I move: "That the Bill be now read a Second Time."
The purpose of this Bill is to implement, with effect from 1st March next, the proposals for a value added tax to replace the existing wholesale tax and turnover tax.
Before describing the main provisions of the Bill, I shall refer briefly to the development of sales taxation in this country and indicate the reasons for changing over to a value added tax.
The introduction of the sales taxes to this country—the turnover tax in 1963, followed by the wholesale tax in 1966—was one of the most significant measures in the tax field in recent years. The increased revenue generated by these taxes has helped to finance the acceleration of the economic and social development which has taken place during the last decade. In 1964-65, the first full year of its operation, the turnover tax yielded £13½ million, equal to about 6 per cent of total Government revenue. This year, the sales taxes combined are expected to produce about £80 million, or up to 14½ per cent of total Government revenue.
The present sales taxes are relatively simple to operate and economical to administer. They were introduced in order to provide a broader base for indirect taxation than had been afforded by the traditional sources— mainly tobacco, beer, spirits and hydrocarbon oils—which had, up to then, provided the bulk of indirect tax revenue. In 1962-63, the year before turnover tax was introduced, receipts from this narrow base accounted for over 40 per cent of total Government revenue and there was a growing danger that the Exchequer's finances could be seriously upset by a sudden fall in the yield from any of these commodities. The turnover tax, on the other hand, applies to almost the whole range of consumer goods and services at the retail level and, since 1st May, 1970, is charged at the rate of 5 per cent on the price inclusive of tax.
The selective wholesale tax was introduced in 1966 in order to give greater flexibility and a degree of progression to the system. It does not apply, for example, to the necessaries of life such as food, fuel, clothing and medicines or to services. The rate applicable as from 1st January, 1969, was 10 per cent on tax-inclusive wholesale prices. However, in May, 1969, a further degree of progression was introduced by increasing to 15 per cent the rate for a narrow range of less essential items such as motor cars, television sets and yachts. With effect from 1st November, 1970, this rate was raised to 20 per cent.
While compliance by traders in the operation of these taxes has generally been very good the fact that such a large amount of revenue is now involved has raised doubts about the adequacy of the relatively simple administrative machinery of these taxes, and the Government have been considering for some time what improvements in the collection machinery could be introduced.
One of the biggest disadvantages of sales taxes such as our wholesale and turnover taxes, is that the duty of paying tax to the Revenue falls on one section of the business economy only. The value added tax, on the other hand, has, as its principal feature, the spreading of the tax over the whole process of production and distribution. We were also aware that the European Economic Community has prescribed a common form of value added taxation for adoption by all member States and that, as members, we would be expected to introduce a similar type of tax in due course.
The form of value added tax designed by the EEC and incorporated in two directives on the subject issued in April, 1967, was aimed at eliminating those features of existing turnover taxes in the Community which were acting as a barrier to the full implementation of the Treaty of Rome. All the EEC countries have now adopted sales tax systems based on these directives with the exception of Italy which is due to make the changeover next year. Among the three countries, apart from Ireland, that have applied for membership of EEC, Norway and Denmark already have a value added tax on the general lines of the EEC model and the United Kingdom has announced that it intends to adopt a value added tax as from April, 1973, in replacement of the existing purchase tax and selective employment tax.
Apart from the EEC aspect the Government are satisfied that the value added tax is the form of sales taxation most suited to our needs and I shall now refer to its main advantages for us. First, with a minimum of disturbance to the existing incidence of taxation and to prices, payment of the tax can be spread over a wider sector of the business community than at present. The tax proposals represent little more than a change in the method of collection and their incidence and impact on prices should be broadly similar to the incidence and impact of the present sales taxes.
Secondly, value added tax makes evasion less rewarding than does a single stage system, as the tax, as I have already stated, will be applied at all stages of production and distribution and the fractional amount which has to be paid at each stage is small thus reducing the incentive to evade liability. Evasion will also be more difficult as the system provides a cross-check by means of the invoices which will be required for all sales between accountable persons. As the amounts shown on these invoices will enter into the calculation of the tax liability of both the seller and the buyer it will be in the interests of both parties to ensure that correct amounts are shown. Anything that makes for better compliance is in the interest of the general body of taxpayers.
Thirdly, the changeover will remove almost completely what little double taxation exists in the present system.
For instance, while wholesale tax is at present borne by a firm on such requirements as office furniture and certain building materials, under the value added tax double taxation of this nature, which, in total, is estimated at £3.5 million a year, will be eliminated. Value added tax on these items, in common with virtually all other such tax charged to a firm by means of invoices, will be deductible against the firm's own liability to value added tax on its sales.
