to individualisation, reduction of the rates and taking the minimum wage out of the tax net?

Mr. McCreevy

In the absence of any dramatic changes in general economic circumstances and having regard to inflationary considerations, I will fulfil the commitments given in An Action Programme for the Millennium and the updated programme in regard to tax rates and individualisation over the next two budgets. The commitment in regard to the minimum wage, negotiated with the social partners, will be put into effect over the course of a number of budgets, not just the next two budgets. That is what we are working towards. I intend to fulfil that commitment over the next three budgets. Hopefully, I will be still be the Minister for Finance following the next election.

Mr. Noonan

What about the £3,000 allowance which will go out of balance as individualisation proceeds? Will the Minister balance that?

Mr. McCreevy

I have stated previously in regard to the introduction of a £3,000 standard rate band that further consideration would be given to individualisation and compensatory measures would be taken into account at that time. The debate on individualisation has moved forward, people now have a greater understanding of this issue and welcome its introduction. I look forward to engaging in a debate with Deputy Noonan at the next election and to hearing him say that he will row back on my actions and abolish individualisation. I wish him the best of luck with the electorate.

Mr. Noonan

The Minister has promised so many things that it would be difficult to row back on them.

Mr. McDowell

The Minister has been very helpful this morning but the low pay argument is being overlooked. Some people were pinning their hopes on the Minister's commitment to take the minimum wage out of the tax net altogether. I do not doubt the Minister's commitment to individualisation or the reduction of the rates but given the potential costs involved - taking £5 per hour out of the tax net will cost a lost of money - I cannot see him making any significant progress in this regard.

Mr. McCreevy

Whatever else he might say about me, Deputy McDowell should recognise that I have been inclined to fulfil my promises.

Mr. McDowell

The programme was already weak in drafting terms and it has been further diluted this morning.

Mr. Noonan

The Minister has actually reduced the possibility of the pay agreement being agreed to.

Mr. McCreevy

I recall saying when I introduced tax credits that it would be far easier in the future to make specific changes to the tax code. Deputy McDowell recognises the advantages of tax credits more than most. Some months ago during Question Time, he stated that he was amazed at some of the comments made about the wage agreement as if last year had never occurred.

Mr. McDowell

The Minister deceived himself.

Mr. McCreevy

A specific commitment was given to exempt the minimum wage from the tax net and that will occur over the lifetime of the programme. The Government entered into that commitment freely in the same way as the social partners entered freely into the commitment regarding individualisation. After all this debate about tax rates and so on, Deputies McDowell and Noonan should be happy to note the statement that the Government and the social partners confirm their support for further tax reform and tax reductions to improve the position of all taxpayers and, further, the statement that tax benefits can be delivered through increased personal tax credits, the widening of the standard rate band and reductions in the rates at which tax is levied.

Chairman

As it is now 1 o'clock, before putting the question as provided for in the Dail Order of 24 February, I am required to take the vote on amendment No. 1, postponed earlier this session.

Amendment No. 1 put.

The Select Committee divided: Tá, 7; Nil, 8.

Tá

• Belton, Louis.
• Deenihan, Jimmy.
• McDowell, Derek.
• Sheehan, P. J.
• Noonan, Michael.
• Ryan, Seán.
• Stanton, David G.

Níl

• Ahern, Michael.
• Browne, John (Wexford).
• Carey, Pat.
• Dennehy, John.
• Fleming, Seán.
• Healy-Rae, Jackie.
• McCreevy, Charlie.
• O’Keeffe, Batt.

Question, "That section 2 stand part of the Bill", put and declared carried.

Mr. McDowell

On a point of order, can I take it that the Minister is rejecting the amendments we have not discussed?

Mr. McCreevy

Yes.

Mr. McDowell

I thought so.

Chairman

I am now required to put the following question in accordance with an Order of the Dáil of 24 February: "That in respect of sections 1 to 11, each section undisposed of is hereby agreed to".

Question put and declared carried.

Sitting suspended at 1.11 p.m. and resumed at 2.30 p.m.

Chairman

Regarding the query earlier about readmitting amendments, all amendments that are guillotined can be resubmitted without being mentioned. If they are voted down, they must be mentioned.

NEW SECTION.

Mr. McDowell

I move amendment No. 20:

In page 24, before section 12, to insert the following new section:

"12.-Section 848 of the Principal Act shall extend with any necessary modifications to such charities recognised for the purposes of section 486A of that Act as are certified for the purpose by the Revenue Commissioners.".

This seeks to extend the relief for donations to charities which was introduced a few years ago. At that time the relief was made available to Third World charities which were certified for that purpose by the Revenue Commissioners. I understand that since then the Minister has made certain provisions in relation to corporate donations and the amendment is intended to refer to personal donations as well. It would make available to certain specified charities the benefits on an equivalent basis to those made available to Third World charities a few years ago.

When this argument was made in the past, the usual response was that it was not possible to control it because the number of charities involved was extremely high. I understand there are approximately 7,000 registered charities. However, only a relatively small number of them benefit from tax free status. I have been given a list of approximately 300 charities which benefit from that status at present. It should be possible to develop a certification system under which the Revenue would certify that particular charities qualify for the extended relief. I am open to the notion that the Minister in making regulations or introducing legislation might wish to specify certain conditions which charities would have to meet to qualify for the relief in question. There is a good case for extending the relief beyond Third World charities to which it currently applies.

Mr. Noonan

I support the amendment. The Minister and his officials will be aware that extensive representations have been received from persons representing charities and fund raisers in general for worthy causes. The voluntary sector needs to be recognised as often and strongly as possible. It does an enormous amount of good work for no reward and at much personal, and frequently monetary, expense to themselves.

I appreciate the reluctance of the Minister and his predecessors in dealing with this issue. When moves were made before in respect of charities, the proceeds of which were expended overseas, there was a reluctance on the basis that it would be uncontrollable. However, I understand that since then the Revenue Commissioners have reduced the number of eligible charities from approximately 7,000 to less than 300 who are registered for this purpose. The number has been reduced to a level which is controllable and I ask the Minister for Finance to accept the amendment or introduce an amendment along similar lines to take into account the case we are making.

Mr. Deenihan

I support the case made by Deputy McDowell and Deputy Noonan. Many of the charities concerned do not receive aid from the State and they do invaluable work which is not done by State agencies. One example is the Meningitis Foundation and the increase in the incidence of meningitis is alarming. I made a contribution to the foundation from the proceeds of a fund raising event and I was informed that it does not receive any State aid. This brought it home to me that little support is provided to voluntary agencies. They have some paid administrators but most of the work is done on a voluntary basis. Many of the volunteers suffer from fatigue while the State is awash with money. On the other hand they are looking after people who are not being cared for by the system. The volunteers are fund-raising almost full time while they would prefer to do some development work. However, to keep their organisations alive they must be professional fund-raisers, which diverts the focus for some organisations. In some cases this affects the level and quality of service they can provide. Given the amount of fund-raising many people are donation weary. If the contributors were to get something in return it would give them some recognition.

We got a great deal of briefing on this matter from various charities. Obviously, there was a major campaign to have it extended. Charities are of the view that if extended it would make their lot easier. I ask the Minister to accede to this request.

Mr. McCreevy

This amendment proposes that the relief under section 848 for individual donations to Third World charities, for which such charities receive related tax repayments from the Exchequer, should be extended to include all the charitable organisations which are currently approved for the purpose of corporate donations under section 486A. This latter provision covers domestic and Third World charities and the effect of the amendment would be to pay tax relief under section 848 on donations to domestic charities.

Section 486A was introduced in the 1998 Finance Act following representations by the Irish Charities Reform group. When I agreed to the introduction of relief I did so on the understanding that it would not be extended to include personal donations. At present there are in excess of 5,000 domestic charities in the State. The tax relief for personal donations to designated Third World charities was introduced in 1995 to mark the 150th anniversary of the famine and in recognition of the particular type and scale of the human tragedy in the Third World. The Minister for Finance made it clear at that time that it was not the intention to extend the tax relief to domestic charities. At present there is no satisfactory mechanism in place for the monitoring and supervision of charities. I understand that the Minister for Justice, Equality and Law Reform, under whose aegis such a supervisory body would be, proposes to bring forward legislation later this year which will provide a statutory basis for the supervision of all charities and charitable organisations in the State.

In view of the particular generosity of the Irish public it is likely that the introduction of tax relief for personal donations would involve a significant cost to the Exchequer. In advance of the development of a proper regulatory regime for domestic charities, therefore, I am not prepared to consider any proposal along the lines of this amendment. Consequently, I cannot accept the amendment.

When my predecessor, Deputy Quinn, introduced the Third World charities relief in 1995 he made it clear it was not the intention to extend it to domestic charities. After the introduction of Third World relief, a campaign got under way by the Irish Charities Tax Reform group, which I would have met when in Opposition. It made a case strictly on the basis that if I introduced tax relief for corporate donations that would satisfy the group. As Opposition spokesperson and, subsequently, as Minister for Finance I had letters on my file on this matter.

I remember clearly the then Minister for Finance introducing this personal relief. I am surrounded by eminent advisers, who were delighted with it. I remember getting letters from the Irish Charities Tax Reform group specifying what they wanted. The then chairperson was very pleased and was one of the few people who has ever come back to thank a Minister for Finance afterwards and went public on the airwaves to thank me for so doing. The whole basis of the request at that time was that it would be for corporate donations. I remember putting it to them that they should not come back immediately afterwards seeking tax relief on personal donations and they agreed not to make such a request. I brought it in and succumbed to their request and now I am asked by the same group to extend this relief to individuals.

Mr. Noonan

It is very unfair.

Mr. McCreevy

It is not that it is very unfair but one would have thought that a group that lobbied so successfully would not request something that clearly it had agreed not to request. When I was in Opposition I made a case for relief for corporate donations but the then Minister, Deputy Quinn, would not accede to my request. When I became Minister for Finance I gave in on the understanding that that was all the group wanted. Lo and behold the group is back requesting something it had agreed not to request.

I am not against groups lobbying. However, it is a bit much in such a short period, having got relief on a particular understanding - this can be checked with the Irish Charities Tax Reform group, which now has a different chairperson - to defend the argument and request relief for personal donations. That is not to say that a further extension of this relief cannot be considered in the future. Having acceded to their request it is a bit much to be faced with a request for further concessions when they said clearly they would not be lobbying in that regard. I think it is a bit Irish.

Mr. Noonan

I am sure there is nothing personal in this. The people who went to the Minister and came to me over the years, unlike others who come to us, are not seeking anything for themselves but something for the causes they represent. They are very loose alliances. There would be no bad faith that their position would have changed when their main representatives change a year or two later. It is understandable that if they are getting a tax concession on donations from the corporate sector that they would move to get a tax concession on the bulk of the donations which they receive, which are from private individuals. Frequently the executives and managers in the corporate sector make personal donations rather than corporate donations and in many cases a personal cheque comes from the business community.

I do not think the Minister is strongly opposed to this request if a mechanism could be found to grant it without leakage of revenue and if it could be done in a controlled way. Can the Minister agree to set up a small interdepartmental committee which would report back for the next Finance Bill or within six months? Can we have a mechanism to mark progress on it? I believe the Minister's attitude is harder than the case justifies. There is a great deal of merit in this case. I know there are technical difficulties attendant on doing what we request but a way could be found which would meet the Minister's needs and at the same time deliver the tax relief requested.

Mr. McCreevy

The Deputy is correct that I am well disposed to the charities covered by the umbrella organisation. I just wanted to put on record that having done something on the basis of one arrangement I am now requested to do something else. However, that is water under the bridge and I understand the bona fides of these organisations. I am reasonably sure the Department of Justice, Equality and Law Reform will introduce legislation on the regulation of charities, which has been promised since the Costello report many years ago, later this year. I intend between now and next year's Finance Bill to streamline many of these reliefs under what I term loosely as the charities' regulations. In that context I promise to consider the possible extension of this relief to personal donations.

Mr. Noonan

Will it be done by regulation?

Mr. McCreevy

No. I have to bring in a section to a Bill. I am not committed, in principle, to not giving relief in this area because I believe we should encourage people to give money to charity. If the tax code can facilitate this it should do so. Before next year's Finance Bill I hope the question of tax relief for charitable donations will have been streamlined. I also hope the regulatory framework of charities will have been improved by the proposals of the Minister for Justice, Equality and Law Reform which are long promised.

Mr. McDowell

I accept that the Minister is going some distance to meet our proposal. He appears to accept the merits of our case while the primary problem appears to be cost. Could the extent of the relief available to a particular individual be limited over a period of time? This could limit the likely cost. Can the Minister indicate the cost to the Exchequer of relief on corporate donations?

Mr. McCreevy

The measure to grant relief on corporate donations was only introduced in, I think, 1998 and figures requested by Deputy McDowell are not yet available. I can give the Deputy the figures relating to the cost to the Exchequer of the Third World charities tax relief introduced by my predecessor, Deputy Quinn. In 1995-6 it cost £219,957; in 1996-7, £376,247; in 1997-8, £431,786 and in 1998-9, £404,455. There is a provisional figure for 1999-2000 but it is mean-ingless at this stage of the year. The Exchequer cost of section 46(a) relief which is corporate related charities is not known as the cost is based on the deduction at source by the company and is not separately identified to the inspector. The figures for Third World charity relief is not very large. I will consider some of the Deputy's suggestions regarding the personal donations area.

I can see the benefit in having a limit at the minimum rate and also something at the maximum. In other countries, particularly the United States, tax breaks for charitable donations are used to a very large extent. I do not know if that is a good or a bad thing. Many of the regulations regarding charitable relief need to be streamlined and I intend to do this before the introduction of the next Finance Bill. In that context, I will examine the principle underlying the amendments put forward by Deputy McDowell and the Fine Gael Deputies. I am not ill disposed to the proposals. On the basis of one commitment I was asked, so quickly, to do the very thing I said I would not do. However, I do not hold that against the charity tax reform group. Something will be done before next year's Finance Bill.

Amendment, by leave, withdrawn.

SECTION 12.

Chairman

Amendments Nos. 21 and 22 are related and may be discussed together, by agreement.

Mr. Noonan

I move amendment No. 21:

In page 24, lines 17 and 18, to delete "(other than the spouse of a qualifying claimant)".

Section 12 introduces the allowance of £3,000 which, according to the Minister, is designed to balance any unfairness or inequity that might have resulted from the individualisation of tax bands. I do not propose to go over the arguments for and against individualisation but to treat this as a stand alone proposal. While the proposal has merits, it contains flaws which could be amended on Committee Stage or Report Stage. Amending the flaws will not increase the cost much above the £125 million annual cost of the Minister's provision.

