Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I am pleased to have an opportunity to contribute to the Second Stage debate on the Finance Bill 2015. Under section 61, I see the Minister is making changes to the application of stamp duty on certain bank transactions, including the use of automated teller machines, ATMs. Under that heading, I raise Bank of Ireland's announcement today setting a minimum over the counter withdrawal limit of over €700 per transaction and a minimum over the counter lodgement of €3,000. The Minister has made a statement to the effect that he was surprised and feels the changes are unnecessary but he needs to go a step further because many older people, in particular, like to deal with a human being in the bank branch and not a machine. There is an important security issue at stake. If any undesirable person observes what is going on around a bank branch and sees an older person taking money out over the counter that person will know the Bank of Ireland the customer is taking out a minimum of €700. Similarly, small traders and farmers seeking to lodge money will have to amass a minimum of €3,000 before making a lodgement over the counter.

This raises a fundamental question about the direction of the banks and banking system which are becoming increasingly impersonal and faceless and the customer relationship is no longer at the centre of banking. That is why I have consistently called on the Minister to bring forward a White Paper on banking so that we can decide what the direction we want banking in Ireland to take. For older people, in particular, going to an ATM presents challenges and many simply do not want to do that. They would prefer to deal with a person in the branch. If they use an ATM, it will typically give out €50 notes, a €20 note is the smallest given out and people like to have smaller denominations for their every day business.

The Central Bank also needs to make its voice heard on this issue. It has a vital role in consumer protection and should be exercising that function robustly. If anyone had told the Minister or me even a few years ago that the minimum withdrawal over the counter in a bank would be €700, we would have thought that person had arrived from another planet. It is ridiculous and the Minister needs to deal with it because it is not fair on older people who rely on that personal contact in their local bank branch. I could not pass up the opportunity to raise the issue because it is broadly relevant to the Bill.

Fianna Fáil will be opposing the Finance Bill on Second Stage as it reinforces the missed opportunities 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 the context of what has been happening over the past 12 months and what is likely to occur in budget 2017.

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 past 12 months. According to information provided by the Department of Finance, and confirmed to me in a reply to a parliamentary question, there will be just €500 million of "fiscal space" available in 2017. This is one sixth of the pre-election blow-out that has taken place in the past few weeks and indicates a considerable slowdown in the level of tax cuts and expenditure measures which can be introduced after the election.

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 €2 billion budget adjustment in 2015 and led to €1.1 billion of Supplementary Estimates at the end of 2014 and a €1 billion tax and expenditure giveaway for 2015.

Already this year the Government has signalled a further €1.7 billion in Supplementary Estimates, without any obvious improvement in services, quite to the contrary in some areas. It supplemented this with budget day measures amounting to €1.5 billion. The total of these measures represents an eye-watering €7.3 billion. 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 €2.47 billion 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 be one of the most volatile tax headings in recent years.

I note the comment of the Revenue Commissioners in The Irish Timestoday that the surge in corporation tax receipts is due to "strong trading conditions" and not "one off factors". However, it is indisputable 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.

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 European Central Bank’s quantitative easing programme. The reversal of any or all of these factors could hit Ireland particularly hard as a small, open, trading economy. The economic turmoil in China during the summer was a stark reminder of the unstable nature of the global economy.

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. These two 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 ten taxpayers account for about a third of overall corporation tax revenue. Should international trading conditions deteriorate, we could see these revenues evaporate. The Governor of the Central Bank, Professor Honohan, made warnings along similar lines before the budget.

By contrast, income tax and value added tax, VAT, were only marginally ahead of expectations this 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.

The Government has failed to articulate a strategy as to how to deploy this extra money effectively. Its record in four key domestic issues: housing, health care, mortgages and water, has been abysmal. It is 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 accident and emergency department 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 and execution of public spending.

There is now a real risk that an incoming Government will be forced into 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." He went on to commit to that within the lifetime of the next Government.

When I checked the data with the Minister for Finance he informed me that it would cost €2.64 billion to abolish the universal social charge on incomes up to €70,000 and a further €1.4 billion to abolish it completely. The same Minister for Finance has told us that the fiscal space for 2017 is €500 million and €1.1 billion for 2018. If the fiscal space continues at a similar pace for the following three 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 as credible as his story of deploying the Army to protect ATMs.

I now 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 the Minister on "Prime Time" 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 earning over €21,000 get an increase of €293 a year and the highest percentage benefit would have gone to those earning 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 in recent years. 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.

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 €300 million of the revenue he had available for tax cuts for the less glamorous option of indexing bands when compared to cutting USC rates. In simple terms, the Minister announced income tax reductions of €595 million but the budget booklet confirms the Department expects to claw back over half of 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 into the top tax rate as a result failure to index bands. He might also explain the basis of his calculation that an extra €300 million in tax will actually be collected by not indexing the tax system.

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 indicated 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 overselling 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 us to think. Those who are living solely on income deriving from savings are effectively excluded. Those people exist and 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 ten times more in tax, PRSI and universal social charge than a PAYE employee. The actual cost of the measure to the Exchequer is just €18 million in 2016, which underlines its limited nature.

