Budget 2000 - Tax Strategy Group Papers

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TSG99/32

1 This paper gives an outline of the present position regarding tax incentives in respect of tax designated areas since 1986 under the urban and rural renewal schemes and also the seaside resort scheme, the rationale for such schemes, and the factors affecting their continued operation. A full list of relevant schemes is set out in Appendix 1.

Background

2 The urban renewal scheme was introduced in 1985 in an effort to alleviate the increasing problem of dereliction and dilapidation which had affected large parts on the inner areas of towns and cities nation-wide. In many cases these inner areas had sustained large population declines as growth and development was increasingly concentrated in the suburbs. The core objectives of the scheme were to promote urban renewal and redevelopment by promoting investment and reconstruction of buildings in designated areas.

Summary of Incentives Available

3 The main tax reliefs, as illustrated by the 1994 Urban Renewal Scheme, were as follows:-

- An accelerated capital allowances for capital expenditure incurred in the construction or refurbishment of certain industrial buildings in designated areas; an initial allowance of 25% (available to both owner-occupiers and lessors) and free depreciation of up to 50% for owner-occupiers only. The normal industrial buildings capital allowances of 4% per annum applied in respect of the balance of the qualifying expenditure.

- a maximum capital allowance of 50% for commercial buildings (including offices except in the 5 main county boroughs); free depreciation of up to 50% available to owner occupiers only and a initial allowance of 25% available to owner-occupiers and lessors with remainder (up to 50%) at 2% per annum.

- Double rent allowance for 10 years for traders leasing new or refurbished business premises. (Hotel lessees qualify for the double rent allowance only if the lessor of the building disclaimed the capital allowances).

- Owner occupier housing tax allowance of 100% for expenditure on refurbishment of residential premises, available at 10% per annum for 10 years; 50% allowance for new-build construction expenditure, i.e. 5% per annum over 10 years.

- "Section 23" reliefs for the construction or refurbishment of, or the conversion into rented residential accommodation. 100% relief was available against all rental income.

- 10 year rates relief on a sliding scale.

First Urban Renewal Scheme (1986 - 1994)

4 The 1986 Finance Act set out the legislation which applied initially in the five county boroughs (Dublin, Cork, Limerick, Galway and Waterford) and to the Custom House Docks Area. In 1988, 10 new areas were added and a further 9 in 1990. In 1991, the tax incentive scheme for the Temple Bar Area was created. Ballymun was designated in 1993, to facilitate a refurbishment project, bringing the total number of areas designated under the scheme to 27. This first Urban Renewal Scheme which ended in 1994 generated investment of £1,084 million.

1994 Urban Renewal Scheme

5 When the original urban renewal scheme ended in 1994 the Government decided to replace it with a new and more targeted scheme from 1 August 1994 for a three year period. The scheme applied to thirty-five urban centres including the addition of the town of Cobh. The scheme was more focused than its predecessor and concentrated on those areas where dereliction was most severe and provided greater incentives for refurbishment work and other measures to conserve existing urban infrastructure. A greater emphasis was also placed on residential dev elopment to provide a better mix of social and private housing and a greater use of vacant upper floors.

6 The new scheme introduced financial incentives for "Living Over the Business", an initiative to promote the refurbishment of vacant upper stories in existing buildings for residential purposes (which in the event did not prove successful). These incentives were to apply in certain designated streets in the five county boroughs.

7 The new scheme also provided for the designation of Enterprise Areas - certain commercial developments in six Enterprise Areas situated in Dublin, Cork and Galway which attracted double rent relief, rates remission and capital allowances. This part of the scheme was aimed at attracting high technology industry to the locations. In order to qualify for the reliefs companies must have first been approved and certified as qualifying companies by Forfas and the Ministers for Enterprise and Employment and Finance.