I draw the Minister's attention to anomalies which arise from the fact that two different concepts underpin the provision. The first is the concept of giving a tax break to families where only one spouse works; the second is that of giving a tax break to families where a spouse cannot work because he or she is in a caring role. These two concepts fit easily together much of the time but sometimes they do not. The Minister's provision confines the benefit of £3,000 relief at the standard rate to a spouse in a caring role. This role is defined as looking after dependent children, relatives over 65 or incapacitated adults. However, in families where, for example, the husband cannot work due to illness or incapacity and the wife is the sole wage earner, as well as being the only wage earner she must carry out the caring function. She must cook, clean, shop and do all the usual housework but if there are no children in the family she will not benefit from this allowance. The Minister's advice is that she should apply for carer's allowance or incapacitated relative's allowance but these are paid at a much lower level. Carer's allowance is means tested so the families I have in mind would not qualify for it and incapacitated relative's allowance is considerably less than £3,000. The allowance for looking after a blind relative is significant. However, in general, the allowance is not.

Where one or other of the parents is incapacitated a child, usually a daughter, may give up work to look after him or her. The Minister's provision is available only when one or other of the spouses is the carer. When an adult child or other relative takes on the caring function, at whatever financial disadvantage to the family, the allowance does not apply. Amendment No. 22 seeks to encapsulate what I have outlined. Section 12 gives three categories of caring situations. Amendment No. 22 seeks to add, as a fourth, where a spouse is incapacitated and there is a live-in carer, other than the other spouse. I propose that in such a situation, the working spouse would qualify for the tax allowance. I do not say I have designed a perfect solution but I have identified a real problem which the Minister should address on Report Stage. Otherwise, the provision is anomalous.

Mr. McCreevy

These amendments are proposed to the new home carer's allowance as provided for in section 12. The person being cared for, the dependent person, is defined as a child for whom social welfare child benefit is payable, a person aged 65 or over or a person permanently incapacitated by mental or physical infirmity. The spouse is specifically excluded from this definition. The amendment is designed to set aside the exclusion of a dependent spouse from the scope of the relief. Amendment No. 22 appears to be designed to bring within the relief an incapacitated spouse who is cared for by somebody other than the qualifying claimant.

In considering these amendments I refer the Select Committee to the press release of 8 December 1999 in which I announced the home carer's allowance. This measure was introduced to recognise the role of spouses who work in the home caring for children, the aged or handicapped persons. It was never envisaged that this allowance would be available for the benefit of a one income married couple where, for example, one of them happens to be over 65 years of age. Neither was it envisaged, as appears to be encompassed by amendment No. 22, that a person other than a claimant or his or her spouse would be providing the care. Where a taxpayer employs a carer to look after his or her incapacitated spouse, section 467 provides for relief on expenditure up to £8,500. As the amendments are not in keeping with the underlying reasoning behind the home carer's allowance which, as I have indicated, was intended to cater for a couple where one works outside the home while the other cares for a dependent person, I am not prepared to accept them.

This morning we discussed the question of individualisation and the amendment made to the original proposal contained in the budget of 1 December 1999. I set out what was intended. It is not my intention to go any further, at least at this stage. When this matter was discussed when Fianna Fáil was in opposition the position of the stay at home spouse was appreciated by some of my colleagues, including the Chairman. The Fianna Fáil manifesto refers to a standard rated allowance for stay at home spouses caring for children. This was extended during the general election campaign to a standard rated allowance for stay at home spouses caring for children, the aged and the handicapped. This was provided for in the announcement of 8 December 1999. I had not intended introducing it until next year or the following year. It was never envisaged therefore, even when the matter was discussed when Fianna Fáil was in opposition, that the allowance would be available to a one income married couple where, for example, one of them happens to be over the age of 65. Neither was it envisaged that a person other than a claimant or his or her spouse would provide the care. There are other reliefs available in the income tax code in respect of this. This allowance was designed for a specific purpose and I am not prepared to extend it in the way envisaged by the amendments.

Mr. Fleming

I seek additional information on the new home carer's allowance which I welcome as it avoids the creation of a big anomaly. Will the Minister confirm that a person who takes up employment will also qualify for the £1,000 PAYE allowance if they earn less than £4,000? Until now only one party in a household has received this allowance.

Mr. Noonan

Are we discussing the amendment with the section?

Chairman

We can.

Mr. Fleming

Will the home carer's allowance of £4,000 be payable in addition to the £1,000 PAYE allowance where a person takes up employment? Will it, in effect, be worth £5,000?

Mr. McCreevy

The PAYE allowance, which is standard rated, is granted to everybody in employment up to the level of their income. For example, a person on an income of £800 will have a PAYE allowance of £800. Those who qualify for the home carer's allowance will be able to retain it if they are on an income of less than £4,000. Couples will have to make a conscious decision at the start of the tax year whether they should opt for the allowance or the two £17,000 standard tax rate bands. Under the section a person will not be discriminated against if he or she decides to work for only part of the year.

Mr. Fleming

While I accept the new allowance has received much publicity——

Mr. McCreevy

It was advertised last week.

Mr. Fleming

——the takeup may not be as high as the Minister suggested. While the Minister may be happy about that, I would like to see couples claim their entitlements. The Revenue Commissioners should produce statistics within a few months to ascertain whether the allowance should be further advertised. Under the individualisation proposals the standard rate tax band is being widened by £6,000. There is therefore a gap of £2,000 and I am concerned that this will widen in subsequent years. The figure of £4,000 should, therefore, be reviewed prior to the introduction of next year's Finance Bill.

Mr. McCreevy

The principle of individualisation was debated this morning. Once this is firmly established in the public's mind I would welcome the initiative of a future Minister for Finance to row back on it.

Mr. Noonan

The figure is £3,000.

Mr. McCreevy

Deputy Fleming referred to the earnings disregard of £4,000, which is a different matter. He also referred to the takeup of the allowance. Everybody on the files of the Revenue Commissioners relating to child benefit should automatically receive the allowance——

Mr. Fleming

Without having to fill out any forms?

Mr. McCreevy

Without having to do anything.

Mr. Fleming

It is great to hear that.

Mr. McCreevy

In these cases there is always——

Mr. Fleming

Extra.

Mr. McCreevy

An advertisement appeared in the newspapers last week about the allowance. If taxpayers do not receive it by way of their tax free allowances they should complete form TFA1. It is estimated that the Revenue Commissioners will pick up between 70% and 80% in matching child benefit and tax files. I am certain that a fair proportion of the remaining 20% will automatically notify the Revenue Commissioners that they are entitled to claim the allowance by completing the appropriate section of form TFA1. While there are always some who do not bother claiming allowances at all, increasingly taxpayers are well informed about their tax allowances.

The Deputy can table a parliamentary question to elicit the information sought but perhaps by early next year we will have an exact handle on the matter. We will know what the figures were at the end of the tax year. I will give any information we have during the year but I am certain taxpayers will ensure they avail of the allowance, news of which will be spread by mouth. In the first year of an allowance there is always a certain number who do not know about it. The Revenue Commissioners are spending £100,000 on publicity and advertising.

Mr. McDowell

Can the allowance be shared between a married couple? Obviously where one of them is not working then the person who is working would get the full £3,000 allowance, but where the other is working and earning a small taxable income presumably that person can claim it.

Mr. McCreevy

One may share it any way one likes, but £4,000 is the maximum disregard. The Deputy should not get confused between the disregard of £4,000 and the allowance, or I will start to get confused myself. The £3,000 standard rate allowance may be shared any way one wishes.

Mr. McDowell

In the event that somebody was earning £4,000, that person would be eligible for the PAYE allowance of £1,000 plus the extra £3,000. It could be used entirely by the carer in that situation.

Mr. McCreevy

Yes. As the Deputy will be aware, the PAYE allowance is given only to the person earning the income.

Mr. McDowell

There are several difficulties with this, but the one which relates specifically to the amendment is, as Deputy Noonan correctly pointed out, the genesis of the allowance. Ignoring all the electoral history of it, etc., it came into being not primarily as an allowance which was intended for people in a caring situation but, to use the Minister's words, to rebalance the individualisation proposals. That has created some of the anomalies to which Deputy Noonan referred earlier.

It seems to me that a far more straightforward way of dealing with the caring situation would have been simply to do away with the means test for the carer's allowance rather than do it the Minister's way. By doing it through the tax system, the Minister inevitably creates traps. This morning he pointed out that he and his predecessors have been trying to avoid these traps, but this is another one in so far as it introduces a disincentive for people on low income to take on work or additional work. If somebody earning £4,000 or £5,000 continues to work, then either that person or that person's spouse immediately loses the £3,000 allowance. That introduces the sort of——

Mr. McCreevy

No, not immediately.

Mr. McDowell

Once the person earns over £5,000, he or she will lose it. That is obviously a significant disincentive to people who are on low income. It might not matter at the higher end of the scale - in fact, the allowance does not apply in any case to people who are claiming the £34,000 - but I suspect that sort of disincentive matters at that lower end of the scale. It seems to me that a far better way of doing it would have been simply to abolish the means test for thecarer's allowance.

That would not have applied to children of course and therefore the Minister would have had to deal with the child care issue in a different way. We need not discuss that now, but my belief is that it should have been done by way of direct payments, which again would not have involved the incentive to work and would have been paid irrespective of whether somebody was working or not.

There will be people, as Deputy Noonan seems to suggest, who are on low income but who nonetheless do not qualify for the carer's allowance, who perhaps are not married but who are caring for somebody. They are the people who have a good cause for grievance in this sort of circumstance. Given the structure which the Minister has laid out, he should try to amend it to include those people to remove that grievance.

Mr. McCreevy

I do not have the figures to hand, but I know that if there is no means test for the carer's allowance in the social welfare code, the cost is substantial. I will get somebody to give the Deputy the relevant figures - I am sure these have been given in reply to parliamentary questions.

Mr. Fleming

About £250 million.

Mr. McCreevy

Some £250 million.

Mr. McDowell

The cost of this is £125 million. The Minister has gone half way already.

Mr. McCreevy

No. This is not just a provision to do with caring people. This is for the stay at home spouse with children, to whom the bulk of this relief relates, and the carer looking after the aged or the handicapped. It includes those three particular categories.

To give some idea of what the multiple of the cost must be, the maximum carer's allowance is about £80 per week, that is, £4,000 per annum. The £3,000 standard rate allowance at 22% is £660. Without doing any big sums, Deputy Fleming tells me that it costs a couple of hundred million pounds. It must be in the order of that magnitude.

As the Deputy will be aware, since the carer's allowance was introduced in the 1980s the means test has been made less severe and an ever greater number of people are qualifying now. I am not so bold as to state that in ten years there will be no means test for the carer's allowance in the social welfare code but the way we are heading that may occur, depending on the Exchequer's circumstances at the time.

While I do not wish to go over this morning's debate about individualisation, this is, as I said at the time, a rebalancing. In the term between now and full individualisation, allowance for this was needed. I am already on record as saying that I did not think it would have been necessary with the change I made this year with the individualisation of £17,000 each, but there was such an outcry from all quarters and all sides of the House that I brought forward this relief.

Mr. Noonan

I want to return to the amendment because I do not think the Minister understands my point. I am not making a political point. Even if one takes his description of the genesis of this idea contained in his party's literature, it started off in effect as a mother's allowance because it was to be applicable only to her since, by definition, she would not be a mother unless she had children.

Mr. McCreevy

Yes.

Mr. Noonan

It started off as a mother's allowance, it was confined to that and in the course of the campaign the caring element was added and it became a carer's allowance where it was a mother caring for children, an elderly relative or an incapacitated person. The next concept was that it was to balance the individualisation proposals, and what was a stand alone proposal in the Minister's party's election literature and programme became a device to balance another decision which he made. There are so many concepts being fed into it now that it really does not adequately fulfil any of them.

Deputy Fleming spoke about balancing. He spoke about adding £4,000 to £28,000 and subtracting it from £34,000, but it is like comparing apples and oranges because a tax allowance does not balance a tax band. Individualisation has to do with bands and this has to do with an allowance. One can put a notional balance into effect but much of the time it is different people who are being affected. The people who would gain from doubling the £17,000 range of the standard rate band to £34,000 if there was only one spouse working are different people from those who would benefit from this. I am aware that there is some overlap, which may be significant, but there is a different focus altogether here.

Once the Minister has introduced this concept of caring to the point where it is now the lever which decides whether a person qualifies or not, he should introduce a fourth category of carer. He lists three of them in the section, one of which must apply before a person qualifies, and his anomaly could be cured by the inclusion of a fourth. I am not saying that any person over 65 who is living with a person who is a taxpayer should trigger this allowance and I am not saying that a married couple, one of whom is over 65, should get the allowance. If amendment No. 21 gives that impression, it is due to my technical incompetence in drafting the amendment. I simply thought that before I could adequately propose the second amendment, amendment No. 22, I needed to remove the reference to spouses through amendment No. 21. The Minister will know of several practical examples from ordinary life and from his constituency work where the mother is sick and the family decides for family reasons that the father is to continue to work and one of the family must care for the mother. In my view he or she - usually it is the daughter or daughter-in-law in that circumstance - is entitled to this allowance.

The Minister referred to the £8,500 allowance but, as I understood it, that was only available in circumstances where money was paid for caring.

Mr. McCreevy

Yes. One must employ a person.

Mr. Noonan

Where a member of the family is the carer, this allowance is not available. There may be a possibility of qualifying for the small incapacitated person's allowance, if that is the appropriate term——

Mr. McCreevy

For the purposes of clarification, it must be somebody who is employed but there is nothing to stop a person from employing a member of the family.

Mr. Noonan

Yes. That is a technical solution but it is not practicable. If Mary, for example, gives up work to look after the mother, the father will not pay her a wage. That is not the way families work.

However, the father who continues to work should get this allowance. There is no reason that a properly designed amendment should not be able to deliver it and it would not cost much more. The Minister is advertising it as a home carer's allowance. The person I am describing is a carer in the home who will not be eligible for the allowance.

Mr. McCreevy

But the Deputy has in mind——

Mr. Noonan

The Minister should wait until I finish the point. I refer to the family circumstances where one spouse works and must be the carer also, that is, the case of the woman I described previously, where the husband is sick and she must go back to work and do everything else as well. He is not capable of working due to illness.

Mr. McCreevy

And he is under 65 years.

Mr. Noonan

He is under 65 years. Whether he is under or over 65 years, the case there is even stronger than a family which is working and where two small children are being delivered to their primary school every morning. The situation of a family where a daughter stays at home on a full-time basis to care for her mother but does not get the carer's allowance because of the means test, and her husband, the one earner in the family, goes out to work, is more worthy of the Minister's attention than some of the others who will avail of this allowance. It is possible to ring-fence it and to do so in a low cost way. I ask the Minister to at least take it on board between now and Report Stage.

