Business and Other Taxes
Corporation Tax
The 1999 Finance Act set out the schedule of corporation tax reductions designed to achieve a single rate of 12 1/2 per cent on trading income by 1 January 2003. The standard rate of corporation tax which will apply from 1 January 2000 will be 24 per cent on trading income as provided for in that Act. In order to assist small and medium-sized firms, I have now decided that the 12 1/2 per cent rate will apply from 1 January 2000 to the trading income of a company where that trading income does not exceed £50,000 per annum.
Film Relief
Last year I extended the current tax incentives for investment in film-making in the State for one year pending the examination of detailed reports dealing with the operation of the incentives and the future development of the film industry here. The short span of that extension caused some disappointment and misplaced concern. I have decided to extend the current tax relief for a period of 5 years to April 2005, subject to one modification which is necessary to meet the terms of the EU Commission's approval of this relief as a State aid. The changes are detailed in the Summary.
Life Assurance Companies and Collective Funds
At present, there are two different systems in operation for taxing the investment returns accruing to policyholders of life assurance companies and investors in collective funds. In the case of the domestic sector, the tax is levied at the standard income tax rate on an annual basis on the investment returns at the level of the company or fund and the policyholder or unit holder subsequently receives the net proceeds tax free when the investment is terminated. In the case of life assurance companies and collective funds in the IFSC, there is no such annual tax. In the light of changing circumstances I have now decided to apply a common system across the board on the lines of the present arrangements now applying in the case of the IFSC. The new system, which will include an exit tax on the investment returns received by the resident investor, will apply from 1 January 2001. The details are set out in the Summary.
Mining Tax
Earlier this year I indicated that I would consider the case for taxing profits from the mining sector at the standard rate of corporation tax rather than at the 25 per cent rate which applies to non-trading income. The Government has undertaken to conduct a consultancy study on comparative tax and royalty regimes with a view to encouraging further exploration and mining. Consequently, I have deferred a final decision on this issue until the findings of this study are available.
Capital Gains Tax
In my first Budget, I reduced the rate of capital gains tax from 40 per cent to 20 per cent in the case of disposals of most categories of assets. The rate change affected four months of the 19971998 tax year yield, and the entire yield for 1998-1999. Instead of reducing the yield the figures are as follows:
1997 - £132 million
1998 - £193 million
1999 - £343 million estimated
Need I say more!
The one category of asset that was left after my first Budget at the 40 per cent capital gains tax rate was development land. But in order to encourage landowners to sell land for housing, as recommended in the Bacon Report, this rate was since reduced to 20 per cent for the disposal of land zoned for residential use or with residential planning permission. This now leaves only one type of asset still liable at the 40 per cent rate, that is disposals of development land for non-residential purposes such as for example road-building, or the construction of factories or offices. I have decided therefore for simplification reasons to apply the 20 per cent rate to this remaining type of asset in the case of disposals occurring after today.
In addition, where the holders of development land are taxed under the corporation tax or income tax codes instead of the capital gains tax code, the rate of tax that will apply in their case on the sale of land for residential purposes will be reduced to 20 per cent. I am introducing this incentive rate for such situations in order to increase the supply of land for housing. Further details are contained in the Summary.
Finally, I am increasing the limit for the capital gains tax retirement relief for businesses sold outside the immediate family from £250,000 to £375,000 so as to encourage the transfer of business assets to younger entrepreneurs.
Capital Acquisitions Tax
I have made it clear for some time that I intended to make substantial changes to the capital acquisitions tax system. This tax has increasingly shifted its focus from real wealth to becoming a tax on gifts and inheritances taken by persons of more modest circumstances who would not normally be regarded as wealthy or well off.
Recent Budgets have made major changes in the amount of capital acquisitions tax applying to business and agricultural assets - giving up to 90 per cent relief in both situations.
It is hardly equitable that no capital acquisitions tax may be due on the transfer of a farm or business with a valuation of up to £1.9 million - yet, a significant tax liability can arise on the inheritance of a modest three bedroomed house in our capital city.
The burden of the tax on the inheritance of the family home on those beneficiaries who are subject to the low thresholds has become an issue of considerable concern and worry to persons who may have limited resources to pay a significant tax demand on inheriting what is in effect their family residence. This situation applies in the case of brothers and sisters sharing the family home, aunts and nieces in similar circumstances and those in family and personal relationships who, under the tax law, are treated as strangers. I propose to address these difficulties.
The Irish capital acquisitions tax code is based on the domicile of the disponer as well as on the location of the assets comprised in a gift or inheritance. Many other countries base similar taxes on the rules of tax residence which is a much more common concept. One result of this present Irish tax arrangement is that it is possible for an Irish resident who has lived here all his or her life to avoid any liability on any gift or inheritance irrespective of its magnitude, provided the disponer is non-Irish domiciled and the assets given are foreign, for example, property located abroad or foreign currency assets. I propose to change the basis for determining liability to gift and inheritance tax from domicile to residence in order to bring it into line with the income tax and capital gains tax codes which have always been based on the concept of residence. Accordingly, as and from today, a liability to capital acquisitions tax will arise where either the disponer or the beneficiary of a gift or inheritance is resident or ordinarily resident in the State. A liability will also arise, as before, where the assets in the gift or inheritance are situated in the State - regardless of the residence status of the disponer or the beneficiary. Further details are set out in the Summary.
