Ceann Comhairle, I welcome the opportunity to speak on the Finance Bill 2016. At the outset, I want to make clear that Fianna Fáil will be opposing the Finance Bill at second stage as it re-enforces the mistakes made in Budget 2016. As I said in my Budget day speech, this is the last throw of the dice by a deeply unpopular government desperate to be re-elected. I want to put the budget in context of what has been happening over the last twelve months and what is likely to occur in Budget 2017.
Fiscal space in 2017 / 2018
Buried deep in the charts which accompany the budget document is a nugget of information that is particularly revealing about the Government’s strategy over the last 12 months.
According to information provided by the Department of Finance, and confirmed to me in a parliamentary reply, there will be just €500m of “fiscal space” available in 2017. This is one-sixth of the pre-election blow-out that has taken place in the last few weeks and indicates a considerable slowdown in the level of tax cuts and expenditure measures which can be introduced after the election.
It is my view that, at the end of 2014, frightened by plummeting opinion poll ratings in the face of the Irish Water fiasco, the government took a conscious decision to engage in a pre-election splurge. This began with a reversal of the planned €2bn budget adjustment in 2015 and led to €1.1bn of supplementary estimates at the end of 2014 and a €1bn tax and expenditure giveaway for 2015.
Already this year the government have signalled a further €1.7bn in supplementary estimates, without any obvious improvement in services. They supplemented this with budget day measures amounting to €1.5bn. The total of these measures represents an eye-watering €7.3bn pre-election splurge. So much for the government’s supposed commitment to stability and fiscal prudence.
According to October’s Exchequer returns published yesterday, the State took in €2.47bn more in taxes in the first ten months of the year than it expected. This is a very impressive figure but, on closer examination, it is revealed that 82% of this additional revenue came from corporation tax which has proved to one of the most volatile tax headings in recent years.
I note the comment of the Revenue Commissioners, in the Irish Times today, that the surge in corporation tax receipts is due to “strong trading conditions” and not “one off factors”. However, it is indisputable that fact that we have seen a boom in exports to record levels helped by a very benign international environment. The domestic elements of the economy are still below peak levels.
It is my belief that Ireland remains vulnerable to a change in international factors. We have benefitted in particular from the weak euro, low interest rates, falling energy prices and the ECB’s quantitative easing programme. The reversal of any or all of these factors could hit Ireland particularly hard. The economic turmoil in China during the summer was a stark reminder of the unstable nature of the global economy.
It is now clear that a considerable proportion of the additional expenditure announced in the run-up to the election is being funded by corporation tax receipts and increased dividends from the Central Bank. Both of these windfalls may not be repeated in future years.
The risk associated with treating corporation tax receipts as permanent can be seen from the fact that the top 10 taxpayers account for about a third of overall corporation tax revenue. Should international trading conditions deteriorate, we could see these revenues evaporate. Governor Honohan made warnings along similar lines before the Budget.
By contrast, income tax and VAT were only marginally ahead of expectations year to date, while excise duty is actually below what was forecast. In fact, each of these categories underperformed in October but this was masked by the strong corporation tax receipts.
Lack of Government Expenditure strategy
The government has failed to articulate a strategy as to how to deploy this money effectively. Their record in four key domestic issues: housing, healthcare, mortgages and water, has been abysmal. They are unable to point to a single concrete achievement in these areas, despite spending being massively ramped up. There have been over-runs in health expenditure, which have failed to deal with waiting lists and A&E overcrowding. By contrast the Minister for the Environment, Community and Local Government, for all his talk, has failed to spend one-third of the capital budget allocated to him. All of this points to a government without a proper plan for the management of the public finances.
There is now a real risk now that an incoming government will be forced in to an immediate reining in of runaway spending in order to comply with EU expenditure rules. This will also considerably reduce the scope for any further tax cuts. In his speech to the annual Fine Gael presidential dinner in Dublin the Taoiseach said “if returned to Government, Fine Gael will put complete abolition of the USC at the centre of the most radical overhaul of personal taxation in a generation.”
