Finance Bill change will hit banks hardest

Financial institutions will be the main target of a Finance Bill change to rules on capital allowances for business that will raise hundreds of millions for the Exchequer over coming years, the Minister for Finance, Mr McCreevy, has indicated.

The Finance Bill, which is at committee stage, extends the period over which capital allowances for "wear and tear" on plant and machinery can be claimed from five to eight years.

The change, which reflects the reduction of the corporation tax rate from 20 per cent to 12.5 per cent over the past two years, will raise an additional €105 million for the Exchequer in 2004, growing to €269 million by 2006, according to Department of Finance figures.

Mr McCreevy said banks were traditionally the most significant claimants of the allowances because of the leasing arrangements they offer to their customers.

It is common, for example, for manufacturing companies to lease their machinery from their bank rather than own it outright, thus allowing the bank to claim the applicable allowance.

"The banks are the biggest users of capital allowances for machinery, probably the biggest in the country," the Minister for Finance told the Dáil Select Committee on Finance and the Public Service yesterday.

Mr McCreevy described the change to the allowances regime as "a more meaningful contribution" to the tax take from the business sector.

The extension in the write-off period had the effect of "expediting a little bonus to the Exchequer", he said, adding that it was "the price to pay" for a low corporate tax rate.

Labour finance spokeswoman, Ms Joan Burton, called for more transparency on the gains banks make from capital allowances on machinery.

She said such information was relevant, since small and medium-sized businesses were not in a position to dictate the terms of leasing arrangements with their banks.

The Minister also said he was considering the elimination of an allowance available on industrial buildings.

The allowance, which is claimed at a rate of 4 per cent of the cost of the buildings every year, is "not all that relevant", according to Mr McCreevy.

He added, however, that he had "no intention" of wiping out capital allowances altogether.

"I am not against focused tax incentives," said Mr McCreevy, acknowledging that such incentives were effectively "grants by another name".

The Minister went on to reject suggestions from Ms Burton that all high earners should be required to pay a minimum rate of tax.

Such a measure would, Mr McCreevy said, result in high earners seeking to reduce their rate of taxation as much as possible.

Debate on the Finance Bill continues tomorrow.