The Bill follows, with certain modifications which I will refer to later, the general scheme of proposals set out in the White Paper published last March. It provides for a general sales tax to be charged at all stages of production and distribution at rates which correspond as closely as possible to the effective rates of sales tax at present in force. The present sales taxes are chargeable on the price of an article including the addition made from tax. The rates of value added tax are, by contrast, to be applied to the price before tax, so that, if the same amount of tax is to be collected as before, the nominal rates of the new tax must be somewhat higher than the existing rates.
This is the reason why the rates proposed in the Bill are 5.26 per cent, 16.37 per cent, 30.26 per cent and a special rate of 11.11 per cent for dances compared with the present rates of 5 per cent plus 10 per cent and 5 per cent plus 20 per cent respectively, and in the case of dances 10 per cent. Exports will be completely free from the tax. This will be achieved by applying what is described as a zero rate to exports and by refunding any tax charged at an earlier stage prior to export.
As I have already mentioned, firms whether manufacturers, wholesalers or retailers will pay tax on their sales, but in doing so can deduct the prior stage tax which they have been charged on their purchases. Thus, although tax is charged a number of times before the goods reach the final consumer it is borne only once and so no duplication occurs. A corresponding tax will be levied on imports to put them in the same position as home-produced goods.
The Bill provides special arrangements for the agricultural sector whereby farmers and fishermen will not be obliged to register unless engaged in specialist activities such as market gardening, the commercial production of poultry or eggs or fish farming. Those who remain outside the system will not have to pay tax on their sales or to keep detailed records. Such farmers will not, of course, be entitled to a refund of tax on their farm inputs, such as seeds and fertilisers, but they will be compensated for the tax element involved by increasing appropriately the selling price of their produce. This special addition to the price can be claimed as a tax credit by a registered purchaser against his liability on his own sales. This tax credit will be at the flat rate of 3.85 per cent of the tax-inclusive price in the case of pigs and 2.68 per cent of the tax-inclusive price in the case of other agricultural and fishery produce.
These rates of credit are calculated to be sufficient to recoup the average farmer for the value added tax which he will have borne on his purchases. There have been numerous representations from farming interests to have farmers' raw materials exempted entirely from tax. I have examined this matter very carefully but I regret that it has been found impracticable to proceed on that basis. The arrangements I have now outlined are the best that can be devised to protect the farmers' interests, and I may add that I am seeking power in the Bill to vary the flat rates by order from time to time so as to keep them realistic.
The Bill also contains special provisions for the building sector and for small businesses which I will describe when dealing with the principal provisions of the Bill later.
Since the publication last March of the White Paper, which invited the views of interested parties, representations have been received from over 200 bodies representing all aspects of agriculture, trade and commerce. Following consideration of these representations certain changes have been made in the original proposals and these have been incorporated in the Bill now before the House. The change of most general application is the deferring of the proposed date of commencement of the tax from 1st January to 1st March next so as to allow traders time to prepare their accounting systems for the tax.
Other important changes are the reduction of the proposed rate of tax on newspapers and periodicals from 16.37 per cent to 5.26 per cent and the extension of the exemption for public transport to cover all passenger transport, including short-term car hire.
The concession to the newspaper industry was made in recognition of the special difficulties being faced by that industry at present and in order to safeguard employment. I am very conscious of the important place which the newspapers, and especially the provincial papers, have to play in the social, cultural and economic life of local communities. The relief now granted will be of substantial benefit to them in overcoming their difficulties. The exemption of all passenger transport, including car hire, will continue the position which applies under the present sales taxes whereby passenger transport is not subject to tax. It was inferred from the White Paper that transport other than public transport of passengers would attract tax but I want to make it clear that this is not the intention.
A further modification of the White Paper proposals is the provision in the Bill of a method whereby cattle marts and cattle dealers will be relieved of accountability on their sales of livestock where they opt for arrangements analogous to the simplified scheme applicable to farmers to which I have already referred. The mart or dealer will be entitled to pass on the appropriate flat rate credit to a registered purchaser.
Another change from the White Paper to which I would like to draw attention relates to auctioneers. The White Paper envisaged that goods sold by auction would be regarded as delivered to and subsequently by the auctioneer who would be accountable for tax. It is now proposed that the auctioneer should be regarded merely as the seller's agent and, further, his commission will be exempt from tax because it will, in any event, be included in the sale price and, therefore, taxable where appropriate.
This arrangement will not, however, apply to vegetables, fruit, flowers, poultry, eggs and fish sold by auction because of special conditions in these markets where the auctioneer is often also a dealer. In these cases the auctioneer will be regarded as a purchaser of the goods for resale.
Dances are at present subject to a special turnover tax rate of 10 per cent on tax-inclusive receipts, equivalent to 11.11 per cent on a tax-exclusive base. In order not to disturb this position a special rate of value added tax of 11.11 per cent applicable to dances only, has been introduced. As this special rate will not affect the great majority of traders the value added tax remains, in essence, a three rate tax. Indeed, it is expected that, in practice, no trader will be concerned with more than two rates at the same time.