When I checked the data with the Minister for Finance he informed me that it would cost €2.64bn to abolish the Universal Social Charge on incomes up to €70,000 and a further €1.4bn to abolish it completely. The same Minister for Finance has told us that the fiscal space for 2017 is €500m and €1.1bn for 2018. Is the fiscal space continues at a similar pace for the following 3 years it will be impossible for the Taoiseach to achieve his aim unless he intends to raise general income tax rates or starve public services of additional resources. It would seem the Taoiseach’s claim on the USC is about as credible as his story of deploying the Army to protect ATMs.
Tax changes favour higher earners
I want to turn to the actual tax changes introduced in this budget.
The highest gain will be for people earning €70,000 and above. They will be better off by €902 a year or 2% of net income. By contrast, someone on €25,000 will gain €227 or 1% of net income.
I debated this point at length with Minister Noonan in the Prime Time studio on budget night. Fianna Fáil proposed an alternative tax package combining an increase in personal tax credit and an increase in the lower USC bands which would have seen every worker over €21,000 get an increase of €293 a year and the highest percentage benefit would have gone to those between €20,000 and €30,000.
This reason we took this approach for this Budget is that we wanted to undo some of the damage that was done by the flat tax increases which were introduced over the lifetime of the government. When the Minister for Finance was raising taxes, he abolished the PRSI allowance costing every employee €264 a year and introduced water charges and local property tax without reference to ability to pay. It is worth recalling that almost 60% of income earners earn less than €30,000 a year.
Government documents reveal €300m hidden income tax hike
A further aspect of the government’s tax strategy, which is worthy of highlighting, is the failure to index tax bands and tax credits. This is a stealth tax as it has the effect of raising government tax revenue without explicitly raising tax rates. Taxpayers will pay more tax as the income tax bands are not being adjusted to take account of expected inflation. According to the Budget document, the Department of Finance projects that inflation will be 1.2% in 2016.
To protect taxpayers from the loss of real income from inflation the entry point for the top tax rate should have been increased by €400 for a single person and €800 for a married couple. The various personal and PAYE tax credits should also have been increased to mitigate the impact of inflation.
Presumably the Minister felt he would get less of a publicity hit from using €300m of the revenue he had available for tax cuts for the less glamourous option of indexing bands when compared to cutting USC rates. In simple terms, the Minister announced income tax reductions of €595m but the Budget booklet confirms the department expects to claw back over half this in 2016 by not indexing tax bands and credits.
However, on a relative basis the biggest losers from this are those earning around the entry point to the top rate, €33,800. Many extra taxpayers will be now pushed in to the top tax bracket if they get a modest pay increase. In his response, the Minister might like to indicate how many middle income earners will now be pushed in to the top tax rate as a result failure to index bands.
173,000 miss out on new ‘self-employed’ tax credit
I welcome the introduction of an earned income tax credit for self-employed persons. It is something we called for two years ago. However, the budget announcement of an earned income tax credit falls well short of full equality for the self-employed and non PAYE income earners.
I understand that 111,600 people will benefit from the change in 2016. A previous parliamentary reply indicating that extending the PAYE tax credit to all non PAYE income earners would cover 284,600 cases. As a result of the restricted nature of the measure being introduced in 2016, 173,000 people living on income derived from savings and other non PAYE sources will continue to be discriminated against in the tax code.
Not for the first time, we find that the government is over selling a measure it announced on multiple occasions. The tax change introduced in the budget to help the self-employed is a lot less generous than the government would like to have us think. Those who are living solely on income deriving from savings are effectively excluded. They will still be discriminated against, particularly so on low incomes.
For example, in 2016 a person with €15,000 of income, who does not qualify for the new tax credit, will pay over 10 times more in tax, PRSI and Universal Social Charge than a PAYE employee. The actual cost of the measure to the Exchequer is just €18m in 2016 which underlines its limited nature.