Mr. McCreevy

Is the Deputy talking about a case where a husband works and his unmarried daughter stays at home to mind the ill mother?

Mr. Noonan

Yes.

Mr. McCreevy

The carer's allowance under the social welfare code is not payable due to the means of the family and it is not possible, one way or the other, to employ that person to avail of the incapacitated spouse allowance or relief up to £8,500. What the Deputy is saying is that——

Mr. Noonan

He would get the £3,000 allowance.

Mr. McCreevy

——he would get the additional £3,000 allowance.

I would prefer to take the approach of the social welfare code dealing with the carer's allowance. As the Deputy rightly pointed out, the principles underlying the stay at home spouse allowance or the stay at home mother's allowance - the name the Deputy gave it, which we should have thought of in 1997 and stuck with it - were extended to the aged and the handicapped. We are in danger of mixing up a lot of principles. I will look at this again between now and Report Stage.

I spoke earlier about streamlining charity relief. What I call charity relief are reliefs in the income tax code which include the universities, third level institutions, Third World charities and covenants. I intend to streamline these in next year's Finance Bill. In that context, I will try to deal with personal donations as well.

Another goal of mine is to streamline the reliefs relating to caring. We have the £8,500 allowance, the old dependent relative allowance, which used to be £110 but which has been doubled and standard rated, and other such reliefs. I intend to try to rationalise them in a chapter. I will not penalise anybody but will try to bring them under a similar set of rules. I thought of considering this aspect in that regard.

I have in mind people in my constituency who have to be looked after when they become old. They might not have a sufficient taxable income to avail of the relief for nursing homes or whatever. There are some reliefs available under the medical expenses relief under which one can qualify if someone gets the dependent relatives allowance. It is all very complicated and I was going to standardise it.

Between now and Report Stage, I will consider the particular matter the Deputy raised and will give it further thought, although I would prefer to try to leave it to next year's Finance Bill in which I intend to rationalise many of these areas.

Mr. Belton

Under the present incapacitated driver's scheme, VRT and VAT are allowed. I came across a case where a son lives in a new house close to the old house in which his mother lives. His mother passed the medical test and VRT was allowed but when he looked for the VAT refund, the inspector refused to allow it because he did not live in the same house as his mother.

Under the scheme which the Minister is introducing, everything is allowed if the person lives next door in a different residence, if it is on the same property and if there is a direct system of communication. Everything which the Minister is allowing here applies in this case, yet the inspector from the VAT section said the son must live in the same residence. There is a contradiction between two schemes which the Minister administers.

Mr. McCreevy

I will take up that anomaly but I cannot understand——

Mr. Belton

This case to which I refer has now gone to the Appeal Commissioners.

Mr. McCreevy

The experts on VRT are not with me but I do not understand how a person could qualify for VRT and fail to qualify under the VAT criteria. I will have it checked.

Mr. Belton

They appealed the decision but it was turned down because of the residence. The two houses are adjacent, are on the one property and are connected by telephone and so on. A strict reading of the legislation was observed in this case.

Mr. McCreevy

I will look at it for the Deputy.

Mr. Belton

I thank the Minister.

Amendment, by leave, withdrawn.

Amendment No. 22 not moved.

Mr. McDowell

I move amendment No. 23:

In page 24, line 47, after "year" to insert "or any part thereof over 6 months".

This relates to the allowance for somebody who employs a carer. It is an amendment which the Carer's Association have sought to promote. As it stands, the person employed must be employed for the full tax year for this allowance to be claimable. It makes the point that, in many cases, the person might well be employed for a shorter period.

Mr. McCreevy

My official has told me the Deputy's amendment has been tabled to the section on the home carer's allowance——

Mr. McDowell

It is misplaced.

Mr. McCreevy

——whereas his contribution relates to the employed carer's allowance.

Mr. McDowell

In terms of the drafting, we have got things confused. Has the Minister been briefed on the substance of what I said as opposed to what——

Mr. McCreevy

I have been briefed on what I thought the Deputy was going to say.

Mr. McDowell

Rather than what I actually said.

Mr. McCreevy

The Deputy's amendment concerns section 12 which provides for a new home carer's allowance. Among the requirements is one that the carer spouse be engaged during the year in caring for one or more dependent persons. Deputy McDowell's amendment proposed the addition of the phrase which would result in the caring requirement being fulfilled if the dependent person was cared for over a period of at least six months. It may be prompted by a view that the expression "during that year", as used in the definition of qualifying claimant, requires that the caring takes place throughout the whole of the year and thus might not be met if, for example, the dependent person died after a couple of months of the year in question or a dependent child ceased to be subject of a child benefit payment.

In the operation of this allowance, it is not intended that a narrow interpretation would be adopted and, indeed, it is long-standing Revenue practice that "during the year" does not mean the entire year. If the words proposed in the amendment were included in the section, it might have the unintended effect of denying the allowance unless a six month minimum caring period had been met as it could remove the discretion to operate the measure in a reasonable manner. I, therefore, think the amendment is not needed.

A Revenue instruction note makes reference to dealing with an allowance or a deduction granted where a condition holds good for or during the year of assessment. The words should not be regarded as meaning for the entire year or as a requirement leading to the apportionment to the proportion or part of the year to which the condition obtains.

Mr. McDowell

It helps to clarify the other point.

Mr. McCreevy

My eminent official tells me that it is throughout the year of assessment. That point was referred to earlier. We are talking about the £8,500 allowance and section 467 of the Principal Act dealing with an employed person taking care of an incapacitated individual which states, "Subject to this section, where an individual for a year of assessment proves- (a)(i) that throughout the year of assessment he or she was totally incapacitated. . . ” It provides for throughout the year in those particular circumstances.

Mr. McDowell

One learns something new every day. We now know there is a difference between "during the year" and "throughout the year" in Revenue terms.

Mr. McCreevy

My eminent official tells me that the incapacitated person who applies for the allowance must employ the person at some stage during the year.

Mr. McDowell

But the person must be employed for the full tax year?

Mr. McCreevy

No. The person must be incapacitated for the full year but the person employed must be employed for some period during the year.

Mr. McDowell

What about the circumstances where a person becomes terminally ill and he or she employs a person to care for him or her for a six month period? The £8,500 would not be claimable in those circumstances. Is that correct?

Mr. McCreevy

Strictly speaking the Deputy is correct, but we consider the Revenue Commissioners would interpret this section liberally. As the Deputy has raised that point, I can consider it for Report Stage or else tidy it up in my rationalisation of the existing anomalies in this area for next year. I am sure the relevant inspector of taxes would not interpret the section as the Deputy outlined. It is a fair point, related not to this section but to the one we debated earlier.

Chairman

Does the Deputy wish to withdraw his amendment?

Mr. McDowell

As the Minister has agreed to consider it before next week, I will withdraw it.

Amendment, by leave, withdrawn.

Question proposed: "That section 12 stand part of the Bill."

Mr. Noonan

When the Minister introduced this allowance before Christmas, he stated in an interview or press statement that its annual cost would be £125 million. He has given the same figure now, even though he has introduced a substantial income disregard in the subsequent period.

Mr. McCreevy

Yes.

Mr. Noonan

I cannot understand how the estimated cost would remain the same, given the income disregard.

Mr. McCreevy

I can give the Deputy figures I had last week on the cost of this allowance based on the numbers likely to take it up. The £125 million referred to on both occasions is the full year cost, given certain estimations of the number of persons who are likely to take up this allowance and the number of persons who will take up the income disregard. I had the figures for a reply last week and one of my assistant secretaries might have that note.

Mr. Noonan

What is the likely percentage take up? Is it likely to be 70% or 80%?

Mr. McCreevy

The 70% or 80% figures refer to the automatic matching of child benefit numbers with tax free allowance certificates. I gave those figures in reply to a point made by Deputy Fleming.

I may not have read this note last week in reply to parliamentary questions but it was at the back of the documentation. The cost of the £3,000 allowance as originally envisaged was estimated at £125 million in a full year, but that estimate did not allow for a disregard of any income earned by the carer spouse. The concession of an income disregard up to £4,000 to qualify for the full allowance and up to £5,000 for a reduced allowance could, in theory, give rise to further costs of about £10 million in a full year. However, our experience of the rate of take up of such schemes together with the conditional nature of the allowance for certain two income couples who could also qualify for the extended standard tax rate band up to £6,000, as provided for in section 3 of the Bill, mean that in all probability the original estimate of £125 million would be the total cost. I can give the Deputy figures on the breakdown of numbers and costs as between recipients caring for children and those caring for the aged or incapacitated persons. That is how the cost of the allowance is worked out.

Mr. Noonan

The Minister might arrange for that to be sent on to me.

Mr. McCreevy

Yes.

Mr. Noonan

Another issue I want to raise arises from the Minister's commitment to review the various aids to carers, whether by way of the social welfare code or through the tax code.

Mr. McCreevy

That is strictly related to the tax code. I want to streamline various measures without penalising anybody and to bring people up to a certain level. Despite objections on the basis of the cost involved from various advisers, I believe that people should get a tax break if they incur expenses caring for an incapacitated person, a sick person etc. The question is how far it should be extended. It is ridiculous we still have an income tax code and a dependent relative allowance of £110, which was the rate until I standard rated it. I did that this year and brought it up to £220 because I did not have time to rationalise these areas, but I intend to do that in time for next year's Finance Bill.

Mr. McDowell

A problem of doing that through the tax code is that people who do not have a taxable income but incur similar costs cannot get benefits.

Mr. McCreevy

Yes. That is true. That principle is established in the social welfare code vis-à-vis the carer’s allowance and we should be able to address that problem there. People with a taxable income who assist in the upkeep of a dependent relative, an aged person or a handicapped person should get tax relief on the costs they incur. I want to bring together these reliefs that are all over the place in the tax code.

Mr. Noonan

I welcome that commitment. The Minister will be familiar with the manner in which nursing home subventions are calculated. One of the tests is whether a person's sons and daughters have sufficient incomes. In some circumstances persons do not get a subvention because their sons and daughters are deemed to have adequate incomes. Yet the sons and daughters who contribute to the care of their fathers or mothers in nursing homes cannot always do so in a tax efficient way.

Even where the maximum subvention is granted, the cost of nursing home care is so high that family members must make a top up payment to the nursing homes, but they cannot get tax relief on such payments. The position is more anomalous than that. If a person in receipt of a pension is in a nursing home, he or she can claim the cost of the nursing home against his or her pension, but if a member of the family pays towards the cost of the nursing home, the third party cannot claim relief in all circumstances. People who pay by way of covenant succeed in getting tax relief, but many people believe covenants were abolished when third level university fees were abolished and they do not realise one can convenant in favour of an elderly relative in a nursing home. There is an anomaly in that some people in the know are able to pay money in respect of parents in nursing home and write it off against tax, while other people who are not in know do not get tax relief.

Mr. McCreevy

The Deputy must have been sitting in on some of the briefing sessions I had with my Department officials in the run up to the last budget when I put the same point to them.

Mr. Noonan

We have the same type of constituents.

Mr. McCreevy

That is why I intend to rationalise this area in next year's Finance Bill.

Mr. Noonan

I take it the Minister is aware of this problem.

Mr. McCreevy

Absolutely. The Deputy is correct in that covenants are a very tax efficient way of dealing with this matter, but many people are not aware of this option. In a case where two sons contribute to the upkeep of their aged mother in a hospital, they should get tax relief on those contributions. I did not have enough time to rationalise this area for this year's Finance Bill, but I intend to do so in next year's Bill for the reasons the Deputy outlined. Some of my officials would be quite used to this argument by now, but I intend to try to bring something to it because I believe in that principle.

Deputy McDowell made the point that people who do not have a taxable income definitely do not benefit from the scheme.

Mr. McDowell

They would be worse off.

Mr. McCreevy

That could be dealt with by the social welfare code or the subvention code.

Mr. McDowell

There should be an equality about them.

Mr. McCreevy

Yes, but I am trying to deal with things in the taxation code and I will do so.

Mr. McDowell

This is one and the same.

Mr. McCreevy

The Deputy also raised the matter of the cost of nursing home care. As he knows, in my first budget I introduced the tax relief for building nursing homes, which has worked fairly successfully, with a view to keeping costs down. Even though there has been an increase in supply, I readily agree with the Deputy that the cost of nursing homes is very high and places an enormous burden on people. The Deputy is correct in saying that if one is smart enough one can qualify for some of these tax reliefs. If one is claiming as a dependent relative the person can pay the medical expenses in the hospital and so on. It should be made simpler, so that if one incurs the expense one gets tax relief. My view seems to be the same as the Deputy's on that matter. Hopefully, this time next year we will have a better system in the tax codes. As regards the other issue raised by Deputy McDowell, we will have to wait for other developments.

Mr. McDowell

Since, this morning, the Minister committed himself to individualising social welfare benefits, I thought he might do a little bit for the relatives.

Mr. McCreevy

It will take me a while to do this in the taxation area. If, over a period of years, we were able to individualise the social welfare code, and having tax credits, it would be as simple as falling off a barn door to merge tax and welfare together.

Mr. McDowell

True. One could also deal with refundable tax credits in a more sensible way.

Mr. McCreevy

Yes.

Mr. Noonan

The Revenue increment has just passed £3 billion, by the way.

Mr. McCreevy

These things will happen in time, Deputy.

Question put and agreed to.

SECTION 13.

Chairman

Amendments Nos. 24 to 29, inclusive, are related and may be discussed together by agreement.

Mr. McDowell

I move amendment No. 24:

In page 27, line 28, to delete "£1,500" and substitute "£2,500".

The amendment relates to the rent allowance which the Minister is proposing to increase. The purpose of this group of amendments - which are, frankly, to stimulate debate more than anything else - is to establish equality of treatment between people who buy and those who rent. Given the current state of the housing market this is an issue to which we need to give a great deal more thought. The amendments seek to raise the amount of rent one can claim against tax to the amount of mortgage interest one can claim, so there would be equality of treatment.

Traditionally, we have accepted that people want to buy their own homes. The genesis of mortgage interest relief was a mixture of accepting that people want to buy their own homes and encouraging that, and encouraging the construction industry by indirectly giving them some benefit as well. Given the current state of the housing market, however, we will have to start thinking about this anew. If we accept the case for mortgage interest relief, there is an equal case to be made for allowing rent against tax in the same way.