Extensions to 1994 Urban Renewal Scheme

8 The 1994 Urban renewal Scheme was originally intended to run for a 3 year period, from 1 A ugust 1994 to 30 July 1997. However, applicants experienced delays in the planning process which precluded them for availing of the incentives in the scheme as provided for. The scheme was extended in the 1997 Finance Act until 30 July 1998 and again in the 1998 Finance Act until 30 December 1998 for transitional projects. A further extension until 30 April 1999 in respect of transitional residential projects was provided for in the 1999 Finance Act. This 1994 scheme has now ended.

According to the latest figures available a total of £500 million was invested in areas designated under the 1994 Urban Renewal Scheme in the Dublin metropolitan area alone. The full final cost in respect of the remaining designated areas is not yet available.

9 A further 3 Enterprise Areas were designated in 1997 and arrangements were also put in place for the designation of areas immediately adjacent to 7 regional airports as Enterprise Areas. In the case of the areas adjacent to the regional airports the EU Commission refused to sanction these other than on a case by case basis. This has led to a situation where potential developers have had to come forward with proposed projects to this Department, which in turn submit the proposed project to the EU Commission for approval. To date only one project, a business park at Cork Airport has been approved by the EU Commission. The qualifying period in respect of both the 1997 Enterprise Areas and the areas adjacent to regional airports will end on 31 December 1999.

Review of Urban Renewal schemes

10 The framework for the new scheme starting in 1999 arose out of a detailed review of the previous urban renewal schemes carried out by way of a consultants report commissioned by the previous Government The study found that the schemes had been highly successful in attracting investment to designated areas. However the study also found that the architectural/design achievements had been of mixed quality, much of the pattern of development was piecemeal with projects being initiated as sites became available and as such no priority was given to the areas most in need of rejuvenation. In addition it was felt that the local communities sometimes considered that urban renewal, as defined by the incentive schemes, did not address issues which they considered as central to the regeneration and susta inability of these areas such as employment, the lack of public amenities, education and youth development. The review also highlighted a number of issues that are common to many tax incentive schemes, such as dead-weight, the displacement of investment from non designated areas and the overall negative effect on the competitiveness of businesses located outside the various designated areas.

The main recommendations of the study were

- the adoption of a more structured approach to the process of designating areas for urban renewal

- the concentration on areas most in need of renewal and a more selective approach to applying the various incentives.

1998 Urban Renewal Scheme

11 Based on the recommendations of the review, a Government decision of 13 May 1997 approved the framework of a new urban renewal scheme which was to come into operation from 1 August 1998 but in the event did not come into operation until 1999.

12 For the purposes of the new urban renewal scheme local authorities were requested to draw up Integrated Area Plans in respect of each urban area they wished to have designated under the new scheme. The main objective of each plan was to translate the overall Development Plan policies and objectives into a detailed area plan, identifying the areas with the greatest need and potential for rejuvenation. Specific sub areas and special projects for special incentives were selected in order to overcome barriers to development. Priority for selection was given to physically run down areas which also suffer from high levels of social disadvantage. In order to minimise the resultant cost to the Exchequer the plans also promoted the optimum use of existing infrastructure.

13 In view of the consultants’ findings regarding the need for the involvement of local communities in future urban renewal schemes, specific measures were put in place to ensure public consultation and involvement in the preparation and implementation of the Integrated Area Plans.

14 A total of 78 Integrated Area Plans were submitted to the Minister for the Environment and Local Government. The Integrated area plans were assessed by a broad based Expert Advisory Panel set up by that Minister for the purpose of making recommendations in relation to the designation of areas. Work on assessing the Integrated Area Plans was completed in 1998 but the announcement of the areas to be designated was delayed due to problems in clearing the scheme’s business tax incentives with the EU Commission.

15 However, in February of this year the Government decided to introduce the residential tax incentives and in doing so announced the Integrated Area Plans that had been selected for designation. The decision to announce the areas designated in advance of EU Commission approval was taken in order to maximise the supply of new residential units and assist in stabilising prices. Many of the sites included in the Integrated areas submi tted by the Local authorities were fully serviced. It was felt that if the uncertainty created by the prospect of designation was removed developers would then decide whether to proceed with planned projects either with or without tax designation.