Insofar as possible, people on the same income should pay the same level of tax. Restricting the credit to what is referred to in the tax code as Case I and Case II income is difficult to defend on equity grounds.
This is not the only aspect of the tax and social welfare code where the self-employed are discriminated against. They are subject to a means test for Jobseeker’s support and have no entitlement to an invalidity pension, illness benefit and occupational injuries benefits, which employees can avail of from contributions made at the PRSI Class A rate. As a country, we have a long way to go before we can say that we truly value the self-employed and their contribution to the economy.
Tens of thousands may not be claiming Home Carer Tax Credit
I welcome the modest increase in the Home Carer Tax credit in the Budget, bringing it up to €1,000. A Home Carer Tax Credit may be claimed by a married couple where one spouse cares for a dependent person such as child, elderly person or a person with a disability.
While the Revenue does make efforts to automatically give this tax credit to some taxpayers, only 81,000 taxpayers benefited from it in 2015. I suspect that tens of thousands of people are not claiming this tax credit as the government does very little to make people aware of it. It is my firm belief that the government should do far more to promote this tax credit so that everyone who is entitled to it knows how to claim it.
For example, a married couple with one earner is likely to be entitled to the credit if either spouse is engaged in care of a family member. In particular, Revenue should be obliged to explicitly bring this €1,000 credit to the attention of each taxpayer who may be entitled to benefit from it.
There is another way in which the tax code can be amended to help married couples with one earner.
Currently a spouse can effectively transfer just €9,000 of their standard rate band income to their spouse out of a total of €33,800. This has not been amended in a number of years and an increase in this amount would be recognition that work undertaken in the home is value by the State.
First time home buyers get no benefit
We have heard a lot about housing and rent certainty or the lack of it since the budget. It is worth remembering that there was there was no mention of any form of tax relief for first time buyers this year.
The DIRT tax rebate scheme introduced last year has had no impact and mortgage interest relief is being abolished from 2017.
A total of 118 applications from first time buyers for a refund of DIRT paid over the previous four years have been received. Just 74 applicants have received a refund of DIRT amounting to around €74,880.
It is now clear that the scheme to provide relief from DIRT for first time buyers has been a major disappointment. In fact, the outcome is an insult to the thousands of people who are struggling to buy their first home.
A chronic lack of supply, exorbitant interest rates, the abolition of mortgage interest relief and the new Central Bank rules on deposits have combined to make home ownership increasing unaffordable for young people. These are the real issues that the government should be focused on if they genuinely want to assist first time buyers.
The announcement of the scheme twelve months ago was nothing more than a gimmick to distract attention from the escalating housing crisis.
The scheme has not even managed to live up to its very modest expectations as previous parliamentary replies indicate that upwards of 10,000 were expected to benefit. In practice, only a fraction of this number has availed of the scheme.
Budget fails to deliver for savers
The budget also failed to deliver for savers. The Minister for Finance Michael Noonan is continuing to preside over a punitive tax regime for savers with no relief provided in the Finance Bill.
The current government has increased the tax on deposit savings by a massive 14% (from 27% to 41%). In addition anyone with unearned income (deposit interest, rent, dividends etc) of greater than €3,174 has to pay an addition 4% PRSI on deposit interest bringing the total tax on saving on to 45%.
This is a punitive tax on people who have prudently saved money which itself has already been taxed in full. Nearly €2bn has been collected in DIRT since 2011.
The combination of tax and inflation means real returns for savers are now negative. By contrast in the UK, the first STG£1,000 of interest on savings is tax free. The rates offered on tax free products by the NTMA through An Post have been slashed under pressure from the banks. There has been no respite for savers looking for a decent return on their money.