I have also decided to radically restructure the rates and the thresholds for all three classes of beneficiaries and to increase the threshold for probate tax.
On or after today the following rules will apply.
CAT on the Family Home
The family home will be exempt from capital acquisitions tax where it is either the disponer's principal private residence and/or the principal private residence of the beneficiary and the beneficiary has continuously resided in the house for at least the previous three years and does not have an interest in any other residential property. It will be a condition of the relief that the beneficiary does not dispose of the residence within the subsequent six years.
New Thresholds
I am increasing the particular thresholds as follows:
Class I: applicable to gifts and inheritances from parents - from £192,900 to £300,000;
Class II: applicable to gifts and inheritances from brothers, sisters, aunts and uncles - from £25,720 to £30,000;
Class III: applicable to all other situations - from £12,860 to £15,000; and the
Probate Tax exemption threshold from £11,250 to £40,000.
There will be a new single capital acquisitions tax rate of 20 per cent instead of the current rates of 20 per cent, 30 per cent and 40 per cent and it will apply uniformly to both gifts and inheritances, instead of the present situation where gift tax is three quarters of the rate applicable to inheritances.
The total cost of these changes is estimated at £46 million in a full year.
Farmer Tax Issues
Turning to farmer taxation, I am increasing the current expenditure limit for capital allowances under the Farm Pollution Control Allowance scheme from £30,000 to £40,000 per annum and extending the operation of the scheme until April 5th, 2003. I am also continuing for a further three years the two-thirds stamp duty relief on the transfer of land to young trained farmers which is due to run out on December 31st next.
The flat rate of VAT which may be charged by unregistered farmers on their sales to registered traders will be increased from 4 per cent to 4.2 per cent from March 1st, 2000, at a cost to the Exchequer of £3.6 million in 2000 and just over £5 million in a full year. The associated VAT rate for livestock will also be increased to 4.2 per cent from the same date.
Capital Allowances for Multi-Storey Car Parks
In order to encourage the construction of multi-storey car parks outside the Dublin and Cork Corporation areas, I am proposing the continuation of the present scheme of capital allowances for such projects for another two years to end-December 2002 where 15 per cent of the total cost of the project has been incurred by September 30th, 2000.
Capital Allowances for Business Cars
In line with the policy followed over several years, the car value threshold for business cars is being increased from £16,000 to £16,500 for the capital allowances for new cars and for the allowable expenses for all cars arising in the course of a business.
New Pension arrangements for the Self-employed and others
I would like to take this opportunity to record the great interest that has been generated in response to the new pension arrangements for the self-employed and proprietary directors, which I introduced in the last Finance Act. These changes have fundamentally altered the situation facing the self-employed person and proprietary directors at retirement. These consumers now have a choice at retirement as regards their pension product, thereby eliminating the forced purchase of an annuity. As I have previously indicated, I am not finished with this area yet and I intend to address some other anomalies in the pensions area for the next Finance Bill.
Miscellaneous Tax Items
Revenue Powers
The faith of the taxpayer in the effectiveness of the tax system in identifying, pursuing and dealing with tax evasion has been tested by recent events. The Government is only too aware of the need to maintain confidence in the efficacy of the tax system in dealing with those who seek to evade their tax responsibilities. The Government has already acted decisively in this regard. The 1999 Finance Act contained major and extensive powers to allow access by Revenue to records in financial institutions and to third party information on taxpayers generally, and gave Revenue greater powers in requiring the provision of information directly by the taxpayer. The scope of these new powers is perhaps not generally appreciated. These powers are already being used by Revenue.
The Government has also acted in pursuing vigorously the various enquiries into certain companies' affairs using the powers under the Companies Acts. The relevant reports have been provided to Revenue who are actively following these up. Revenue are also following up matters arising from the McCracken Tribunal report. We established the inquiry by the Public Accounts Committee into the DIRT affair. We have made it clear that the corporate governance provisions of company law will be strictly enforced to achieve much greater compliance levels with regard to meeting the filing and return requirements laid down by law. I have acted already to provide the Revenue Commissioners with more resources in the specialised areas and skills involved in pursuing complex tax investigations. I understand that the Revenue Commissioners are at present reviewing the staffing of their Office and I will be prepared to consider requests which the Commissioners, based on their experience and estimate of needs, may put to me in this regard.
There is an ongoing determination on the Government's part to tackle this issue and to see those culpable dealt with to the fullest extent. The new powers given to Revenue applied forcefully and targeted on serious tax evasion will produce results and ensure that public confidence in the professional organisation which Revenue has developed into over the past ten years can be justifiably reinforced and sustained.