Mr. McCreevy

These amendments relate to section 473 of the Taxes Consolidation Act, 1997, which grants relief for rent paid by individuals in respect of private rented accommodation. Currently, the level of rent qualifying for relief is dependent on one's marital status and age; under 55, or 55 and over. The effect of the Deputy's amendments would be to introduce a single limit, irrespective of marital status, but with different limits for those under 55 and those aged 55 and over. There would also be an increase for all over the limits proposed in the Bill.

Since the Murphy decision it has been the practice to cast allowances in a form which results in those available to married couples being double those granted to single taxpayers. For example, this is what happened in the case of mortgage interest relief. Rent relief, when originally introduced, followed the same pattern. While there is no constitutional imperative that the rent allowance should be double for married couples, it can be argued that the limit for married couples should be higher than that for single taxpayers on the basis that their accommodation needs and the resultant rent payments could be greater.

If there was to be a single limit irrespective of marital status the justification raised for the differentiation would also disappear. My main reason for opposing these amendments is cost. I estimate that the cost of implementing the amendments as proposed would be of the order of £36.5 million in a full year. This has to be considered alongside the proposals we implemented in this Finance Bill, which will deliver the largest tax package in the history of the State and will convey substantial direct tax deductions all round.

Personal tax deductions amount to more than £1 billion and this is on top of over £1 billion in tax cuts delivered in the Government's first two budgets. Further costs, such as those which would result from the changes proposed in these amendments, over and above what has already been provided for this year, cannot be contemplated. I must, therefore, reject the amendments.

Mr. McDowell

In his response the Minister has not actually addressed the primary reason I gave for moving the amendment in the first place, which is the notion of equality of treatment between the rented sector and the home purchase sector. We should give the same encouragement to people who are looking to rent or buy. I would be interested to hear the Minister's reflections on that.

While the Minister is thinking about that, perhaps he can give me a few facts about the take up on the existing allowance. Can he tell me how many people are claiming it?

Mr. McCreevy

I know we have those figures because I saw them at some time.

Mr. McDowell

One of the reasons the allowance was introduced in the first place was in the hope that it would bring more landlords into the income tax net. I wonder how effective it has been in that regard. One hears stories of landlords advising tenants that they should not claim the allowance, and warning them that if they do so they will be turfed out or have their rent increased. Is the Revenue aware of any evidence to that effect?

Mr. McCreevy

I have heard such stories myself but I have never come across anybody who was a direct victim of that particular allegation. The total number of claimants for rent relief is 98,000. There are 3,000 claimants aged 55 or over. The cost in the first year would be £0.9 million, or £1.4 million in a full year. There are 95,000 claimants aged under 55. The full year cost would be £35.1 million.

Mr. McDowell

How does that relate to the total number of people in the private rented sector? Can we make any assessment of that kind?

Mr. McCreevy

I would not have those figures, Deputy, but I am sure they are available, probably in the Department of the Environment and Local Government, or in the abstract from the census volume. From my own personal knowledge, having a young family, I think younger people who are paying rent do claim it. I would say it started off as quite a low figure and it has been going quite merrily in the past couple of years as people became aware of it. That is the point Deputy Stanton made about another relief. At the moment, however, there are 95,000 claimants aged under 55.

The Deputy made an interesting point that he wanted equality of treatment between mortgage interest relief and rent relief. He will notice that in the Finance Bill, at some cost, I have streamlined the particular relief. I was in Government when we brought in the present rules about the £5,000 allowance for first time buyers. I cannot remember which Department I was in, but I remember that we were briefed at about 2.30 p.m. on budget day. I am sure the files are available. At that stage, Ministers used to go over to the Department of Finance for the budget briefing. I wanted to point that out, because there seems to be some confusion about what information is given on the morning of the budget regarding tax matters. Deputy Noonan can concur on this point. I do not know any Minister for Finance who has ever announced taxation changes to his Cabinet colleagues before the morning of the budget.

Mr. Noonan

Never.

Mr. McCreevy

When this was being explained at the time, I remember saying "it was bad enough until now but this will be impossible." So I availed of the opportunity of streamlining the relief regarding mortgage interest.

Deputy McDowell made the point that there should be equality of treatment between the two housing reliefs. I can see the rationale he put forward. There is also the issue of additional costs. It would be hard for me to argue against his logic. He asked why mortgage interest relief cannot be treated in the same way as rent relief. I concede he made a logical argument and I will see what I can do in future years on that matter.

Mr. McDowell

I accept the Minister's silken words.

Amendment, by leave, withdrawn.

Amendments Nos. 25 to 29, inclusive, not moved.

Sections 13 and 14 agreed to.

SECTION 15.

Chairman

Amendment No. 31 is consequential and amendments Nos. 30 and 31 may be taken together, by agreement.

Mr. McDowell

I move amendment No. 30:

In page 28, line 38, after "occurs" to insert "and by the substitution in that definition of '8 per cent' for '10 per cent' ".

My amendment deals with the rates of interest below which it is considered that benefit-in-kind kicks in. While I agree that the reduction of mortgage rate on home loans to 4% seems reasonable in terms of the current state of the market, it also seems that 10% is still a bit on the high side. It is possible on the open market to get term loans and car loans at a lower rate of interest rate of 7% or 8%. To consider anything lower than 10% as a BIK seems a bit harsh to me.

Mr. McCreevy

These amendments relate to the tax charge on an employee in respect of the benefit from the employer providing a loan at preferential rates. The charges calculate a reference to the difference between the interest which would have been paid by the employee at the specified rate if the loan had been maintained on an arm's length basis and the interest was paid by the employee. There are two specified rates - one applies to home loans and another applies to all other loans.

The policy review to specify rates at budget time and taking commercial rate movements into account are considered necessary to announce changes to take effect from the following tax year. Based on reductions in mortgage interest rates last year I announced in the budget my intention to reduce the home loan rate from 6% to 4%. The vast bulk confirm a reduction despite the fact that the decrease in interest rates has been reversed and rates are expected to increase over the next 12 months.

There was no justification at budget time for reducing the specified rate for non-home loans and recent term trends and interest rates would not now support such a reduction. In the circumstances I am not prepared to accept the Deputy's amendment which would reduce the specified rate for non-home loans from 10% to 8%.

Around budget time every year interest rates are analysed because a commitment was given some years ago to have home loan interest rates adjusted in line with what was about. The reason for doing that was that in the months of December 1998 to October 1999 the figures would have been around 4%, but the A category overdraft for the same period in October 1999 would have been between 10.1% to 10.5%. It was the same for June and September 1998. In March 1999 it would have been 10.45% to 10.5% and in December 1998 it would have been 9.95% to 10.75%. Therefore, the charge of 10% is still the appropriate rate for the non-home loan category. There did not seem to have been any shift in that area of lending ——

Mr. McDowell

That is an interesting proposal.

Mr. McCreevy

——as there was in the house purchase area.

Mr. McDowell

As far as overdrafts are concerned that seems to be right. As far as term loans are concerned, surely it is possible to get a term loan on the open market for much less than 10% without too much difficulty? A person can get a typical car loan for 8% and 8.5%.

Mr. McCreevy

Loans are being advertised at that rate and people can get their car or home loans somewhere else. That is the basis on which we made the proposed changes. I used the same table to reduce the home loan interest rate from 6% to 4%.

Mr. McDowell

That makes sense. The 10% figure seemed very high.

Mr. McCreevy

There was not a big change in the other area.

Mr. McDowell

It is not a major issue of principle. It is just that the 10% figure seemed high.

Mr. McCreevy

That rate is readily available for car loans but not for other loans. I have had occasion to approach my financiers for a term loan in the past few months.

Mr. Fleming

I concur with Deputy McDowell on the figure of 8%. This year I had reason to shop around for a car loan and the 8% APR is advertised in several Sunday newspapers. When we add it up it is approximately right; it is the other way round if there a potential tax liability. There is nothing to prevent employees in that position from shopping around outside of their employers and benefit-in-kind loans to get those loans. I know that is not the point made by Deputy McDowell but that option exists.

Mr. McDowell

There is no major principle involved.

Amendment, by leave, withdrawn.

Amendment No. 31 not moved.

Sections 15 and 16 agreed to.

SECTION 17.

Chairman

Amendments Nos. 32 to 34, inclusive, are related and may be taken together, by agreement.

Mr. McCreevy

I move amendment No. 32:

In page 29, paragraph (a), line 47, to delete “an individual”.

These are drafting amendments to correct a number of minor drafting errors in section 17.

Amendment agreed to.

Mr. McCreevy

I move amendment No. 33:

In page 30, paragraph (a), to delete lines 1 to 3 and substitute the following:

"(I) an individual assessed to tax for the year of assessment in accordance with section

1017, or

(II) a widowed individual,".

Amendment agreed to.

Mr. McCreevy

I move amendment No. 34:

In page 30, paragraph (a), to delete lines 16 to 19 and substitute the following:

"(iii) in the case of-

(I) an individual assessed to tax for the year of assessment in accordance with section

017, or

(II) a widowed individual,".

Amendment agreed to.

Chairman

Amendments Nos. 35 and 36 are related and may be taken together, by agreement.

Mr. McDowell

I move amendment No. 35:

In page 30, line 22, to delete "£5,000" and substitute "£6,000".

My amendment is only one of a number of amendments which I would like to have tabled. Unfortunately, my other amendments would have been deemed to have been out of order and this amendment gives a distorted picture of what I had in mind.

We need to examine mortgage interest relief and what we hope to achieve by it. The Minister and I are aware that a few economists - I know that when anyone uses the word "economists" it has a bad effect on the Minister——

Mr. McCreevy

No. I agree with all economists who agree with me. I do not have much time for the other economists.

Mr. McDowell

There is an argument to be made, which is not made by economists alone, that mortgage interest relief does not help the housing market and the price of property in that it may be feeding part of the increase in house prices because it increases afforadability. That is an interesting argument. Like the Minister, I am aware of the political realities of this issue and they are more pre-eminent in our minds when we debate it. We need to debate it in more detail. With regard to the political realities, we should consider whether we do not need to skew mortgage interest relief and its availability towards particular types of purchasers, especially first time purchasers, and whether we should not discriminate even more than more we currently do between first time purchasers of property, whether new or second hand, and people who already own a property. The people who are suffering most from the current state of the housing market are those who are not house owners at all and cannot gain access to it because they cannot afford to. There is a case to be made for giving them a disproportionate benefit. If everyone benefits, then greater encouragement is not given to first time buyers.

My amendment is one way we can consider doing that. My amendment proposes to increase the mortgage interest relief to first time buyers only to £6,000. Given half a chance I would have opposed the reduction or streamlining referred to by the Minister because people who already have a property will typically have smaller mortgages than anyone getting a mortgage today and the relief is far less important.

Mr. McCreevy

First time mortgage holders are allowed to claim 100% relief on the standard rate of income tax on interest paid on home loans. Deputy McDowell's amendment seeks to increase the upper limits for first time purchasers from £5,000 to £6,000 for married and widowed persons and from £2,500 to £3,000 for single persons. The cost is estimated to be £4.5 million in a full year.

As I announced in the budget, with effect from 1 April 2001 I propose to introduce new arrangements for the deduction of mortgage interest relief at source. In view of these proposed arrangements this year, I am simplifying the current provisions relating to mortgage interest relief. In the case of non-first time mortgage holders, I propose to simplify the existing arrangements by abolishing the 80% rule and the de minimis reductions of £100 from a single or widowed person and £200 from married persons. In future, non-first time mortgage holders will be entitled to a ceiling on interest reliefs of £2,000 for single and £4,000 for married persons.

In the case of first time purchasers I propose to leave the existing limit of £2,500 for single persons and £5,000 for married persons stand but to extend the married limit to widowed persons. There will be no losers from these measures and a considerable number of gainers. The total cost in a full year is approximately £33 million. In addition, the full cost of the personal tax reliefs provided for in the Finance Bill comes to almost £1 billion and is all that can be afforded this year.

In the circumstances I am not prepared to accept the Deputy's amendments. He made a case about mortgage interest relief and the ongoing, long standing debate on the efficiency of having tax relief on mortgage interest at all. I have never yet met an economist who argued for it. When eminent papers are produced by the ESRI and interviewers asks why one is not doing what such papers propose, I am always inclined to answer that the ESRI also suggests doing away with mortgage interest relief. Then again it has been saying that for a number of years. From the economists' viewpoint, given the strict way they have of looking at things, they have always argued that mortgage relief is most inefficient and should be abolished. However, as the Deputy recognised, there are political exigencies involved and though I have stirred up some controversies in some of my budgets, even that might be a bridge too far. If I said I was abolishing mortgage interest relief I do not think I would get away with telling either Deputy Noonan or McDowell that it was strongly recommended by the ESRI. I would get an answer to that.

That said, there are two reasons I streamlined mortgage interest relief on this occasion. One was that I felt from the time of its introduction in the early 1990s, when I was in Cabinet, the way it was changed, with the first time relief and de minimis and so on, was far too complicated and should have been changed some time ago. I always intended to do so when I became Minister for Finance. The second reason relates to what I intend to do with deductions at sources as and from 1 April 2001. I have provided for that this year and we have entered negotiations with the financial institutions and the medical insurance bodies so that as of 1 April 2001 there will be deductions at source for mortgage interest and medical insurance. It has been done in other countries - I did not just pick up this idea myself. It is far more efficient and will do away with the problem of people, at the end of the tax year, notifying the Revenue about making a new claim for mortgage interest and for different rates of voluntary health insurance. It will be deducted at source and arrangements will be made between the VHI or BUPA and the Revenue Commissioners for the tax break there and between the financial institutions. It will also ensure there is a 100% takeup on mortgage interest reliefalso.

It is a far more efficient way of doing things and will do away with much paperwork. Those in the tax offices will be able to concentrate on getting on with following tax evaders.

My second reason for streamlining this year was to make it simple for that changeover as, with the de minimis and the 80% rule, it would be far too complicated to try to get financial institutions to buy into such a change. We will have enough trouble trying to get them to do it in any event without adding all those complications, so I made it quite simple.

Deputy McDowell's amendment proposes increasing the reliefs for first time buyers. Given what economics experts say about the inefficiency of mortgage interest tax relief I suppose I could throw that argument against them but it is something I may revisit when we have the new system of deduction at source. However, I made significant changes this year and am not in a position to go further. Given we are discussing mortgage relief and so on, another inefficient expenditure by the State - one that economists would now say is totally inefficient - is the first time new house buyer's grant, which costs the State in the order of £30 to £35 million in a full year. Most people would readily agree with my view that that is already counted for by the house builder, so that is something else in the tax code. I would like the co-operation of Deputies opposite in proposing its abolition so that I could convince my Cabinet colleagues. Then I could tell the Dáil that Deputies Noonan and McDowell advised me to do this so I have cross-party support. Will I hold my breath on that one?