16 The Expert Panel recommended designation in respect of 49 of the 78 integrated area plans submitted. The designation cover a total of 43 cities and towns. The total area recommended for designation by the panel constituted 40 % of what was sought by the local authorities originally. The total area designated is similar to the total area designated under the 1994 Urban Renewal Scheme but due to the greater selectivity in the application of the incentives the likely cost to the Exchequer will be substantially reduced in comparison to the previous schemes. Unlike previous urban renewal schemes there was no blanket designation of areas for tax incentives - in some cases only one or two incentives apply in many small sub areas within individual Integrated Area plans and in some cases the incentives are often limited to residential tax incentives only. Taking account of the then recently published Bacon Report the Expert Panel recommended Section 23 type relief (Rented Residential) for new house construction in a very limited of cases where it was considered absolutely necessary to achieve Integrated Area Plan objectives. A less restrictive approach was taken in respect of refurbishment of older buildings. The application of owner occupier relief was permitted to a larger extent, however the application of this relief was recommended over a whole Integrated Area Plan in only a very limited number of cases.

17 The legislative provisions for the integrated Area Plans were provided for in the 1998 Urban Renewal Act and the package of proposed tax incentives were legislated for in the 1998 Finance Act. The reliefs were similar to the reliefs that were available under the 1994 Urban Renewal Scheme. It was also intended that the 3 year qualifying period of the scheme would commence on 1 August 1998 subject to EU Commission approval.

18 It is too early to assess the effectiveness of the designation process of the 1998 Urban Renewal Scheme in the successful and cost effective targeting of relief. The Department of the Environment have put in place a monitoring system to ensure the aims and criteria set down in each integrated area plan are strictly adhered to. They have also legislated for the certification of projects for tax relief to be confined to those projects that comply with the guidelines laid down in respect of each individual Integrated Area Plan. The Department of the Environment have also indicated that they are opposed to the ad hoc designation of areas in the future which was an unfortunate characteristic of previous schemes. Such ad hoc designations led to a dispersal and dilution of the reliefs which is contrary to the policy regarding the necessity of the appropriate targeting of reliefs to ensure their effectiveness

Changes to urban and rural renewal schemes arising from EU approval

19 The business tax incentives of both the Urban Renewal Scheme and the Rural Renewal Scheme were submitted for approval to the EU Commission on 17 September 1998. From the outset (the Commission had taken this view as early as May 1998) the Commission indicated that they were opposed to both double rent relief and rates remission on the grounds that they are operating aids and are in breach of State Aid rules. Ireland is currently in the process of moving from a category covered by Article 92(3)(a) to the category under Article 92(3)(c) of the EU Treaty. Under the new categorisation (Article 92(3)(c)) operating aid is allowed only in exceptional circumstances.

20 In addition while the Commission does not object in principle to the granting of capital allowances, which they consider as investment aid, the long writing off period of such aid was also questioned by the Commission. The negotiations concerning the approval of the Commission of this and other similar schemes were both difficult and protracted and illustrated the Commissions resolve to examine stringently all State Aid applications in the future in line with the new Regional Aid Guidelines.

21 The business tax incentives with the exception of double rent relief and rates remission were formally approved by the Commission on 23 June 1999 and introduced with effect from 1 July 1999. In order to compensate for the delay in both introducing the business tax incentives and the non-availability of double rent relief, capital allowances will now apply for expenditure incurred up to 31 December 2002. The year 1 capital allowances have also been increased to 50 per cent for both owner occupiers and lessors with the remaining 50 per cent to be written off at 4 per cent per annum.

Seaside Resort Scheme

22 The Seaside Resort Scheme which has applied since 1 July 1995 in 15 designated seaside resorts was covered in a TSG paper last year. The review of the scheme by this Department, the Revenue Commissioners and the Department of Tourism, Sport and Recreation is due for completion shortly. Since last year the cost of the scheme has escalated and may eventually reach a figure in excess of £200 million tax foregone, although this figure may have to be revised upwards somewhat as more developments are completed. The scheme which will end on 31 December 1999 has been heavily criticised in some recent media articles as leading to development in these areas (such as holiday cottages) which have done little to rejuvenat e the areas as originally intended.