Tax Consolidation Acts
In recent years, substantial consolidation of various taxes has been effected. I aim, however, to build on this significant record and I have asked Revenue to turn their attention to the remaining areas of tax law not yet consolidated, that is, Capital Acquisitions Tax and VAT and to prepare a programme of work to consolidate tax law in these areas.
Travel Tax
Ireland applies a travel tax on passenger tickets of £5 per ticket on travel by air or sea to locations outside of the island of Ireland. There are some limited exemptions from the tax. It does not apply to journeys within the State. The EU Commission has challenged the tax before the European Court of Justice on the grounds that its non-application to domestic journeys or to Northern Ireland is discriminatory under the EU Treaty in that it favours domestic journeys compared with overseas cross-frontier trips. Rather than extend this tax, I propose to abolish it with effect from January 1st, 2000, at a cost of approximately £20 million to the Exchequer. I would expect that the operators will use this development to keep access transport costs low, to benefit both business and tourist traffic to Ireland. This measure will also assist the elderly in visiting friends and family.
Excises
Concerns about the effects on health of smoking intensify dayby-day. I feel that it is necessary to send out a clear message about the concern of the Government at the substantial health damage caused by tobacco consumption and to help persuade consumers of the serious health risks they run.
I propose accordingly to increase the excise duty on cigarettes from midnight by 50p per packet of 20 inclusive of VAT with corresponding increases in other tobacco products. This will raise £132 million in a full year and add 0.75 per cent to the CPI. In line with the announcement earlier this year by my colleague, Mr Brian Cowen, TD, Minister for Health and Children, that the tobacco industry should be seen to pay for the health effects of tobacco usage, I am proposing that the revenue equivalent to this tax increase will be paid by the Revenue Commissioners by way of Appropriation-in-Aid to the Department of Health and Children to help fund the increasing cost of health provision in this State - a cost to which cigarette smoking adds significantly.
I do not propose to seek additional revenue from any other excises. I have, however, decided to cut the excise duty on kerosene which is mainly used as homeheating oil from £37.30 to £25 per thousand litres in view of the large price gap for this product with Northern Ireland and the trade distortion which that gap has given rise to in border areas.
Environmental Taxes
Last year, I indicated that it was intended to take up the issue of green tax policy with the Social Partners in the context of the successor to Partnership 2000 with a view to putting in place an agreed policy in this area in view of the impact of tax increases on inflation and those on low incomes. My Department will be raising this issue in the course of the negotiations which have just recently begun.
For many years, the Government has given a tax concession for diesel fuel used in buses and trains. I propose to modify the existing excise duty rebate on diesel fuel, which is available to CIE and certain other bus operators, by stipulating that this concession will only be available where low-sulphur diesel is used.
Car Parking - Benefit-in-Kind
Last year, I indicated that I proposed to introduce a benefit-in-kind charge for car parking spaces and I asked the Department of Finance and the Revenue Commissioners to undertake a review and come up with a fair and workable system. Surprisingly, the working group has not been successful so far in resolving the issues involved. To ensure that the initiative in this area is not lost, I have directed that my Department consult with the Dublin Transportation Office and other relevant Agencies on the practical measures required to impose a straightforward tax on persons using any employer-provided car parking spaces in the inner city area of Dublin.
Current Expenditure
The Action Programme for the Millennium published last month by the Government parties reaffirmed the 4 per cent ceiling on the average annual increase in net current spending. In 2000, the annual average increase in net current spending over the 1997 out-turn will be marginally over 4 per cent. This does not include a provision for a new pay round or for other spending measures which might arise from a new National Agreement. Adhering to the 4 per cent target in 2000 and in subsequent years will represent a considerable challenge which the Government is determined to meet.
Medium-Term Budget Projections
In keeping with the practice of previous years, I am including a contingency against all budgetary costs of £769 million in 2001 and £1508 million in 2002. In addition, provision for pensions prefunding will reduce the General Government surplus by about 0.3 per cent of GDP in each of the two years. The General Government surplus is projected at 2.5 per cent of GDP in 2001 and 2.6 per cent of GDP in 2002. In my view, it is entirely appropriate that we continue to run substantial budgetary surpluses while economic conditions are favourable.
Conclusion
Budget 2000 is the third in a series of five for this Fianna Fail/Progressive Democrat Government. It sets new goals and a vision for our future.
It is innovative and radical.
It consolidates our economic and social progress and it presents a strong economic and budgetary position and ensures that it will be maintained.
It aims at improving not just income levels but also the quality of life for everyone.
It provides for progressive improvement in living standards and social services.
It aims to sustain our capacity to grow - through massive investment and by increasing incentives to work.
It addresses the problem of skill shortages in a fast growing economy.
It addresses the problems of childcare in a balanced and equitable manner.
This Government will, over its lifetime, have brought about fundamental change to our taxation system - thereby, ensuring fairness and equity between all taxpayers.
This Government has prepared the ground for our continued ability to maintain services and pensions in the face of fundamental demographic change.
I commend this Budget to the House.