Chairman

Is the amendment withdrawn?

Mr. McDowell

I want to let it stand as a further discussion on it might be useful later. Perhaps I did not articulate my case as well as I might have done.

The Minister has made things more generous for those who already own houses. However, in so far as he wants to make the scheme more generous, it should be targeted exclusively at first time buyers. That is my case.

Mr. McCreevy

Perhaps I can revisit the matter in a subsequent Finance Bill.

Amendment, by leave, withdrawn.

Mr. McDowell

I move amendment No. 36:

In page 30, line 25, to delete "£2,500" and substitute "£3,000".

I move the amendment simply for it to be examined.

Amendment, by leave, withdrawn.

Question, "That section 17, as amended, stand part of the Bill", put and declared carried.

SECTION 18.

Question proposed: "That section 18 stand part of the Bill."

Mr. McDowell

I am interested in what the take-up has been for this section for the last while.

Mr. McCreevy

As the Deputy knows, I signalled this change some months ago; I said we would accommodate the restructuring of Tara Mines. When I came to the Finance Bill I improved it somewhat from the original intention.

This section amends section 202 of the Taxes Consolidation Act, 1997, which provides for income tax relief on lump sums paid to employees who have agreed to pay reductions as part of an approved restructuring scheme under which their employer company faces substantial adverse changes in its competitive environment and restructures its operations by agreement with the workforce to ensure survival. The current exemption is in respect of an amount of up to £6,000 plus £200 for each year of service, subject to a maximum of 20 years. This results in a maximum exempt figure of £10,000. To qualify for the exemption, the payable reduction must be at least 10% of basic pay. The amendments now being proposed will enhance the reliefs in certain cases and were announced by me in July 1999 to facilitate the proposed restructuring of Tara Mines. The existing exemption is being change to a three tier system as follows: for pay reductions between 10% and 15% the exemption is £6,000 plus £200 per year of service to a maximum of 20 years. This means a maximum lump sum of £10,000, which is the same as the current limit; for pay reductions between 15% and 20% the exemption is £6,000 plus £500 per year of service to a maximum of 20 years. This means a maximum lump sum of £16,000 and for pay reductions of more than 20% the exemption is £8,000 plus £600 per year of service to a maximum of 20 years, which means a maximum lump sum of £20,000. Lump sum payments in excess of these amounts will continue to be taxed in the usual way. The changes will apply to schemes approved on or after 21 July 1999. In addition, the relief which was due to expire on 5 April next is being extended for a further three years to 5 April 2003.

Mr. McDowell

What is the take-up since 1997? How many schemes have actually been approved?

Mr. McCreevy

That information would be available from the Department of Enterprise, Trade and Employment.

Mr. McDowell

Is it in single figures?

Mr. McCreevy

To date, there have been only two circumstances in which this section has been availed of, through which several hundred employees would have been affected. The legislation has been applied on a self-assessment basis re its administration by the Chief Inspector of Taxes in relation to employees. Therefore, for example, in regard to the case of Tara Mines, no return will apply until 2001.

Mr. McDowell

Does the Minister have a view on that?

Mr. McCreevy

Deputy Quinn introduced this relief when he was Minister for Finance. I recall asking him at the time what its purpose was. I originally thought its purpose was to accommodate change in a certain semi-State organisation but I was wrong. Deputy Quinn's intention was to provide for a restructuring mechanism in circumstances where there would be a permanent reduction in the cost base and a significant reduction in people's basic pay. Substantial restructuring occurred late last year in the company to which I referred.

Various groups lobbied my predecessor on this issue and the measure proved valuable when the Tara Mines difficulty arose last year in that the section could be built upon to accommodate the workers there. Subsequent difficulties have been experienced in that dispute and I am not up to date on those. We thought that this tax mechanism whereby employees were given a substantial lump sum in order to reduce basic costs proved beneficial in settling the dispute. My officials tell me that these figures are based on returns made to Revenue on a self-assessment basis and that there may be some others in the pipeline of which we are not yet aware.

Question put and agreed to.

Chairman

We have now completed session two, sections 12 to 18, inclusive. Session three, between 4.30 p.m. and 6 p.m., will cover sections 19 to 25, inclusive.

Sitting suspended at 4.14 p.m. and resumed at4.30 p.m.

SECTION 19.

Mr. McDowell

I move amendment No. 37:

In page 32, line 11, to delete "1990" and substitute "1999".

Mr. McCreevy

Deputy McDowell is correct. The reference in the Bill as published to the Companies Acts, 1963 to 1990, should be to the Companies Acts, 1963 to 1999. I thank the Deputy for pointing this out and I accept the amendment.

Amendment agreed to.

Section 19, as amended, agreed to.

Section 20 agreed to.

SECTION 21.

Mr. McDowell

I move amendment No. 38:

In page 33, lines 38 and 39, to delete "Local Authority" and substitute "Local Authorities".

Mr. McCreevy

I accept the amendment. The reference in the Bill as published to the Local Authority (Higher Education) Grants Acts, 1968 to 1992, should read, "the Local Authorities (Higher Education) Grants Acts, 1968 to 1992. I thank Deputy McDowell for pointing this out.

Amendment agreed to.

Mr. Noonan

I move amendment No. 39:

In page 35, line 20, after "State" to insert "or in the United States of America, or a university or similar institution of higher education, approved by the Minister in any other jurisdiction".

This is a welcome provision whereby postgraduate fees paid by an individual or on behalf of a dependant are subject to tax relief. The definition section proposes that full time residential postgraduate courses will have to be in the jurisdiction. It seems there are other qualifying courses such as distance learning, correspondence type postgraduate qualification courses. The relief is confined to such courses emanating from a college in a European Union state.

I seek to amend the section so that a course from a college in the United States will also qualify or, indeed, a course from any college in any jurisdiction deemed appropriate by the Minister. According to the definition section, that Minister is the Minister for Education and Science. I am not sure of the thinking behind the section, therefore, I will not indicate that I will table an amendment on Report Stage until I hear from the Minister. I believe the definition section should be changed so that postgraduate courses in a United States university would also qualify. This would not seem to be the case.

Many young Irish graduates would be more inclined to do a postgraduate course in the United States than in continental Europe. They certainly would be more inclined to do a residential course in the United Kingdom rather than a correspondence course from Berlin. I am not sure of the thinking behind the section. I tabled my amendment to indicate the general nature of my problem with the section. If the thinking is as I believe, I will move an amendment to the definition section on Report Stage when I will seek to extend the definition of "approved college" to include colleges in the United States of America or colleges in other jurisdictions which the Minister for Education and Science would approve, together with the extension to which I have referred in respect of distance learning.

Mr. Stanton

Has the Minister an estimate of how much this section will cost in a full tax year? I assume there is tax relief at present to cover postgraduate fees. For this reason, I welcome the section. However, this assumes that a student will reach postgraduate level. Has the Minister considered giving relief in the future at undergraduate level, given that there is a low level maintenance grant and that the income threshold for receiving such a grant is very low? I am sure many Deputies have received calls from parents, as I have, saying that their sons or daughters may have to leave college because they cannot afford the costs. More should be done to encourage young people to stay on in third level colleges in order to reach postgraduate level. Is anything being done to assist those who have no income apart from the maintenance grant? This presupposes that one has an income to be taxed, otherwise one will not receive tax relief. Perhaps the Minister would comment on some of these points.

Mr. McCreevy

The amendment relating to section 21 proposes to introduce a new tax relief, that is, relief for postgraduate fees paid in publicly funded colleges here and in the European Union and also in private colleges in this country. The measures propose to widen the scope of the measures to include publicly funded colleges in the United States of America, or universities or similar institutions approved by the Minister for Education and Science. Since the introduction of the free fees initiative, a number of tax reliefs have been introduced for undergraduate students who must pay fees. In 1995, tax relief at the standard rate was made available for full-time undergraduate courses in private colleges in the State. Since 1996, tax relief has been available for part-time undergraduate courses in private and publicly funded colleges in the State while last year relief was introduced for full-time undergraduate courses in publicly funded colleges in other EU member states.

In introducing this year's measure for the postgraduate sector, it was intended to mirror broadly what was available to undergraduates. I have indicated that the institutions that qualified in the context of undergraduates are those situated here and in the EU. I do not propose, therefore, to extend the scope of this measure on the lines proposed in the amendment, at least not at this stage. In this regard there is very little information available on the number of Irish postgraduate students who are studying outside of the EU. However, it is likely that postgraduate students in America are in receipt of a scholarship and have their fees paid. Next year I will look at the whole area of tax relief for fees of undergraduate and postgraduate students with a view to rationalising the sections. At that stage I will consider the Deputy's proposal as there will be scope for such relief.

In reply to Deputy Stanton, I do not know what will be the cost of the relief to undergraduates. The existing schemes cost in the order of £2 million per annum. May I say that I can claim a little bit of ownership of these reliefs both in Opposition and as Minister for Finance. When in opposition, I pressed the then Minister, Deputy Quinn, to grant such relief, which he did on Committee Stage. I recall a very funny aside to that because a certain official, who is sitting not too far from me now, thought he would fall off the chair at the idea of Deputy Quinn granting the relief. At the time I did not think that I would end up sitting close to the esteemed official. That relief was granted and last year I amended it further so that students attending college within the EU would get relief on undergraduate fees.

The proposed tax relief on postgraduate fees was proposed by my colleague, the Minister for Education and Science, who recommended this to me as a logical extension of relief for undergraduate fees. To try to mirror what is contained in the undergraduate allowance here or in the European Union, I did not propose extending the relief to colleges in the United States. I will consider the matter further next year when I will be rationalising these areas. Even though these were considered in the last four or five years, there are anomalies between the different reliefs which must be streamlined so that the same conditions apply to all of them. The undergraduate relief extends to fees up to £2,500 at the standard rate, that is, approximately $3,500. I heard recently of someone who had to borrow approximately $150,000 to do a postgraduate course in the United States.

Mr. Noonan

In Harvard?

Mr. McCreevy

Costs in the United States differ from here. The thrust of the measures taken in recent years and what I advocated when in Opposition is based on the principle the Deputy and I discussed earlier in relation to medical and caring expenses. If people who incur these expenses are willing to do so, they should be given a tax break. I am not against the principle of what Deputy Noonan is trying to achieve. However, I do not intend doing anything further in this regard this tax year but I will reconsider the matter for next year's Finance Bill when I will streamline the relief for undergraduate and postgraduate fees.

Mr. Noonan

I am not certain what the Minister is proposing to do in the section. There is a definition of approved course, on which not much hinges. However, there is also a definition of approved college and a subsequent definition of qualifying college. A qualifying college appears to be different from an approved college.

Mr. McCreevy

An approved college is a college in Ireland, while a qualifying college is one in the European Union. That is the difference.

Mr. Noonan

That is correct, but that is not my point. A claim can be made for postgraduate fees along the lines of the claim that can be made for undergraduate fees for a college in Ireland. However, the only courses which appear to be claimable for a European college are those involving distance learning rather than residential learning.

Mr. McCreevy

That is not the intention.

Mr. Noonan

This is the inference with regard to qualifying colleges. The definition of qualifying colleges is not in the definition section. A qualifying college appears to be any college in Europe which provides distance learning. If one goes to France to do a postgraduate course, it appears one would not qualify. Perhaps I am misreading the section.

Mr. McCreevy

I will check it now, but that definitely is not my intention. This matter was discussed at length before the Bill and the budget were published. I am told by my eminent adviser that the key word is in line 21 on page 35. The provision states:

'qualifying college' means any university or similar institution of higher education in a Member State of the European Union (other than the State), including such a university or similar institution of higher education that provides distance education. . .

I understand the key word is "including". It does not only cover distance learning. The intention is to cover the Deputy's point.

Mr. Noonan

That is what I want to clarify because it is not blindingly obvious when one reads it. Perhaps it is obvious if one is used to drafting as are the Minister's officials. My amendment would extend the position but it does not meet the case to say that the postgraduate relief is being modelled on the undergraduate relief because few Irish students are pursuing undergraduate courses abroad, other than in the United Kingdom, but many people are studying abroad on a postgraduate basis.

It would probably be university policy, if not policy in the Department of Education and Science, to encourage people to do postgraduate work abroad rather than at home so they would have a mix of experience and ultimately would be a greater asset to Ireland when they return. It would be appropriate for the Minister to introduce an amendment on Report Stage to include courses in the United States as well as courses in the European Union because many Irish people do postgraduate courses in the United States.

I take the Minister's point that third level education in the United States is subject to the free market like everything else there. While some of the courses are enormously expensive, others are not too expensive. There are circumstances where people are on scholarships or partial scholarships or they work on campus while they are studying. They are being subvented by parents or they have earnings which could be claimed against tax when they return to Ireland. It is not a big issue. I did not suggest it should be available on a worldwide basis but, because Irish students have traditionally gone to the United States, the Minister would not be taking a great leap in the dark if he extended the provision to the United States. Authority could be vested in the Minister for Education and Science to approve universities or colleges in any other jurisdiction. This is a modest way to proceed but there is no justification for excluding postgraduate studies in the United States of America.

Mr. McCreevy

I understand the Deputy's point and I will consider it in the review of these reliefs for next year's Finance Bill. However, the problem with the Deputy's amendment is that the undergraduate and postgraduate reliefs which are being introduced only apply with regard to a publicly funded college. I understand that in the United States there are no publicly funded colleges. The definition would have to be changed in that regard.

Mr. Noonan

It covers privately funded colleges in Ireland.

Mr. McCreevy

Yes, but the Minister for Education and Science is willing to approve them. The difficulty is that the Minister for Education and Science is not willing to allow his Department to take on the role of approving courses in other jurisdictions. This is another difficulty. However, I understand the Deputy's point. The relief is not only confined to postgraduates but the Deputy's aim is in line with my doctrine in this regard. I will not disapprove anybody when this area is being streamlined for next year's Bill, but I do not foresee anything against the Deputy's proposition that postgraduate courses in the United States should be included because many people go there to do postgraduate work. The assistance offered may not be much, but it would be something. I promise to deal with the matter next year when I may have a better solution to it.

Mr. Noonan

It probably would make as much impact on somebody studying in the United States as it would on somebody studying in France or Italy. In many universities the postgraduate fees can be significant.

Mr. McCreevy

The problem is how one would know whether it involves approved courses because the Department of Education and Science is not willing to take on that role. Would the Deputy suggest that the Bob Jones University would qualify?

Mr. Noonan

It probably would for certain people. It appears to be an eminent institution for some people and not for others.

Mr. McCreevy

Somebody would have to make the decision on it.

Mr. Noonan

There was a time one had to take a Eucharistic test to attend Trinity College, Dublin.