It is very important to state that DIRT tax is applied in a discriminatory manner. Any single pensioner earning just over €18,000 (or €36,000 for a couple) is liable for DIRT at the full rate of 41% even if they are only subject to income tax at 20%. For low income families under 66, the situation is even worse. Low income earners who have put aside some savings pay the same rate of DIRT tax as millionaires.
Savers have also been hit in other ways through the hated levy on their private pension funds, increased capital gains tax rates and the emasculation of the credit union sector. All in all, the Minister for Finance has made it increasingly difficult for families to put money aside for their future wellbeing.
Inheritance Tax thresholds are still too low
Despite a report in the Irish Times prior to the budget that a separate inheritance tax threshold of €500,000 was to be introduced for the family home, the actual change to thresholds was relatively minor.
Inheritance tax has been a bonanza for the government coffers. Fine Gael and Labour have increased the number of people liable to pay inheritance tax by 34% and since 2010 the amount raised has more than doubled. In 2016, the government expects to take in €375m in tax on gifts and inheritances even after the change to thresholds. This is €5m more than the amount they expect to raise in 2015.
The Coalition has twice reduced the threshold for capital acquisition tax as well as increasing the rate from 25% to 33%. In the 2013 budget, Minister Noonan justified these tax increases by saying “I am introducing a number of measures in the area of capital taxes to ensure that people with wealth make a fair contribution to the State”.
The level that will apply in 2016 is still €52,000 below the threshold which applied when the government came to power.
Recent increases in property values mean that far more families are now being drawn in to the inheritance tax net. In many areas, modest family homes can no longer be passed from parent to child without imposing a large inheritance tax liability. This can often result in the forced sale of the property to pay the inheritance tax due. This penalises those who have prudently saved their already taxed income during their working life so that they can pass it on to their children.
It is every parent’s wish to provide security for their family. This becomes even more important in later years as a parent will naturally want to be able to pass on the benefits of their lifetime’s work to their children, grandchildren and other close family members. This may be in the form of their family home or savings, so that parents are able to help secure the future financial wellbeing of their family.
Prior to the budget Fianna Fáil proposed an immediate increase to €300,000 with a clear commitment to raise the threshold further in future years.
I also believe there is a need to apply an annual indexation to thresholds based on the Residential Property Price Index to give greater certainty in the application of CAT. The change made in Budget 2016 was a step in the right direction but further reform of inheritance tax rules are needed in the years ahead.
This should also encompass an easing of the restrictions on the Dwelling Home Relief which allows a beneficiary to inherit a house free of inheritance tax if they have resided in the house for three years prior to the disposition and continue to live there for six years afterwards. Currently there is a very strict test that a parent cannot also have lived there during this period unless they are compelled by old age or infirmity to depend on the child.
I would like to take this opportunity to commend my colleague Senator Mary White for her ongoing campaign to lift the burden of inheritance tax on families.
Capital Gains Tax relief regime is not competitive with UK
The extension of CGT relief is restricted to first €1m of gains. In contrast the UK has a simpler, clearer and more attractive relief which applies a flat 10% rate to entrepreneurial gains of up to Stg £10m. The Stg £10m limit has increased three fold since the relief was introduced.
I would like to raise a number of technical issues arising in relation to the design of the draft measures. Firstly, an individual may hold shares directly in a company which is engaged in a business or may hold shares in a holding company which in turn holds shares in companies engaged in business.
The provisions currently recognise this. However, the manner in which the definition of ‘holding company’ is framed means that it is practically impossible for someone to claim eligibility for the relief where the corporate structure for the business, which they have owned and grown, happens to have a holding company.
For example, it has been suggested that by some professional advisors that, in addition to holding shares, holding companies also hold bank accounts to discharge their running expenses, raise debt and lend debt to their subsidiaries and often oversee and manage the activities of subsidiaries and in so doing may charge and recoup management expenses whether in the course of the conduct of a services trade or otherwise. This means that the assets of a typical holding company do not consist wholly of shares which comprise 100 percent of the shares in other companies engaged in business as the draft provisions currently require.
