The Minister for Finance is expected to restrict some allowances for individuals and companies when he presents the Finance Bill today, writes Cliff Taylor, Economics Editor.
A tax break that benefited property investors is expected to be targeted in today's Finance Bill, as the Minister for Finance, Mr McCreevy, continues to close off tax loopholes that benefit high earners. A tightening of some business allowances is also expected.
The Minister is likely to move to end a scheme that allowed property investors to reduce their tax bills on rental income.
Under the scheme, investors sold the stream of future income from certain rental properties to a financial institution, which paid them a lump sum in return. This meant that instead of being liable to income tax at 42 per cent on the rental income, they were liable only to pay capital gains tax at 20 per cent. In practice, as some of the cost of the property could be written off against tax, the effective tax bill often fell well below 20 per cent.
The financial institution benefited as it took a profit margin on the deal, while the tax savings for those with large rent rolls could be very significant. The Bill, which is expected to close off this scheme, will also set down rules for ending another arrangement under which wealthy investors could benefit from capital allowances following the purchase of a property in certain designated areas.
Mr McCreevy announced recently that he would use the Bill to restrict the use of capital allowances attached to these buildings, so that in future they could only be used to offset rental income from the building in question.
The Finance Bill enacts the measures announced on Budget day and also generally contains other anti-avoidance and technical measures.
Among the issues that will be closely watched will be the implementation of the €100 million per annum bank levy. The detail of changes to capital gains tax will also be studied, particularly the proposed end to roll-over relief, which had allowed businesses and individuals to defer capital gains tax bills through reinvestment.
There has also been some speculation that Mr McCreevy could move to abolish the penalty on those wishing to withdraw funds from SSIA accounts, in an effort to cut the cost to the Exchequer of these accounts.
The overall tone of today's Bill will be to move further to restrict allowances and loopholes to safeguard the Exchequer finances.
As well as property-based allowances, the Minister may target a scheme under which directors of a manufacturing company can get tax-free income routed through a company that gets royalty from the parent group in relation to patents. However, any change in this area is expected to be measured so as not to damage genuine research and development.
The technology industry has also been pressing the Government to introduce a special tax credit to encourage research spending but it is not clear if this will be included.
Another area that will be closely watched by tax experts is whether Mr McCreevy introduces measures to tax the undistributed profits of companies.
These could be designed to stop individuals trying to avoid income tax by "incorporating" themselves or to take a larger slice of tax from some big indigenous companies which could hold large undistributed profits for long periods, thus avoiding any tax charge, apart from the basic 12.5 per cent corporation tax.
The tax community will also be watching for any signal on transfer pricing, the practice where multinational companies maximise their profits here to benefit as fully as possible from the 12.5 per cent rate. Any fundamental move in this area is unlikely but the Minister could signal a consultation process on the issue with a view to future changes.
The Minister announced on Budget day that he would end a range of property-based tax breaks such as the urban renewal scheme, with projects having to be finished by the end of 2004. Measures are likely to be included to allow some extension of the deadline for schemes already under way.