Mr. McCreevy

That is true.

Mr. Noonan

One had to get it signed by the local bishop in the 1960s if one was of a certain religion.

Mr. McCreevy

I remember it well. It lasted until 1971.

Mr. Noonan

We are fairly recent liberals.

Mr. McCreevy

That is true.

Mr. McDowell

I am not clear about one point. Are postgraduate fees currently payable by all postgraduate students?

Mr. McCreevy

I understand the answer is 'no'. It depends, but grants are available for here and Northern Ireland.

Mr. McDowell

There is not an equivalent of the free fees system. It does not apply to postgraduate fees.

Mr. McCreevy

No.

Mr. McDowell

In that case, there is a difficulty. If somebody decides to take time off work to do a postgraduate course, he or she is liable for the full fees because he or she does not have a taxable income. However, somebody who is working at the same time can write off the cost against tax or a parent can write it off.

Mr. McCreevy

That point was put forward when the section was being drafted and the fees paid by an individual or a parent or guardian are allowable.

Mr. McDowell

That is why I use the example of somebody who works until he or she is 25 or 26 and then leaves to go back to college for a couple of years. He or she does not receive any relief.

Mr. McCreevy

The same question was raised with regard to other sections. If one does not have a taxable income, a tax allowance is not much use. As the Deputy is aware, the argument has been made to the Minister for Education and Science that there should be a grant scheme for postgraduate courses.

Mr. McDowell

That is what I am getting at.

Mr. McCreevy

My generosity to the educational sphere has made me decide that it would be better to give people a tax break rather than creating a grants scheme. However, that pressure has built up in the system over time. My official has calculated that the cost of a tax relief for postgraduate fees would be at least double that of the relief for undergraduate fees.

Mr. McDowell

I accept that postgraduate fees are generally more expensive. If the cost factor is primary in the Minister's mind, he could cap it if necessary.

Mr. Noonan

There are also fewer people doing postgraduate courses.

Mr. McCreevy

There are no free fees in the postgraduate area, but there are free fees in the undergraduate area.

Mr. McDowell

In that case, could the Minister make it possible for somebody to write off the cost against tax on future income for a period after he or she completes a postgraduate course?

Mr. McCreevy

That strikes me as a reasonable proposition.

Mr. McDowell

A grants scheme is probably a better way of going about it but if we are confining ourselves to the tax system——

Mr. McCreevy

I am sure my officials will remind me of that point. I undertake to consider it because it is a sensible suggestion that it could be carried forward until one has a taxable income.

Mr. Noonan

The Department of Finance likes it but Revenue are a little upset.

Mr. McCreevy

Usually it is the other way round. Revenue do not mind what is introduced so long as they can operate it. We will consider the end review next year. It strikes me as reasonable that a person might undertake postgraduate studies, with a lot of expense building up, and the least he or she should be entitled to would be tax relief on the fees. If they had a taxable income they could have written them off. I assume if that was not the case they would have to be funded either by parents or by a loan. Postgraduate study is more likely to be funded by parents, but if it is funded by a loan it shows the person has real commitment. I see nothing against that idea.

Mr. Stanton

It is a pity a bright student from a low-income family can be prevented from going on to postgraduate level because there is no such thing as free fees at that level. That may be the only reason such a student could not proceed, at a time when our economy needs such students to go forward. Will the Minister do anything about the low level of maintenance grants and the income threshold for such grants? People are screaming out to all TDs on this matter. I ask the Minister to look seriously at it because there are students and families who are suffering and students who have to drop out of college because of that.

Mr. McCreevy

I am informed there is a grants scheme for maintenance of postgraduate students. The Deputy asked if there could be a grants scheme to cover fees for postgraduate students. There has been a debate on that matter and there has been a lobby to have a grants scheme. I am not disposed to having a grants scheme for postgraduate students. If a person has got that far in their education, given the rewards they will have in the future, whatever resources may be my disposal should be directed at the bottom end of education. This is more or less the same debate we had when Deputy Noonan and the former Deputy Niamh Breathnach were in Government. I have no doubt this whole area was debated adequately when the abolition of fees for third level students was under consideration. The socialist branches of the Labour Party won out. It was one of the most outstanding decisions for socialism of our time that money was put into that area rather than into primary education. I would remind Deputy McDowell it was ——

Mr. McDowell

It had to do with covenants which better off people were using.

Mr. McCreevy

I can assure Deputy McDowell, without breaching Cabinet confidentiality, there was a debate on the matter when Fianna Fáil was in Government with Labour but it was not acceded to. However, we are not pure socialists.

Mr. McDowell

That is one thing of which I have never accused the Minister.

Mr. McCreevy

It was such a revolutionary socialist idea that there should be free fees for third level students as against giving money to, say, primary and disadvantaged students.

Mr. McDowell

Posing the choice ——

Mr. McCreevy

I like the Labour Party to show its true conscience. There were even extreme socialists in that Government in Democratic Left. It is a pity Deputy Noonan was isolated in his beliefs.

(Interruptions.)

Mr. Noonan

I will have to ask the Minister a question to get him out of his mischievous mood. Would a qualified nurse who is doing a degree course be able to avail of this section? The Minister will realise that his colleague in the Department of Education and Science considers that university fees should apply to a nurse. Nurses are the only undergraduates who have to pay fees at present. He will recall that they marched on the universities at the start of this term. A nurse qualifies after a two-year diploma course and if she completes another year she is still an undergraduate. She gets her degree after three years but is a qualified nurse after two years. Under the terms of this section would she considered to be a postgraduate when doing her primary degree course and be eligible to avail of the tax relief or would she be considered not to be qualified? A young man or woman who has a primary degree would not be a qualified teacher but if they complete a year's diploma in education they will qualify as a teacher - they would have a degree plus a diploma. On the face of it the person studying to be a teacher would qualify for the tax relief because it is a postgraduate course. Can the Minister say anything in ease of the nurses?

Mr. McCreevy

It is such an excellent question I will have to come back to it on another occasion. It strikes me that the nurse does not have a degree until she actually does the degree in the third year.

Mr. Noonan

This could be worse than the credit unions - the Minister could regret this.

Mr. McCreevy

I must be particularly careful because I have a better chance of being sick than having to go for a loan to the local credit union. I am informed there is no tax relief for full-time undergraduate courses in public colleges in Ireland.

Mr. Noonan

What was that point?

Chairman

I suggest we go into private session to ask the experts.

Mr. Noonan

No, the nursing profession has a right to hear this. We are not going into private session.

Mr. McCreevy

I am aware of the point that has been made to my colleague, the Minister for Health and Children, regarding University College Galway. One of my own children has been pursuing me in that area also. The Minister for Education and Science is not in a position to accede to that request at present.

Mr. Noonan

Will they qualify under this section?

Mr. McCreevy

I do not think so, subject to checking it again. I do not think it is a postgraduate course. I think the third year is a degree course.

Mr. Noonan

Every other post-qualification course of study qualifies.

Mr. McCreevy

I get the point.

Mr. Noonan

Is "postgraduate" in the definitions? The nurses have a primary qualification which is a diploma rather than a degree, but they are actually doing a post-qualification course when they do the degree course.

Mr. McCreevy

If I was able to grant them that particular relief under the tax code would they give over their campaign for free fees?

Mr. Noonan

I do not know.

Mr. McCreevy

Is the Deputy advocating that?

Mr. Noonan

When I was negotiating with the nursing unions I would have thought they would be very grateful to the Minister for making this concession and that they would have continued to pursue their original claim.

Mr. McCreevy

Both the Deputy and I can agree on that because given the new range of concessions in 1997 one might have thought that was the end of the nursing pay claim, but we were both mistaken about that. I will come back to that on Report Stage.

Mr. McDowell

What is the position about undergraduate courses being written off against tax by employers? Did I understand the Minister to say that was not allowable under any circumstances?

Mr. McCreevy

I am sure if an employer in the course of his ——

Mr. McDowell

There is nothing ——

Mr. McCreevy

Deputy McDowell asked if there was any allowability against an employer's profits——

Mr. McDowell

Yes. Is it seen as——

Mr. McCreevy

——for sponsoring students at colleges, as some employers do. I do not know what the tax position is. The same rules apply. If it is solely and exclusively for the purposes of the businesses that would be allowed. That could be broadly interpreted by certain businesses. There was at least one company in County Kildare that had a scheme for the sons and daughters of its employees to send them to second and third level. It is a long time since there were fees for second level.

Mr. Fleming

With regard to the question of companies being allowed to write off the cost of third level fees for students whom they sponsor, one of the country's biggest financial institutions is advertising a millennium scholarship award with an award fund of £10 million. I would be horrified to think that the taxpayers would be asked to underwrite such a public relations exercise. Would this be regarded as a business expense?

Mr. McCreevy

That would be a matter for the taxpaying company and its local tax inspector. Generally, if an expense is wholly, exclusively and necessarily incurred in the performance of a trade, profession or vocation it is allowed. Normally, proportional expenses are allowed. As corporation tax rates come down the cost to the taxpayer is less than when rates were higher.

Deputy Fleming raises an interesting point - should there be tax relief for such expenditure or for private and corporate donations? One of the arguments against allowing such tax breaks is that they allow a third party to decide to grant aid a particular project to the exclusion of another, rather than have such decisions made by the State on behalf of the taxpayer. By giving a tax break to an individual, the taxpayer forfeits his right to decide how taxes are spent. A further question relates to undergraduate and postgraduate fees. Tax relief on third level fees allows people with taxable income to make such decisions while Deputy McDowell might argue that underprivileged people in certain parts of his constituency do not have that option. Of course, thanks to the former Minister for Education, Niamh Bhreathnach, he no longer has to make that argument. The rules regarding the allowability of tax relief on a company's expenditure are universal.

Mr. Fleming

Are they confidential to the taxpayer?

Mr. McCreevy

They are confidential to the taxpayer but the general rule applies universally. Deputy Fleming has raised an interesting point. While we may advocate tax relief for various forms of donation, Deputy Fleming's horror at the possibility of granting of tax relief to a particular company is equally valid. I know the company to which he refers because I have heard the advertisements on the radio.

Mr. Noonan

That is not how the sentence is cast. It goes through the procedures for making an individual claim.

Mr. McCreevy

Deputy Noonan asked earlier if distance learning would qualify or whether it was necessary for a student to attend an institution. I think I have covered that point.

Mr. Deenihan

Forgive my brief absence, I was paying tribute to a former colleague. May I revisit the question of tax concessions for students who are studying in American universities. I was in an American university this weekend.

Chairman

This matter has already been dealt with.

Mr. Deenihan

This point is relevant.

Chairman

Not if you are revisiting a point that has been discussed for 20 minutes, Deputy.

Mr. Deenihan

This is new ground. Due to of the large number of US information technology companies locating in Ireland, many are anxious to send their workers to universities in the United States. De Paul University in Chicago, which I visited last weekend, is very anxious to pursue such programmes with Irish graduates who are held in high esteem. If Ireland is to remain at the forefront of the information technology and software industries we must give an incentive to our people to study in America. This amendment proposes a small tax incentive which would help students to do so. The maintenance of a connection with an important industry is also important.

The Minister may not be in a position to accept this amendment but the proposal should be considered in the longer term.

Mr. McCreevy

I have undertaken to rationalise many of these reliefs in next year's Finance Bill. I have also explained to Deputy Noonan that I am not opposed in principle to extending tax relief to students in colleges in the United States.

The relief relates to undergraduate and postgraduate fees. The next pressure will relate to attendant costs. Fees are often a very small part of the cost of sending a student to a university. I have been a supporter of tax relief schemes since Deputy Quinn was Minister for Finance but I recognise that such schemes are, inevitably, extended again and again as time goes by. I am reminded of our friends in the Irish Charities Tax Reform group. This must be borne in mind. I am sure many multinational companies assist employees to undertake postgraduate studies. At this point I am not in a position to accept the amendment.

Chairman

I accept that Deputy Deenihan has made a valid point.

Mr. Deenihan

Thank you, sir. I would not see it otherwise.

Chairman

Do not tempt me, Deputy.

Amendment, by leave, withdrawn.

Section 21, as amended, agreed to.

Section 22 agreed to.

SECTION 23.

Mr. McCreevy

I move amendment No. 40:

In page 48, lines 30 to 34, to delete subsection (2) and substitute the following:

"(2) (a) Paragraph (b)(iv) of subsection (1) shall be deemed to have come into force and shall take effect as on and from 6 April 1999.

(b) Paragraphs (b)(iii)(l), (d)(iii ), (e) and (f) of subsection (1) shall apply as regards an approved retirement fund or an approved minimum retirement fund, as the case may be, where the assets in the fund were first accepted into the fund by the qualifying fund manager on or after 6 April 2000.

(c) Subject to paragraphs (a) and (b), subsection (1) shall apply as on and from 6 April 2000.

(d) Notwithstanding the provisions of Part 30 of the Principal Act, a retirement benefits scheme which was approved by the Revenue Commissioners before 6 April 2000 shall not cease to be an approved scheme because the rules of the scheme are altered on or after that date to enable an individual to whom the scheme applies to exercise an option under subsection (3A) (as amended by this Act) of section 772 of the Principal Act, which that individual would be in a position to exercise in accordance with the terms of that subsection as regards a scheme approved on or after 6 April 2000 and, as regards such a scheme, the provisions of this section shall apply as if the scheme were one approved on or after that date.”.

The purpose of amendment No. 40 is to change the commensurate provisions of section 23 which make certain changes in taxation treatment of pension arrangements. First, these will ensure that the proposed growth roll-off for ARFs and AMRFs will only apply to new ARFs or AMRFs. Existing ARFs or AMRFs will continue to be subject to the existing net roll-off basis. This is because investment decisions in relation to those funds would have been made on the basis of net roll-off and, in the case of insurance based products in particular, it would not be possible to change at this stage. Second, they will ensure that existing occupational pension schemes which change their rules to offer the option to AVC holders to opt for an ARF in respect of the part of the fund related to the AVC will not lose a Revenue approved status because of that change. While the new provision re AVCs is mandatory for new occupational pension schemes, it cannot be unilaterally imposed on existing schemes and, where it is adopted, it will have to be with the agreement of the trustees of the scheme.

Mr. Noonan

I do not have a difficulty with the amendment.

Mr. McDowell

The option will exist in respect of AVCs made after the commencement date but may not exist in respect of the same person making contributions before the commencement date.

Mr. McCreevy

Contributions made after the commencement date must automatically comply with the new rules. In respect of existing AVCs the agreement of the trustees of the scheme must be sought. If one thinks about it this is understandable as the scheme would have been set up on a contract basis but it is assumed that most will change.