The Bill has been drafted to conform, as far as possible, to the directives of the EEC. These directives do not lay down standard rates for the tax and, in other matters also, permit of a degree of flexibility in the systems to be adopted nationally. It may be found that some minor modifications to our system will be required to bring it fully into line with the EEC directives. The Community have agreed to our request for a transitional period of one year from the date of accession in order to effect any necessary changes.
It has been stated in the Press and elsewhere that the value added tax has resulted in severe inflation in the Continental countries which have adopted it and that similar results may be expected here. I should like to emphasise again that what we are doing is limited almost entirely to a change in the method of collecting tax. All of the countries which had unhappy experiences on the change-over were attempting to do much more. In some cases, the incidence of the tax being replaced was being substantially altered. For example, the rate of tax on food, which in some cases was very low or non-existent, was generally raised to 5 per cent or over. In other cases, the value added tax was being used to increase substantially the revenue from indirect taxation as part of a general tax reform. In our case the change-over will not significantly affect the revenue and, as I have already indicated, the incidence of tax will broadly remain unchanged. There will, therefore, be no ground for an increase in prices generally, though there may be some minor changes, which will balance out in the aggregate, because of the fact that it is not possible to ensure precise alignment at all points between the old and the new systems. The relief from the double taxation existing in the present system, to which I have referred already, will accrue to manufacturers and distributors and should help to counteract any tendency for prices to rise at the retail level.
The explanatory memorandum circulated with the Bill contains a detailed description of the various provisions. It will suffice, therefore, if I limit my remarks to the more important sections.
Section 2 imposes the charge to value added tax. With effect from 1st March, 1972, in general, deliveries of goods and rendering of services within the State will be liable. Tax will also be charged on imports of goods into the State so as to equate the treatment of home and foreign goods. Under section 15 (2), however, persons who are registered for the tax will not, subject to certain limited exceptions, have to pay tax on imports for the purpose of their business because such persons would, in any case, be entitled to a credit or refund of tax at the end of the month.
Section 3 defines deliveries of goods to include the transfer of ownership of goods in pursuance of an agreement or contract, whether or not accompanied by a transfer of possession. In the interest of securing the revenue, it is also provided that certain other transactions will constitute taxable deliveries. The most important of these is the handing over of possession of goods under a hire purchase contract. It is also necessary to tax, for example, goods appropriated from his business stock by a registered person for the personal use of himself or another.
Section 4 contains special provisions applicable to immovable goods such as land and buildings. Building is at present exempt from the sales taxes but, as I have mentioned already, certain building materials bear turnover and wholesale tax. These are estimated to amount to about 3 per cent of the cost of a building. Under the value added tax certain buildings will be brought into charge. Briefly, it is provided that value added tax will not affect land, or buildings which are already in existence, no matter to whom or by whom they are sold, unless and until major building, re-building or demolition work, constituting a development, is carried out after 1st March next. When this happens, for example, if a house or factory is built and sold after that date, tax will be chargeable at the 5.26 per cent rate. However, by virtue of section 10, only 60 per cent of the price will be charged so that the effective tax on buildings will remain at what it is at present—about 3 per cent. Sales of secondhand buildings will not be taxed, except where the seller is a registered person who obtained a tax credit when he acquired the building.
A sale of immovable goods will be deemed to take place when an interest in them is transferred for a period of ten years or more. Transfers of less than ten years duration will not normally be taxable as sales. Where building work is carried out on behalf of a registered person such as a manufacturer or shopkeeper the new system will result in significant relief because, whereas no allowance is given at present for the wholesale and turnover taxes payable on materials used in the construction of factories and business premises, under value added tax full credit will be allowed for the tax charged to a registered person.
Rents will continue to be exempt from tax unless the landlord elects to become registered and be accountable for tax on his rents. He might wish to make this election if, for example, he rented office buildings to registered persons.
Section 5 defines the rendering of services in very wide terms to cover all business activities other than the delivery of goods. Provision is also made for taxing services rendered by a person for the purposes of his own exempt business, where the service would be taxed if rendered to him by another person.
Section 6 and the First Schedule provide a list of activities which will be exempt from the tax. Persons engaged in such activities will bear tax on their purchases but will not have to pay tax on their sales. Of the services which are exempted from turnover tax at present, those affecting the ordinary consumer, such as banking, insurance, governmental, medical and educational services, will remain exempt from the value added tax. I will have power, as at present, to extend by order the list of exempted activities.
Section 10 defines the amount on which tax is chargeable as, normally, the amount of the full consideration which becomes receivable excluding value added tax while, under section 19, tax becomes due usually on the issue of the invoice in the normal course. There are various exceptions to these rules. The most important is that registered persons who deal mostly with unregistered customers will be allowed, under section 14, to account for tax on the basis of cash receipts. Where the transactions are services, the cash basis may apply even if the customers are registered.