As such, the owner of the company in this instance would not be eligible for the relief. One possible solution is to adopt a group definition approach which is similar to the UK approach which has worked successfully. In addition, the requirement for a three year period of ownership ending on date of disposal is overly long and is uncompetitive compared to the UK.
Finally, the restriction that in order to qualify, shares are not listed on official lists of exchanges, is an unnecessary limitation on the commercial freedom of a company as to whether to list its shares.
Employment and Investment Incentive Scheme is still not up to scratch
In relation to other tax measures to assist with the creation of jobs, the government have tinkered with the rules to allow companies to raise more finance under the scheme but have not made it more attractive for investors. This is the real difficulty with how it operates.
The scheme could be improved by increasing the €150,000 annual investment limit for individuals, removing EII from the High Earners’ Restriction permanently, providing full income tax, USC and PRSI relief in the year of investment (rather than in two stages) and excluding EII shares from the charge to Capital Acquisitions Tax.
Fair treatment of PRSAs
There are currently two points at which Personal Retirement Savings Accounts are disadvantaged when compared to Occupational Pension Schemes.
The Finance Bill as published provides for an exemption for employees from USC on employer contributions to a PRSA, to bring the USC treatment of such contributions in line with employer contributions to occupational pension schemes, which addresses the first major disadvantage suffered by PRSA holders.
However, a second anomaly exists in that in the case of PRSAs, both employer and employee contributions are subject to Revenue limits allowable for tax relief. In the case of Occupational Pension Schemes, ONLY the employee contributions are subject to Revenue limits.
I would hope the Minister could address this at Committee Stage.
Exemption limits relating from statutory audits for small companies
The Companies Act last year was a welcome consolidation and simplification in the law relating to how companies operate. It was particularly useful for small companies.
One aspect that the Minister may wish to consider is the apparent inconsistency between the rules governing when a company needs to carry out a statutory audit under the Companies Act and those required by Revenue.
Under the new Companies Act, a company with a turnover of less than €8.8m is not required to carry out a statutory audit. However, as I understand it, the rule applied by Revenue is that, once a firm has a turnover of greater than €100,000, a full audit is required. There is a clear case for consistency is how the law is applied and I would ask the Minister to take a look at this.
Income tax exemption in respect of certain expense payments for relevant directors
Last year, I brought forward amendments to the Finance Bill in relation to an income tax exemption in respect of certain expense payments for relevant directors.
I cited the example of a company based in Ireland who appoints an overseas Director. If that Director travels to Ireland several times a year for board meetings, Revenue’s current position is that the Director’s flight and hotel costs are a benefit in kind (“BIK”) and he or she ought to be subject to income tax on them. By contrast, a European civil servant coming to Ireland for a meeting with the Department of Finance would not pay BIK in such circumstances. Therefore, there was an inequality of treatment with businesses looking to avail of overseas expertise to improve their firm.
I welcome the changes that have been brought forward in the Finance Bill as a positive step towards acknowledging the critically important role that non-executive directors and boards play in the leadership and governance of businesses in Ireland.
However, I note concerns that have been express about the inequities created by the restrictiveness of its application to non-resident non-executive directors only, and the serious anomalies that such a restriction will create for domestic Irish business and Ireland’s entrepreneurial culture in general.
Tax Treatment of Expenses of Travel and Subsistence for Employees
There is a continuing increased demand for contractors across ICT & Healthcare sectors. However, multinationals looking to expand are finding it increasingly difficult to fill posts.
The current interpretation of the Normal Place of Work by Revenue is disallowing professional contractors their business travel and accommodation expenses for tax purposes. This is being done even though the expenses are incurred wholly and exclusively in undertaking their work.
Contractors are not freely moving to sites where the work is. Instead, they are trying to find work locally even if it is not the most suitable. This means that skills are not being deployed where they are needed hence the skills shortage.