Mr. McDowell

As the Minister is well aware I was sceptical when the original scheme was introduced last year. It is probably too early to assess how it will work out but does he have any information in that regard?

Mr. McCreevy

The level of interest expressed in the changes made last year far exceeded my expectations. The level of interest expressed abroad in the new Irish arrangements was not anticipated either. There were some favourable comments in newspapers as diverse as The Financial Times that people were coming to Ireland to look at the new scheme which was considered to be revolutionary and would be copied in other states throughout the world. As to what the effects of the scheme will be, it seems that people are very anxious to control their own funds. There are many selling points but the fact that this money will form part of a person’s estate is a major attraction. That is the big selling point of the changes made last year.

Mr. McDowell

It is probably too early to revisit the substance of the changes made last year. My major concern was that we were moving away from an insurance to a savings scheme. I had a fundamental difficulty with this. Why did the Minister choose to go just for AVCs? Why did he choose not to extend it beyond proprietary directors and the self-employed as he suggested he might do last year?

Mr. McCreevy

I have made some changes this year regarding proprietary directors. A proprietary director was defined last year as someone who owns more than 20% of a company. I have reduced this figure to 5%. I have also extended the new flexibility arrangements in respect of AVCs which are also regarded as coming within a person's discretion. He or she should have control over that element. I chose not to extend it to everybody for some of the reasons outlined last year by the Deputy. More importantly, later this year the Minister for Social, Community and Family Affairs will bring forward a pensions Bill which will provide, as signalled three or fours ago, for the concept of PRSAs. The scope of that Bill will be influenced somewhat by the changes made last year as regards the liberal ethic introduced in relation to pensions. The grounding principles of PRSAs will be influenced somewhat by this. It would not be appropriate however to extend any further the changes made last year considering that the pensions Bill will be introduced later this year but I anticipate that over a period of years the liberal arrangements will come to the fore in the entire pensions area. I have done my bit so far as proprietary directors and the self-employed are concerned.

Mr. McDowell

What the Minister seems to be saying is the self-employed and proprietary directors can be trusted to look after their own money whereas others they cannot. That grates on me.

Mr. McCreevy

I do not accept that. The people who protested against the changes made last year and were afraid to go any further were those with whom the Deputy would be closely associated in his political life. That is the argument they advanced. They did not want to go along with it but they were willing to accept the argument advanced by me that the self-employed and proprietary directors have had control of their money for a long time and should be trusted. They seemed to think that it would be too dangerous to go further for ordinary individuals. As I made clear last year I do not subscribe to this view but I was willing to accept their advice. In my estimation within seven or eight years everybody will have moved considerably in the direction I moved last year.

Mr. McDowell

We have a difficulty in the sense that the Minister wants to liberalise for everybody and I want to maintain certain constraints and we are left with a hybrid discrimination against certain individuals. Depending on which way one cares to look at it, certain individuals are being favoured but I am certain that we cannot resolve this difficulty today.

Mr. McCreevy

The Department's living expert on this matter has now joined us.

Mr. McDowell

How many people generally make AVCs? In other words, does this represent significant extra liberalisation?

Mr. McCreevy

As the Deputy is aware individuals make AVCs to top up their existing DB - defined benefit - or DC - defined contribution - schemes. I am not certain if the Revenue Commissioners have made an assessment but the Irish Pensions Board has some figures in that regard. We might be able to get them for the Deputy. I am aware that even members of the Department of Finance have joined AVC schemes during the years. This is quite a serious matter.

Mr. McDowell

Typically the persons concerned will receive a defined benefit plus a liberal element.

Mr. McCreevy

That will be the position under the new arrangements. Under existing AVC schemes contributions are made to top up existing arrangements. Under the new arrangements persons will have the same discretion as proprietary directors and the self-employed for whom the arrangements were liberalised last year. This is only fair because the persons concerned have decided to make extra voluntary contributions.

Mr. McDowell

As regards an AMRF a minimum provision of £50,000 was provided for last year. How does this relate to AVCs?

Mr. McCreevy

The same principle will apply. One only has to put £50,000 into an approved minimum retirement fund if one does not have a guaranteed pension of £10,000 or more. One can almost assume therefore that the person who makes AVCs from their normal——

Mr. McDowell

The benefit will be sufficient to cover the MRF?

Mr. McCreevy

One can put in £10,000 so that there will a free lump sum. This may not happen in some cases——

Mr. McDowell

And if it does not, the AVCs cannot be applied.

Mr. McCreevy

The same rules would apply. It would be very unusual for a person to join an AVC scheme which would not have a defined contribution of £10,000 but it could happen. If it does not, the same rules would apply.

Amendment agreed to.

Question, "That section 23, as amended, stand part of the Bill", put and declared carried.

NEW SECTIONS.

Chairman

Amendment No. 41 is in the name of the Minister. Amendments Nos. 42 and 43 are related. Therefore, amendments Nos. 41 to 43, inclusive, may be discussed together, by agreement. Is that agreed? Agreed.

Mr. McCreevy

I move amendment No. 41:

In page 48, before section 24, to insert the following new section:

"24.-Section 515 of the Principal Act is amended in subsection (2A)(b) (inserted by the Finance Act, 1999) by the deletion of ’5 years’ and the substitution of ’period of 5 years, or such lesser period as the Minister for Finance may by order prescribe,’.”.

All three amendments relate to approved profit sharing schemes and employee share ownership trusts. First, under the current APSS legislation there is a limit on the value of shares which can be appropriated tax free to an eligible employee in any one year. The normal limit is £10,000, but in certain circumstances and subject to certain conditions this limit can be increased to a once off £30,000. This £30,000 limit was approved in last year's Finance Act and it is intended to cover the case where shares must be held for a long period in an ESOT because they are required as security for borrowings and are not consequently available for appropriation to employees until the borrowings have been paid off. One of the necessary conditions is that shares must be encumbered, that is, held as security for the loan, for at least five years from the time the ESOT was established. This condition was specifically related to the circumstances of the Telecom Éireann ESOT. However, it has since been put to me that in some cases it would be possible to repay borrowings by ESOTs over a shorter period but the existing rules would result in loans being prolonged artificially with consequent delays in shares being given to employees. This makes no sense. To resolve the problem, I am now proposing that the Minister for Finance may, by order, reduce the required period of encumbrance if circumstances require it.

Second, as the legislation stands currently, a participant may only receive an appropriation of shares from one APSS scheme in any one year. I now propose to relax this restriction in the particular circumstance of a takeover of one company by another. In that event, employees will be able to benefit in the year of takeover from the APSS schemes established by both companies, subject to the existing limits of £10,000 and £30,000 to which I have just referred being satisfied in relation to the aggregate value of shares obtained that year.

These amendments will allow these schemes to operate more flexibly and they will be welcomed by those concerned. I, therefore, commend them to the committee.

Mr. Noonan

I am prepared to take them on trust on the Minister's recommendation. I always have a difficult when the Minister provides for him doing something by way of regulation which should be contained in primary legislation, particularly when the advantage being granted is for one particular set of people and one particular company. That is not to say anything about the merits of this case, but it is just bad principle that a Minister, by regulation, can be so focused in a way which is not transparent to take action to benefit what may be a very small category of people.

Mr. McCreevy

I see the point Deputy Noonan is making and I have some sympathy with it. There are other sections of the Bill where I will be taking some powers by order, but as a general principle I agree with what Deputy Noonan is saying. If I remember correctly some years ago there was a successful case in the agricultural area, where taking things by order may not have been the appropriate way. This practice is not that widespread in Finance Bills, but it has been put to me that in this particular area it should be so done. This has been agreed by the people who want this particular change made.

The Deputy's point is that as a general principle the Minister should not do so by the use of such sections and an order which would benefit only a very small number of persons, even though they relate to what was a public sector company until recently. I cannot disagree with what he is saying in principle, but I am advised that this is the best way of making this particular change because it involves trying to assess whether it would be justifiable in the circumstances.

This is a technical area and if we go into a very technical debate about it, my experts will need to deal with the section. However, the ESOTs and ESOPs have been asked for by the Communications Workers' Union, for example, in the case of Telecom Éireann. These are all in the public service area. Concessions have been made by successive Ministers in this area. The purpose in this particular instance is to give a further concession but we want to try and assess in the circumstances of the time whether it would be justified to remove this encumbrance. The new section is being inserted to allow for it to be introduced by ministerial order.

Mr. Noonan

Can the Minister put a time limit on the period in which he could validly exercise the order?

Mr. McCreevy

The intention is that it will have regard to when the people will ask for it, but I have no idea when people might ask for this particular change. Is the Deputy suggesting that I should put a time limit on it now, for example, that it will last for the next two years?

Mr. Noonan

Yes, something like that. It seems that the Minister is taking on power to do something by order at the request of a group of workers, who will only make the request if it is to their financial advantage.

Mr. McCreevy

Yes.

Mr. Noonan

That is fair enough. There were many concessions made to get Eircom to market and my party supported it all the way, but what would be the Minister's position if there is another ESOP, where the difficulties which would have arisen in the Telecom Éireann/Eircom case would not have arisen and they wanted to exercise the financial advantage without having the justifying circumstances surrounding it and where it would be purely a financial consideration? Would the Minister be exposed to pressure from that particular group?

Mr. McCreevy

I will return to this matter again before Report Stage and report to the Deputy further on it. Generally on principle I do not like to do such things because, as the Deputy correctly pointed out, pressure is applied to do so. Just because it involves one particular company, the Minister is expected to head in that direction. It is something at which I would like to take a further look.

Mr. Noonan

I thank the Minister.

Amendment agreed to.

Mr. McCreevy

I move amendment No. 42:

In page 48, before section 24, to insert the following new section:

"24.-Schedule 11 to the Principal Act is amended by the insertion after paragraph 13 of the following:

'13A. (1) Notwithstanding paragraph 13, an individual who has had shares appropriated to him or her in a year of assessment under an approved scheme established by a company ("the first-mentioned company") shall, subject to subparagraph (2), be entitled to have shares appropriated to him or her in that year of assessment under an approved scheme established by another company ("the second-mentioned company") if, in that year of assessment, the second-mentioned company acquires control, or is part of a consortium that acquires ownership, of the first-mentioned company under a scheme of reconstruction or amalgamation (within the meaning of section 587).

(2) Section 515 and paragraph 3(4) shall, subject to any necessary modification, apply as if the first-mentioned company and the second-mentioned company were the same company.

(3) This paragraph shall apply to an appropriation of shares made, on or after the date of the passing of the Finance Act, 2000, by the trustees of an approved scheme (within the meaning of section 510(1)).'.".

Amendment agreed to.

Mr. McCreevy

I move amendment No. 43:

In page 48, before section 24, to insert the following new section:

"24.-Clause (d) of paragraph 11(2B) of Schedule 12 to the Principal Act (inserted by the Finance Act, 1999) shall apply to employee share ownership trusts approved on or after the passing of this Act under paragraph 2 of the said Schedule 12, subject to the modification that the words ’, or such lesser period as the Minister for Finance may by order prescribe, commencing on the date’ shall be inserted after the words ’5 year period’.”.

Amendment agreed to.

Chairman

Amendment No. 44 is in the name of the Minister. Amendment No. 45 is related. Therefore, amendments Nos. 44 and 45 may be discussed together by agreement. Is that agreed? Agreed.

Mr. McCreevy

I move amendment No. 44:

In page 48, before section 24, to insert the following new section:

"24.-The Principal Act is amended-

(a) in section 128-

(i) by the insertion after subsection (2) of the following:

'(2A) Notwithstanding any other provision of the Tax Acts, where a person is, by virtue of this section, chargeable to tax under Schedule E for a year of assessment in respect of an amount equal to the gain realised from the exercise, assignment or release of a right, he or she shall be a chargeable person for that year for the purposes of Part 41, unless-

(a) that amount is deducted in determining the amount of his or her tax-free allowances for that year by virtue of regulation 10(1)(b) of the Income Tax (Employments) Regulations, 1960 (S.I. No. 28 of 1960), or

(b) the person has been exempted by an inspector from the requirements of section 951 by reason of a notice given under subsection (6) of that section.’,

(ii) by the substitution in subsection (11) of '30 June in the year of assessment following' for '30 days after the end of', and

(iii) by the insertion after subsection (11) of the following:

'(11A) Where in relation to any right-

(a) the person referred to in subsection (11) is resident in a territory other than the State, and

(b) the person who obtains that right is a director or an employee of a company which is resident in the State,

the provisions of subsection (11) shall also apply to that company.',

(b) by the insertion after section 128 of the following:

'128A.-(1) Subject to subsection (2), in any case where-

(a) for any year of assessment a person is chargeable to tax under Schedule E, by virtue of section 128, on an amount equal to a gain realised by the exercise of a right to acquire shares in a company (“the relevant shares”), which right was exercised on or after 6 April 2000, and

(b) following an assessment for the year in which that right was exercised (“the relevant year”) an amount of tax, chargeable by virtue of section 128 in respect of the amount referred to in paragraph (a), is payable to the Collector-General, and

(c) the person concerned makes an election in accordance with subsection (3),

he or she shall be entitled to defer payment of the tax in accordance with subsection (4).

(2) Subsection (1) shall not apply where the relevant shares are disposed of by the person concerned in the relevant year.

(3) An election under this section shall be made by notice in writing to the inspector on or before 31 January in the year of assessment following the relevant year.

(4) Where an election has been made under this section the tax referred to in subsection (1)(b) shall, notwithstanding any other provision of the Income Tax Acts, but subject to the provisions of this section, be paid on or before the earlier of-

(a) 1 November in the year of assessment following the year of assessment in which the relevant shares are disposed of, or

(b) 1 November in the year of assessment following the year of assessment beginning 7 years after the relevant year.

(5) The reference in subsection (4)(a) to the relevant shares being disposed of includes a part disposal of such shares, and in the case of a part disposal, the tax to be paid shall be determined in a manner that is just and reasonable.

(6) Subject to any other provision of the Income Tax Acts requiring income of any description to be treated as the highest part of a person's income, in determining for the purposes of paragraph (b) of subsection (1) what tax is chargeable on a person by virtue of section 128 in respect of an amount referred to in paragraph (a) of that subsection, that amount shall be treated as the highest part of his or her income for the relevant year.

(7) Notwithstanding any other provision of the Income Tax Acts, the due date in relation to tax, the payment of which has been deferred by virtue of an election under this section, shall, for the purposes of section 1080, be the date when the amount becomes due and payable under subsection (4).',

and

(c) in Schedule 29-

(i) by the deletion in column 2 of 'section 128(11)', and

(ii) by the insertion in column 3 after "section 127(5)' of 'section 128(11) and (11A)'.".