As part of the general arrangements for the livestock trade, section 10 also provides that where livestock is sold by registered farmers or registered dealers the tax will be charged only on a specified fraction of the sale price. As a result of this arrangement livestock will have the same element of tax built into the sale price irrespective of whether the seller is registered or not.
The provisions for agriculture are contained in sections 8 and 13. As I have already explained, farmers and fishermen, with certain exceptions, need not come into the system unless they so wish and similar facilities are being provided for cattle marts and cattle dealers. Section 13 enables farmers who remain outside the tax system to recover the tax borne on their inputs by issuing sales invoices which will rank for credit at the next stage. The invoices must be made out by the purchaser and the farmer's only obligation will be to sign them on request.
Section 8, which defines the persons accountable for tax, provides also that small traders will not have to pay tax on their sales or keep records unless they elect to be accountable. The figures of turnover at which persons are obliged to register under the present sales tax system have been maintained as far as possible, but, because the 16.37 per cent rate will apply down to the retail level, it has been necessary to reduce the limit for traders, where more than 50 per cent of their goods are liable to that rate, from £1,000 turnover per month to £500 per month. Conversely, the existing limit of £150 turnover per month for traders who purchase their supplies directly from unregistered producers, such as farmers and fishermen, is being raised to £500. Under value added tax all inputs of such producers will have borne tax already, whereas at present they are largely exempt. The present £150 turnover limit for persons providing services, such as hairdressers, will continue.
Section 11 prescribes the rates of value added tax. The 5.26 per cent rate applies to the goods and services listed in the Third Schedule. These are, mainly, food, drink clothing, fuel, medicine, books newspapers, building materials, agricultural goods, buildings and services. Most of them are already charged at the equivalent rate under the present system. The 30.26 per cent rate applies to the limited range of goods specified in the Fourth Schedule —mainly motor cars, television sets, caravans and yachts, which are at present liable to turnover tax and the higher—20 per cent—rate of wholesale tax. Because of the problems attached to applying such a high rate at the retail stage the 30.26 per cent rate will be collected at the manufacturing and import stages only. Subsequent sales of these goods at the wholesale or retail level will be charged at 5.26 per cent. The difference between these two rates, that is 25 per cent, will be trapped in the price of the goods by reason of the fact that deduction of prior stage tax on them by wholesalers and retailers will be limited to 5.26 per cent. As this proposal follows closely the present arrangements there will be no increase in the burden of tax on these goods.
I have already mentioned the special rate of 11.11 per cent for dances. This rate will also apply, as at present, to the charge for food and drink included in the admission price. The rate of 16.37 per cent applies to the sale of all goods not specifically charged at one of the rates already mentioned.
In the case of the hiring of goods the rate of tax applicable will, with minor exceptions, be the rate that would apply if the same goods were sold outright.
A rate of zero per cent applies to exports of goods and to certain related services set out in the Second Schedule. The effect of a zero rate is to exempt the transaction from liability to tax and to enable all prior stage tax to be refunded. Exporters will, therefore, get back all tax which is charged to them on their purchases.
The Bill contains administrative and enforcement machinery for assessing, accounting for, and passing on the tax by means of invoices and enables the Revenue Commissioners to make regulations for the purpose of implementing the Act. In particular, I should like to draw attention to the provision in section 32 under which the Revenue Commissioners are being empowered to accept estimates of the amount of tax payable. This should prove helpful to the many traders selling goods some of which will be taxable at 5.26 per cent and some at 16.37 per cent, who may not find it practicable to keep precise separate records of their sales under the two different rates.
Section 34 authorises a tax credit or refund to traders in respect of the element of turnover and wholesale tax included in stock-in-trade held at the commencement of the value-added tax. Since value added tax will be chargeable when these stocks are sold, the credit is essential to prevent double taxation. For this reason it will be necessary for such firms to take stock at the changeover date and submit a claim for credit or refund. The amount of tax involved is estimated to be in the region of £1 million.
My description of the Bill has had, of necessity, to be confined to the main features. It is a complex and highly technical measure and there are a number of smaller matters which I have had to omit from my description. I will be glad, however, to deal with any points on which Deputies may require further information or clarification.
In commending the Bill to the House for a Second Reading, I would like to state that, since the circulation of the Bill, a number of minor changes, principally of a drafting nature, have been found to be necessary for which I propose to introduce amendments on the Committee Stage. Furthermore, the inclusion of section 40 relating to the excise duty on betting will, I understand, require a lengthening of the long title of the Bill. As betting is not being brought within the scope of the value added tax the excise duty rate is being increased from 10 per cent to 15 per cent to compensate. This will leave the incidence of tax on betting unchanged.