McCreevy rows back on reliefs despite tough talk

Lobbying pays. That must be one of the big lessons of Budget 2004. Successful pleadings won a reprieve for film tax relief and a surprise extension for a range of property allowances. It also ensured a new tax relief aimed at encouraging research and development and an extension of the Business Expansion Scheme, writes Cliff Taylor, Economics Editor

And all this despite a section of Mr McCreevy's Budget speech pointing out the problems with tax reliefs. The lobby groups must have felt that they had lost the fight when they heard the Minister argue that reliefs narrow the tax base, raise issues of equity and reduce the tax bill of those in the higher income brackets.

"Those who both simultaneously decry this fact and at the same time campaign loudly to retain certain reliefs should recognise the inherent contradiction of their position," he declared. Surely this was a prelude to ruling against the campaigns to retain or introduce new ones?

Strangely not. The decision to extend the Business Expansion Scheme and the associated Seed Capital Scheme - which are used to attract private venture capital into the SME sector - came as little surprise. The annual cost is about €20 million, spread around more than 2,500 investors and the merits of the scheme - in terms of their wider economic benefit - were argued by business lobby groups such as IBEC.

The same case won a reprieve for the section 481 film tax relief. This costs some €30 million a year and was the subject of the most intensive campaign, which not only won a reprieve but also an increase in the ceiling of investment per film to €15 million. Mr McCreevy said that "future decisions" will depend on abuse of the scheme not continuing. However, as he has extended it to 2008, the "future" is a long way off. It was a big win for the "luvvies" and for John O'Donoghue, the Minister for Arts, Sport and Tourism.

Strike three was the new research and development tax credit, under which 20 per cent of R&D spending can be written off against corporation tax. The software and high-tech sector - represented by ICT Ireland - has been fighting for this since last year, supported by the industrial development agencies and the Tánaiste, Ms Harney.

This year their boat came in. The measure has some logic as part of an approach to encourage research investment, but the current tax structure can discourage this, as multinationals can find it more financially effective to locate - and write off - such spending in higher tax locations.

Now the hope is that research will be conducted here competitively and that, if it is successful, the company undertaking it will be encouraged to commercialise the resulting product or service here to benefit from the low taxes on the resulting profits.

The extension of a range of property-based reliefs from the end of 2004 to mid-2006 surprised many. The construction industry and project promoters apparently persuaded the Minister that it was impossible to finish all the planned projects by the end of next year and that trying to do so would disrupt the construction industry.

These schemes are expensive and Revenue figures show they are the key vehicles used by higher earners to shelter their income from tax. There are no overall figures for the cost of these schemes but a Revenue study of high earners suggests it is substantial. In the 2000 tax year, relief of almost €70 million was claimed by 400 high earners from the various property-related schemes, suggesting the overall total runs into hundreds of millions.

Last year, Mr McCreevy said that, given the demand for property investment and the need to promote equity in the tax system, "there is no justification for a continuation of these reliefs beyond 2004". The proposed abolition applied to nine schemes but their retention until 2006, gives new life to such delights as the "living over the shop" scheme and the "park and ride" allowance.

An individual case can be put forward for most tax allowances and reliefs. The problem is that, while some achieve their objectives fairly efficiently, others cause dislocation and lost tax to the Exchequer.

As a group, the continuation of special reliefs means the general tax burden is higher than it would otherwise be. Some reliefs have a clear economic logic, but for many there is a real question about whether the benefit offsets this cost.