In so far 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 earners 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 if their business fails and they have no entitlement to other essential welfare supports such as 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.

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 a child, an elderly person or a person with a disability. While Revenue makes 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 because they are simply not aware of it and the Government and Revenue need to do a lot more to make people aware of the existence of this tax credit and the ability 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 the care of a family member, including a child in respect of whom child benefit can be claimed. 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. Revenue has access to sufficient information to make a reasonable assessment as to whether a couple would be entitled to this credit, which would amount to an extra €1,000 in their pockets.

There is another way in which the tax code can be amended to help married couples with one earner. This goes back to the debate around individualisation. 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 valued by the State.

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 no mention of any form of tax relief for first-time buyers this year, despite the odds being stacked against them. The DIRT 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 not worked. 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, which we have consistently highlighted, the abolition of mortgage interest relief and the new Central Bank rules on mortgage deposits have combined to make home ownership increasingly unaffordable and unattainable for young people. These are the real issues that the Government should be focused on if it genuinely wants to assist people who aspire to own their own home. The announcement of the scheme 12 months ago was well intentioned but it has failed to deliver.

The budget also failed to deliver for savers. The Minister for Finance is continuing to preside over a punitive tax regime for savers with no relief provided in the Finance Bill. The Government has increased the tax on deposit savings by a massive 14% from 27% to 41%. In addition, anyone with unearned income such as deposit interest, rent, dividends, etc., of greater than €3,174 has to pay an additional 4% PRSI on deposit interest, bringing the total tax on interest to a whopping 45%. Combined with effective zero rates of interest, it means people are effectively earning little or nothing from saving. This is a punitive tax on people who have prudently saved money which itself has already been taxed in full. Nearly €2 billion 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 £1,000 of interest on savings is fully tax-free. The rates offered on tax-free products by the NTMA in Ireland through An Post have been slashed under pressure from the banks, as has been revealed through responses to freedom of information requests. There has been no respite for savers looking for a decent return on their money in this country.

DIRT is a tax that 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 individuals under the age of 66, the situation is even worse. Low-income earners, who have put aside some savings, pay the same rate of DIRT as millionaires, which is unfair. Savers have also been hit in other ways through the hated levy on their private pension funds, which is now thankfully coming to an end, increased capital gains tax rates and the emasculation of the credit union sector. All in all, the Minister has made it increasingly difficult for families to put money aside for their future economic well-being.

Despite a report in The Irish Timesprior 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 the Labour Party 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 €375 million in tax on gifts and inheritances even after the change to thresholds in the budget. This is €5 million more than the amount it expects to raise in 2015.

The coalition has twice reduced the threshold for CAT as well as increasing the rate from 25% to 33%. In the 2013 budget, the Minister, Deputy 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 threshold that will apply in 2016 is still €52,000 below that which applied when the Government came to power.

Recent increases in property values mean that far more families are now being drawn into the inheritance tax net. In many areas, modest family homes can no longer be passed from parent to child without imposing a very large inheritance tax liability, which can often result in the forced sale of the property. 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. Our budget submission made proposals in this area which we will pursue further in coming months.

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 that home 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 take this opportunity to commend my colleague, Senator Mary White, on her ongoing campaign to lift the burden of inheritance tax on families in Dublin and throughout the country.

The extension of CGT relief in the Finance Bill is restricted to first €1 million 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 £10 million. The £10 million limit has increased threefold since the relief was introduced.

I would like to raise a number of technical issues on the design of the draft measures. 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 by some professional advisers 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. In doing so, they 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% 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 similar to the UK approach which has worked successfully. In addition, the requirement for a three-year period of ownership ending on the date of disposal is too long and is uncompetitive. 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.

In other tax measures to assist with the creation of jobs, the Government has tinkered with the rules to allow companies to raise more finance under the scheme but has 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 and excluding EII shares from the charge to CAT.

There are currently two points at which personal retirement savings accounts are disadvantaged when compared with 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 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 hope the Minister will examine this issue on Committee Stage.

The Companies Act enacted 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 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 €8.8 million 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 in how the law is applied and this issue should be examined.

Last year, I tabled amendments to the Finance Bill to provide an income tax exemption in respect of certain expense payments for relevant directors. I cited the example of a company based in Ireland which 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 represent a 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 introduced in the Finance Bill as a positive step towards acknowledging the critical role that non-executive directors and boards play in the leadership and governance of businesses in Ireland. However, I note concerns that have been expressed 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.

There is an increasing demand for contractors across the ICT and health care 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 most needed. This is an area on which submissions have been made to the Minister and I ask him to examine them very closely.

On Committee Stage, we will deal with the issue of the knowledge development box and some outstanding issues concerning the local property tax. While I welcome the deferral of the revaluation which was meant to happen in 2016, I am very disappointed that Dr. Thornhill has done a U-turn, as such, on the deductibility of the local property tax for income or corporation tax purposes by landlords of rental properties. I will also comment at a later date on the fiscal council comments, which the Minister addressed in his opening remarks on Second Stage. Overall, I look forward to a constructive and detailed engagement with the Minister and his officials on Committee Stage of Finance Bill 2015.

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