A LOOPHOLE in the tax system through which company directors and managers of manufacturing companies could get tax free payments has been closed in the 1996 Finance Bill.

The Bill introduces legislation to implement the measures announced in the 1996 Budget as well as new measures, such as the legislation to deal with abuses of patent royalty relief.

Under the patent royalty relief scheme, a company could set up a separate company or subsidiary to carry out research and development. This company could then patent the products developed and charge the main company royalties for their use. This royalty income could then he distributed free of tax to the directors or managers of the research company, who very often were also directors or managers of the main company.

The Minister for Finance said yesterday that there was evidence that this scheme was being used gas a means of rewarding directors and certain employees in a tax efficient manner without any clear benefit to the economy from greater research and development activity".

The cost of this abuse to the Exchequer was significant and increasing, he said.

Department of Finance officials described the new measures as "perhaps one of the most important items in the Bill many millions of pounds are being lost in recent years because of the abuse". Similar abuses in the non manufacturing sector were dealt with in the 1994 Finance Act.

To target the tax relief to companies pursuing genuine and ongoing research and development programmes, the 1996 Finance Bill has made two main changes.

It stipulates that the relief will only be available where the royalty income is received from "unconnected companies".

Where royalty income is received from connected companies, tax relief in any tax year will only apply to payments equal to the research companies actual spending on research and development in that year and the preceding two years. Companies can appeal this point to the Revenue Commissioners on the grounds that their invention is radical and their patent was not taken out for tax avoidance purposes.

Other measures announced yesterday which were not disclosed in the Budget include additional reliefs for investment in Irish made films.

The Bill introduces restrictions on the tax incentives for holiday cottages and apartments under the Seaside Resorts Scheme and measures to combat avoidance of capital gains tax by companies, which was discovered by the Revenue anti avoidance unit.

Certain employment grants will be exempt from tax from April 6th.