Pilot Rural Renewal Scheme

23 The Pilot Rural Renewal Scheme was introduced from 1 June 1998. This is a pilot initiative of rural renewal aimed at invigorating the Upper Shannon region and covers all of the counties of Leitrim and Longford as well as certain areas in counties Cavan, Roscommon and Sligo based on a District Electoral Division basis. It has lo ng been recognised that the area designated has suffered long term population decline and less than average economic growth. It is also an area that is without significant urban centres that elsewhere have acted as focuses for economic growth and inward investment. In an effort to address these problems provisions were made in the 1998 Finance Act for the introduction of a tax incentive scheme along the lines of the urban renewal schemes for thi s area, both to encourage people to reside in the area and to promote new economic activity.

24 The business tax incentives available under the scheme are tax relief for the expenditure incurred on the construction or refurbishment of industrial buildings or structures in use for the purpose of a trade and facilities such as piers and jetties. These buildings are entitled to 100 per cent accelerated capital allowances for both owner occupiers and lessors. The business tax incentives were introduced with effect from 1 July 1999. The delay in the introduction of these reliefs was due to delays experienced in the approval process with the EU Commission. As with the Urban Renewal Scheme the Commission objected to the granting of double rent relief and rates remission. As a consequence of the non-availability of both of these relief the maximum levels of capital allowances were increased from 50 per cent to 100 per cent for both owner occupiers and lessors of commercial buildings. The qualifying period of the scheme is being extended to 31 December 2002.

25 The scheme also provides for tax relief for both owner occupiers and lessors of residential property. The reliefs are similar to the relief available generally under the Urban Renewal Scheme with 2 major exceptions. In the case of the owner occupier relief the maximum allowable residential floors space is 210 square metres which is in excess of the maximum size in all other schemes. The relief available for lessors of rented residential property is conditional on the lessee of the property using the house as his or her main or sole residence for a lease of at least 3 months duration. This condition is important in that it is designed to discourage very sho rt term letting and the availability of the tax incentives for holiday homes. The removal or further alteration of this qualifying condition would effectively cancel the incentivising effects of the tax incentives available to encourage people to reside in the area. A proliferation of second homes owned by affluent non residents would push up property prices to the detriment of locally-based investors.

26 It is far too early to give an estimate of the eventual cost of this scheme but media reports of late have detailed an upsurge in both residential and commercial property development in the area in the last few months. However, it must be taken into consideration that a lot of developers and property owners held back on the commencement of planned projects while the scheme was under consideration by the EU Commission.

Town Renewal Scheme (for towns with populations of between 500 and 6,000).

27 The Minister for Housing and Urban Renewal, announced on 26 July 1999 a new Town Renewal Scheme. The main objective of the scheme is to counter the continuing trend for people moving out of towns, to make the town environment more attractive as a place to live, to restore older buildings and to help promote a wide range of commercial, leisure and social activities in towns. In recent years many smaller towns and villages had begun to serve as dormitory or weekend centres with many vacant or under utilised upper floors and derelict sites. In order to attain the objectives of the scheme tax incentives for a range residential and commercial development have been proposed.

28 The scheme will be confined to towns with a population of between 500 and 6000 and will run for 3 years from early next year. It is also proposed at this stage that the scheme will have subsequent 3 year phases to cover the centres that were not designated in the initial phase. Towns which benefited unde the 1998 Urban Renewal Scheme, the Seaside Resort Scheme, the Rural Renewal Scheme or towns within the administrative counties of Fingal, South Dublin and Dun Laoghaire Rathdown will not be considered for designation under this new scheme. There are 233 towns potentially eligible to participate in the scheme and approximately 100 of these will be designated in the initial phase.