Amendment No. 44 is concerned with the taxation treatment of share options granted to employees by their employer companies other than options obtained under the save as you earn scheme, which I provided for last year.

In general terms, the law as it currently stands imposes an income tax charge when these options are exercised, that is, the shares are acquired. This charge is based on the difference between the option price and the market value of the shares on that day. In the event that the shares are subsequently sold any further appreciation in the share value is chargeable to capital gains tax.

Share options are increasingly used, particularly in the technology sector, as a means of retaining key staff and curbing wage inflation at the company level. This creates an environment where employees, because of this ownership involvement, can share more fairly in the future success of the company, whereas it has been put to me by the industry that the imposition of the tax charged on the occasion of exercising the option defeats this purpose because not only must the employee fund the purchase of the shares but also the tax bill which must be paid. The employees often find themselves forced to sell some of the shares they have acquired to pay this bill.

I indicated in the past that the Government is prepared to look at schemes for employee financial participation provided that such schemes are properly focused and justified, offer benefits to as wide a range of employees as possible, do not open the door for abuse and do not provide relief for the few at the expense of the many. More recently I received representations from a number of groups, including the Irish Software Association, to apply capital gains tax treatment rather than the present mixture of income tax and capital gains tax treatment to the full profit from share options.

The new Programme for Prosperity and Fairness recognised the importance of various forms of employee financial participation, including share options and gain sharing, in developing and deepening partnership and in increasing performance and competitiveness. The PPF proposes that a consultative committee, involving ICTU, IBEC and appropriate Departments and agencies, be established to prepare proposals for consideration in the context of budget 2001. The committee has already been established and held its first meeting on 16 February. I await with interest and will give careful consideration to the outcome of its deliberations.

In the meantime and in order to ameliorate the financial burden caused by the tax due on exercising options, I propose that those affected may elect, if they so wish, for the income tax charge to be deferred until the shares are actually sold or for seven years, whichever is the earlier. At that point the tax would have to be paid and, in most instances, would be met out of proceeds of the disposal.

In addition, I propose a number of minor technical changes to the current legislation to confirm that persons in receipt of share options are, in general, chargeable to tax under self-assessment in respect of the gain arising to them from share options, to extend the deadline for the company's returns of information regarding share options to 30 June after the end of the tax year - it is currently 30 days after the end of the tax year, that is, 5 May - and to ensure these returns of information are also required from the Irish employer where the shares were granted by a non-resident person. I commend these amendments to the committee.

Mr. Noonan

I thank the Minister for his explanation and his amendment. We have all been lobbied along the same lines. It seems to be a disincentive to key staff, in certain circumstances, if when they exercise a share option, which was to be one of the attractive aspects of their remuneration package, they immediately incur an income tax liability and have to sell part of the shares for which they have opted to raise the money to pay the tax bill. I do not think we could stand over that. I support what the Minister is doing in recognising that difficulty.

I would like to hear him again recite the solution he proposes as I understand that now the tax liability could be deferred to the point of sale or for seven years, whichever is the earlier.

Mr. McCreevy

If one sells the shares, one has to do so within seven years.

Mr. Noonan

One has to do it within the seven years anyway - whichever is the earlier. At that point, one would be liable for the original income tax. I take it that the liability would not attract interest penalties over the period of deferment.

Mr. McCreevy

No, because the law will be such that it would be deemed to be the date of the tax transaction.

Mr. Noonan

If the liability was £10,000 on the day of the exercise of the option, one would pay £10,000 seven years later if one still possessed the shares.

Mr. McCreevy

Yes.

Mr. Noonan

Any gain which takes place subsequent to the date of option will be treated as a capital gain.

Mr. McCreevy

As is the situation now.

Mr. Noonan

Does one's deferral defer one's date of option for seven years or would it be treated as capital gains between the date one exercised the option to the end of the deferral? Is the seven years liable to income tax or capital gains?

Mr. McCreevy

It would be liable to capital gains tax.

Mr. Noonan

In terms of the transaction, one opts and any increase in value is capital gains after that.

Mr. McCreevy

Yes.

Mr. Noonan

For tax purposes, one's date of option is deemed to be the date of sale or the seven years.

The amendment in my name and that of Deputy Deenihan fits fairly well into the sequence of what the Minister is doing. We are, in effect, saying that the value added to shares at any point from the time they are granted would be treated not as benefit-in-kind to which income tax would apply but as a capital asset to which capital gains tax would apply. This would be more in line with what is happening in other jurisdictions. In some jurisdictions it does not matter because the top rate of income tax and the top rate of capital gains tax would be so close that, whether it went one way or the other, there might not be a huge disincentive in it.

Obviously, we are not talking about the ordinary run of taxpayers but about a policy decision that it would be appropriate to allow companies to organise remuneration packages which would be tax effective in the delivery of shares so that key personnel would remain in or be attracted into the economy. I do not believe one can justify it on other grounds. If it is a way to enable people not to pay their tax, then it cannot be justified. It has to be tied into a situation where one is dealing with the remuneration of people who have an added value to the economy as a whole rather than simply an added value to the company and themselves.

We propose that it would be a capital gains tax rather than an income tax. The advantages are obvious in that capital gains is 20%, while the marginal rate of income tax is still 46% and will be 44% next year. The Minister appreciates the disincentive which arises.

In comparison with other jurisdictions, difficulties would arise. If there are key personnel in Silicon Valley which one would want to attract into the software industry in Dublin, the tax treatment of their share options in the west coast of America would be substantially more favourable than their tax treatment here. France, for example, applies capital gains tax but it varies the rate depending on the length of time one held the shares, so that if one sells within the first five years one pays 28%, but after five years one pays 20%.

Mr. McCreevy

We had a capital gains tax general regime like that.

Mr. Noonan

Our rates were very high.

Mr. McCreevy

We had that type of system for a while.

Mr. Noonan

In regard to share options, there is merit enough in that. People have to be incentivised but, at the same time, they are tied into and work in a company in which they are prepared to incur investment risk as well as investing their careers. If they are prepared to leave their potential earnings locked in, there should be some reward for allowing them to leave them locked in over a period of time.

The Minister is fully aware of what I am saying. We cannot have a situation where a company or a set of employees have carte blanche to take all their income that way in lieu of salary. Then we would have a situation where people would get notional salaries and the main reward would come in such a form that it would be purely a tax avoidance scheme so that they would be taxed at 20% instead of at the marginal rate of tax.

Our amendment proposes to cap it in terms of annual earnings. We suggest the maximum would be five times annual earnings but that is a negotiable figure and others might have a different view of what that might be. What is the Minister's view on our amendment? He seems to be thinking along the same lines without actually taking the jump.

Mr. Deenihan

The Minister may remember that I raised this matter on Second Stage and he responded to it. At the time I commented on the fact he did not continue the policy in last year's budget with the save as you earn incentive. There does not seem to be any emphasis on the sole issue of gain sharing and profit sharing in this budget. The Minister is moving more in that direction with his amendment and I hope he might consider our amendment as well.

The Minister is probably well aware that what is driving the IT and software industry in America is venture capital and profit sharing for employees. That is what employees look for and bargain for if they are to stay in a company. The first thing young graduates look for is a share in the action. This trend will become more prevalent here. I notice the Minister set up a consultative committee under the PPF. I hope there will be further proposals and incentives in next year's budget and Finance Bill. Our amendment would help incentivise this area before the consultative committee reports for next year.

It is desirable that the Minister would address this area. A number of reports, including one from IBEC, recommend changes and there is strong lobbying for change. Further changes would be welcomed and would address what is happening in the workplace.

Mr. McDowell

I agree largely with what Deputy Noonan and the Minister said, but I am not sure that I agree with what Deputy Deenihan. I would be utterly opposed to any scheme that would be intended to benefit better off workers, whether in information technology or any other sector. If companies want to retain well qualified people, whether in the software industry or another industry, they can pay them out of their resources. They should not expect particularly favourable treatment from the Exchequer to do that.

If we are talking about a broadly based scheme within a company which is intended to encourage the participation of all workers or most workers within that firm, that is a different matter and something towards which I would be favourably disposed. I would not favour a scheme that would be selectively available to employers to featherbed workers who are already well paid. All we need do is consider the experience in the United States. Many workers, usually directors or key workers in the software industry, are enormously well paid and derive a considerable percentage of their income from the exercise of such shares usually, as Deputy Dennihan said, at a favourable tax rates. I do not want to go down that road, but I would be well disposed to negotiating a broadly based scheme.

Mr. Deenihan

A scheme would have to have a broad application. Such a scheme would be introduced to motivate all members of a workforce. I did not mean to be selective. I pointed out what is driving companies in the Silicon Valley and the information technology industry in America. We could learn from that. I am not promoting a selective scheme. It would be great if all employees in a company were to have a stake in it because it would be a major motivational factor. It would be worthwhile if employees felt that the harder they worked, the more they would be rewarded. That makes sense.

Mr. Noonan

In applying a test to such a scheme, one must distinguish between what is a capital asset and what is a form of cash or bond that can be transferred immediately into cash, in other words, what is liquid asset and what is a capital asset. The code indicates that capital gains tax applies to gains on assets and income tax applies to remuneration of another kind. We must keep in mind that distinction. We must consider whether a scheme will give tax efficient remuneration to people or if it will facilitate participation by all the employees in a company. Where there is an element of risk the appropriate tax would be capital gains tax. The later case should fall under the application of capital gains tax.

Mr. McCreevy

I dealt with the question of the treatment of share options in my amendment, which we just discussed. Therefore, in effect, I have responded to this amendment. Whatever about the merits of this proposal, it would be premature at this time to agree to it. The committee has my assurances that I will refer this proposal and the others being put forward on the question of employee financial participation to the consultative committee proposed in the Programme for Prosperity and Fairness in good time for budget 2001. I have made clear the Government's interest in the matter and its promise to give full and careful consideration to the outcome of the consultative committee's deliberations. In the circumstances, I cannot accepted the amendment at this time.

As I pointed out earlier, that consultative committee met on 16 February because of the urgency of the matter. The Deputies opposite made a fair presentation on the matter and the competing interests against which this must be judged. Deputy McDowell wants such a scheme to be more broadly based. I readily recognise that the growth of the software industry here needs a special incentive to retain key personnel, but it is difficult to frame a scheme in such a way that it would be broadly based and generally available and would not endow only a few people.

In the Fianna Fáil parliamentary party I have often referred to the example of two fellows who leave education with the same qualifications, whether at second level or third level, who take up two different jobs. One goes to work for a multinational software company and the other goes to work for a meat company. We devise a scheme whereby one of them is rewarded by having a share option and the other one has to pay tax at 46% or 44% on a reasonably low level of income. One could say the tax code discriminates in many areas in that there are incentives for urbanisation, seaside resorts and so forth for people who have money.

When we had a similar scheme, which was abolished by the Taoiseach when Minister for Finance in 1992, it was abused mainly by the financial institutions. They rewarded their top employees and used it effectively. On the other hand, there is a compelling case to allow Ireland to become, what the software industry refer to as, the Silicon Valley of Europe. These type of share option schemes work effectively in the United States and have driven forward that business there. Employers recruit employees the employees get a reasonable salary with the expectation that they will get a big reward at the end of the day. All the employees do not get bit rewards. For every one who is successful, three or four are not successful. That helps keep down salaries and gets people committed to an enterprise. Undoubtedly, that has been one of the primary factors driving the technological revolution in the United States. That must be balanced against ensuring fairness and equity for other categories of taxpayers.

I am predisposed to encourage people to take a chance, but I readily recongise the difficulties involved in framing a scheme that takes account of all the points raised by the Deputies, particularly those raised by Deputy McDowell. I hope the consultative committee will come up with a solution before next year's budget, although it will not be easy to find one. I referred this matter to those involved in the partnership talks some time ago. I had hoped they would come up with a scheme, but that was expecting too much because it was not possible for them to devote time to devise a scheme for this area. The consultative committee met on 16 February to consider this matter. I am not against the idea put forward by Deputy Noonan and I replied to Deputy Deenihan's point earlier. It will be difficult to come up with a scheme that will satisfy the competing constituencies and be fair to all.

Mr. Noonan

That is the direction in which industry is going here. Younger skilled people will carry the country. That is the direction we are going, irrespective of whether we control it politically. We may be able to steer it and incentivise it. Some of the better schemes I have seen operate or have read about in the United States, as a matter of practice or as a matter law or both, have two concepts. They have a concept of universality whereby everybody in the company is included, even down to the person who sweeps the yard. They also have the concept of proportionality, whereby employees are included at a level in proportion to their salary. In that way such schemes cannot be stacked in favour of the top management team. They have various ways of working matters out after that. If those two concepts were kept in mind in devising such a scheme, they would overcome many of the areas of abuse and the abuse of the scheme that was abolished in 1992. Such abuse could not occur if the scheme contained those two concepts. Following what arises from the consultative committee, the Minister might consider legislating in terms of the parameters of such a scheme.

Mr. McCreevy

I spent a good deal of time during the past year considering such schemes. On balance, I think it is important to drive the economy forward in the future. In the area of technology, which is the way growth in this country will come, it is imperative that we come down in favour of the scheme and take the chance. I would ask Deputy McDowell to use his influence in other quarters to get people to think like that. On balance, we must go in that direction. If we do not, others will and they will get the benefits in future.

Mr. Noonan

May I put the amendment, Chairman?

Mr. McCreevy

I would like to notify the committee that I propose to amend section 24 of the Bill, as initiated, on Report Stage to make certain technical adjustments consequent on the introduction of that section.

Chairman

As it is now 6 o'clock, I am required to put the following question in accordance with an order of the Dáil of 24 February: "That amendments Nos. 37 and 38, and the amendments set down by the Minister for Finance in Chapter 2 of Part I of the Bill and not disposed of, are hereby made to the Bill, and in respect of each of the sections undisposed of in the said chapter, that the section, or as appropriate the section as amended, is hereby agreed to".

Is that agreed?

Mr. Noonan

No, Sir. I could not vote on the amendments, so I am voting against the section.

Mr. McDowell

You asked for that, Chairman.

Question put.

The Select Committee divided: Tá, 8; Níl, 6.

Tá

• Ahern, Michael.
• Browne, John (Wexford).
• Dennehy, John.
• Fleming, Seán.
• Foley, Denis.
• Kitt, Michael.
• McCreevy, Charlie.
• O’Keeffe, Batt.

Níl

• Belton, Louis.
• Deenihan, Jimmy.
• Farrelly, John.
• McDowell, Derek.
• Noonan, Michael
• Stanton, David.

Question declared carried.

The Select Committee adjourned at 6.10 p.m. until 10 a.m. on Wednesday, 1 March 2000.