From the multinational side, it is increasingly frustrating and worrying that they cannot get skilled resources when they need them. There is a significant increase in the use of hiring companies with a lot of new players entering the market – this is driving the cost up. More and more, it is getting costlier to find and hire resources.
The knock on effect is that projects are getting delayed / cancelled, project costs are soaring due to rising rates and precious time is lost trying to assemble project teams.
As has been pointed out by employers representatives, legislation should be altered to provide that in such situations where an expense is incurred wholly, necessarily and exclusively in the proper performance of a contract worker’s duties; it is permissible for an employer to reimburse that worker free of tax. It would of course be reasonable to limit this to vouched expenses in order to satisfy Revenue as to the bona-fides of claims.
I would ask that the Minister consider this issue for report stage.
Knowledge development box
Last year in his budget statement the Minister announced the abolition of the so-called ‘double-Irish’ structure to be replaced by the introduction of a knowledge development box. He said that the knowledge development box “will be best in class and at a low, competitive and sustainable tax rate”.
I welcome the fact that the Finance Bill puts meat on the bones in relation to this.
There are a number of technical issues which can be teased out at Committee Stage when I will be bringing forward a number of mainly technical amendments.
One I would mention initially is the suggested approach to the definition and scope of qualifying expenditure which is set out at section 769G(2) is to frame qualifying expenditure “on the qualifying asset [as] …expenditure incurred by the relevant company …in carrying on by it of research and development activities …where such activities lead to the development, improvement or creation of the qualifying asset”.
I would suggest that, to remove any doubt, expenditure on R&D which results in a ‘failure’ or ‘negative’ outcomes or ‘discoveries’ can be included in ‘qualifying expenditure’ where such outcomes form part of the development process that ultimately leads to the creation of an asset, we suggest that the scope of qualifying expenditure might not be described as expenditure “on the qualifying asset” but instead “qualifying expenditure in relation to the qualifying asset”.
Local Property tax
As a result of sustained pressure on the Minister the November 2016 property tax revaluation has been put off for 3 years.
As it stood, 52pc of all families would be forced to pay a minimum of €90 extra per year with around 110,000 taxpayers would have faced an increase between €270 and €540 a year in their LPT bills.
This report includes 13 recommendations, at the centre of which is changing how the tax is structured. Instead of the rate being set nationally, each local authority should be given a targeted amount to collect, and the tax rate set locally so this target is achieved. There are other suggestions, including removing the exemption for new and previously unused properties purchased from developers.
Unfortunately, the Thornhill report got lost in the coverage surrounding the budget and it would be useful for a separate debate on it at some stage.
It is noteworthy that Mr Thornhill has done a complete u-turn on deductibility of LPT for income or corporation tax purposes by landlords of rental properties. He says, “On further consideration, this recommendation in favour of deductibility does not rest easily with the concept of the LPT as a tax on the amenity value of residential properties rather than as a business cost.”
This is just another twist in the saga of the tax treatment of landlords and how this impacts on the supply of rental accommodation in the country.
Fiscal Council comments on budget
I would like to address for a moment the comments made by Prof. John McHale, the Chairman of the Irish Fiscal Advisory Council, the day after the budget when he stated that his initial assessment of Budget 2016 was that the scale of the deficit reduction in 2016, as measured by the change in the structural balance, was insufficient to meet new fiscal rules.
The Fiscal Council provides very valuable commentary and advice on the public finances and the appropriateness of fiscal policy. The members of the Council, including the recent appointees, bring a wealth of experience to their role. It is important that they receive full co-operation from Government departments. It is reasonable to assume that they would be proactively provided with any information that they would need to undertake their work. The government must explain why it appears this did not occur. Ministers must acknowledge the importance of the Fiscal Council and support it in its works. At present, it appears to regard the Council as a nuisance to be side-lined as much as possible.
I look forward to participating fully in the Committee Stage debate on the Bill.