29 The selection and designation process will be similar to the process undertaken in the 1998 Urban Renewal Scheme. Local authorities have been asked to submit town renewal plan to an Expert Advisory Panel before 31 December 1999. This panel will then advise the Minister for the Environment and Local Government regarding the towns and sub areas within towns that are suitable for designation under the scheme.

30 The proposed package of reliefs will be broadly the same as those available under the 1999 Urban Renewal Scheme and will consist of capital allowances for commercial development, 50 per cent relief for owner occupiers of newly built residential property and 100 per cent relief for owner occupiers of newly refurbished or converted residential property. There will also be relief for investors in rented residential property in limited cases. The range of commercial tax incentives will have to be notified to the EU Commission prior to their introduction and will be legislated for in next year’s Finance Act.

Effects on Employment of Designation

31 As a method of employment creation the correlation between the amount invested in designated areas and number of jobs created is not too evident. The KPMG study of urban renewal over the 10 year period to 1996 gave a net job creation of 1,600 additional jobs after displacement of existing jobs and the exclusion of construction employment are taken into account. However, the schemes were successful in attracting employment and investment into the designated area that otherwise would more then likely gone elsewhere, The total number of jobs created nationwide in designated areas during the 10 year study period stands at approximately 77,826 when displacement of existing jobs is ignored and the number of construction jobs are included.

Measures to curtail cost of schemes

32 In 1998, following a study of tax rates actually paid by higher earners, measures were introduced to limit to £25,000 per annum the total amount of capital allowances that can be written off against non-rental income by passive individual investors. (The restriction did not apply to investment in hotels in certain counties). Prior to this in addition to claiming capital allowances against rental income from property, investors could write off the residual capital costs against their total income including employment income, with no limit. An increas ing number of wealthy individuals had invested in certain designated properties to such an exte nt that their tax liability on often very high incomes had been substantially reduced or largely written off. In addition the total number of passive investors that could invest in an individual project in order to avail of capital allowances has been limited to a maximum of 13 since 1991.

General Issues

33 The above mentioned measures and the introduction of new designation and monitoring procedures as seen in the Urban and Town Renewal Schemes will enhance the ability of policy makers to prioritise the targeting of relief to areas that are most in need of renewal. However the demand still continues for more designations, the removal of the restrictions referred to in paragraph 32, and the extension of section 23 relief on a wider basis than at present. A number of new schemes have been introduced recently as outlined above.

34 The question of equity also arises since the majority of the beneficiaries of property tax relief schemes are high net worth individuals or corporate investors. The intr oduction of further tax incentive schemes even in times of exchequer surpluses does not assist the policy of continuing to lower tax rates and widen the base from which taxes can be levied. The possibility that tax incentives for property development have contributed to the emergence of asset price inflation cannot be discounted. Such reliefs may not be the most appropriate and cost effective way of promoting the development of an area or promotion of a undertaking given the present economic climate with record growth and increasing construction costs.

Conclusion

35 The TSG may wish therefore to give its views on;

- the rationale for such continued tax reliefs in the light of the substantial tax cost involved,

- the practicality of limiting the number of such tax relief schemes by focusing on a small number of deserving areas in the light of the actual experience of trying to do so,

- the tax equity and base broadening aspects of taxation policy in relation to such reliefs,

- the feasibility of further caps or limits on the tax reliefs available to investors e.g. by restricting the percentage of investment that can qualify as in the case of film relief.

There appears to be limited public support for restricting these type of reliefs with many requests being made for additional and more extensive designation of particular areas.

1 Custom House Docks Area 1986

2 Temple Bar Area 1991

3 Urban Renewal Scheme (1994) 1994

4 Seaside Resorts 1995

5 Enterprise Areas Scheme including Regional Airports 1995 - 1997

6 Dublin Docklands Area 1997

7 Rural Renewal 1998

8 Hotels in 7 North Western counties 1998

9 Urban Renewal Scheme (1999) 1998

10 Relief of Provision of Park and 1999

Ride Facilities

11 Small Towns Renewal 2000

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