Dáil Éireann debate -
Wednesday, 15 Jan 1975

Vol. 277 No. 2

Financial Resolutions. - Financial Resolution No. 9: Value-Added Tax.

The Taoiseach

I move:

(1) That with effect on and from the 16th day of January, 1975, section 11 of the Value-Added Tax Act, 1972 (No. 22 of 1972), be amended as follows—

(a) by the substitution of the following subsection for subsection (2):

"(2) Where goods which are of a kind specified in the Fourth Schedule and which—

(a) were imported, or sold in the State, before the specified day in such circumstances that wholesale tax was chargeable or would have been chargeable if that tax had been in force on the date of the importation or sale, or

(b) were, on any previous occasion on or after the specified day, imported by or delivered to a person other than a manufacturer of goods of the kind so delivered or imported in such circumstances that tax at the rate for the time being specified in subsection (1) (c) was chargable in relation to such importation or delivery, are delivered within the State on or after the specified day, tax shall be charged at the rate for the time being specified in subsection (1) (a) on the appropriate amount of any consideration for such delivery.", and

(b) by the substitution of the following subsection for subsection (4):

"(4) Where goods for the manufacture of which materials have been supplied by or on behalf of any person are delivered by the manufacturer to that person and the rate of tax chargeable in relation to the delivery of the goods exceeds that which would be chargeable in relation to a delivery within the State of the materials, the person who delivers the goods shall in respect of the delivery of such goods be liable, in addition to any other liability imposed on him by this Act, to pay tax on the value of the materials supplied to him at a rate equivalent to the difference between the two aforementioned rates.".

(2) It is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the Provisional Collection of Taxes Act, 1927 (No. 7 of 1927).

This resolution amends section 11 of the Value-Added Tax Act, 1972, by substituting a new section for subsection (2), and substituting a new subsection for subsection (4). The amendments also come into effect from tomorrow. Both of these are designed to clarify the position as regards the construction of the existing law which has created the possibility of considerable tax avoidance. One doubt relates to whether, on the cessation of manufacture or assembly operations by either a manufacturer or an assembler of goods to which the Fourth Schedule applies, stocks of finished goods can be subjected to the higher rate, that is the 36.75 rate applicable only to sales at manufacturing level.

A second doubt relates to the provisions concerning the supply of materials. The existing subsection 11 (iv) was intended to ensure, in a case where materials are supplied for the manufacture of goods and where the tax rate for the finished goods exceeds the rate chargeable for the materials, that the Exchequer would receive in total the amount appropriate to the finished goods. The doubt referred to is whether the provision can be applied in cases where, for example, the materials were imported free of tax by a person registered for VAT purposes.

Mr. Lalor

In the case of the first amendment there appears to be an anomaly to be cleared up and obviously the advice the Minister has received is that there are anomalies under both headings but I am rather worried about the effect of the second amendment, that is the substitution of the new subsection for subsection (4). Again I do not see the urgency in this. The Taoiseach talked in terms of a fiddle in regard to the last resolution. The Minister said there was tax avoidance but certainly in regard to the second amendment he did not outline the extent of the avoidance. The other resolutions talk about the assembly of motor cars, motor cycles, radios and so on but this particular one covers all sorts of materials. I am thinking particularly about the textile industry and about the cost of clothing. As far as I know this is covered by this resolution.

The Taoiseach

This only applies in practice to the Fourth Schedule. This is all linked together in order to correct the avoidance. The three of them are necessary and the total estimated loss of revenue covered by the three is £½ million.

Mr. Lalor

This substantiates my argument about this being a financial measure rather than a budget day resolution. The benefit to the State is marginal. We may rush this through and find that it covers more than it appears to cover. The first part of the Financial Resolution spells out quite clearly the goods which are of a kind specified in the Fourth Schedule but the second amendment does not specifically refer to the Fourth Schedule. It is unfortunate than on budget day we must check back on former Acts. This should be done in a normal Committee Stage discussion. I hope I can get reassurance from the Taoiseach that there is nothing in the substitution of the new section that could do an amount of harm in the long term.

The Taoiseach

I am advised that in practice it only applies to the Fourth Schedule. The Fourth Schedule applies to motor vehicles designed and constructed, motorcycles, autocycles, radio receiving sets, gramophones and gramophone records. Textiles are not caught by it.

Mr. Lalor

There have been cases where firms have run into difficulties, particularly the GEC firm in Dunleer, in the last few years. As I read the subsection, if articles come in duty-free there has to be a duty built into them that is chargeable to the consumer eventually, thus increasing the price.

The Taoiseach

That is not so. This is purely to prevent a manufacturer or importer selling at a depressed price to a subsidiary company of his own, thus avoiding payment of tax. It is charged at the normal price to the retailer but the company in control of the subsidiary gets the advantage while the revenue suffers a loss and the customer is at a disadvantage.

Mr. Lalor

I was assuming that the subsidiary fiddle referred to already in Financial Resolution No. 8 had been dealt with. When the Minister referred to the tax avoidance he wished to clear up he did not say that this had any relationship with the fiddle of selling to a subsidiary company. Is the Taoiseach saying that is covered in this resolution?

The Taoiseach

It applies only to Fourth Schedule goods.

Mr. Lalor

Subsection (4) has nothing to do with the intermediate company. It is a question of goods which are subsequently manufactured into something else being imported duty-free and sold without any reference being made to their components.

The Taoiseach

The Deputy will appreciate that this is a complicated matter but I will try to elucidate it further. Apparently cases have come to the notice of the Revenue Commissioners where an assembler claimed to have ceased manufacture at a certain time and took the view that only the lower rate would be applicable to subsequent sales. Such stocks included a substantial quantity of vehicles purchased before the relevant date for which the full import credit was claimed, as well as vehicles assembled to his order for which he had imported and supplied the CKD components. The position is that in order to put the matter beyond doubt, the new subsection will provide that the application of the lower rate will be limited to cases where the goods in question were previously delivered to or imported by a non-manufacturer. The additional words are designed to ensure that credit at the full rate is not allowed. As I have pointed out, Fourth Schedule goods comprise motor cars, motorcycles, television and radio sets, gramophones and gramophone records. The parliamentary draftsman takes the view that as the words "which are delivered within the State on or after the specified date" were in the original subsection they should be repeated. I should like to make it quite clear that there is no intention to apply the change in the law retrospectively—it will only apply for the future.

Mr. T.J. Fitzpatrick

(Dublin Central): Will parts imported for assembly carry the lower rate?

The Taoiseach

It applies either to assembly or to manufacture where the person who imports, assembles or manufactures does so, where he has a subsidiary company and sells the goods imported, manufactured or assembled to the subsidiary at an artificially low rate and pays on the lower rate——

Mr. O'Malley

That refers to No. 8.

The Taoiseach

The point is that the two are covered together. If that happens, that person gets the advantage to the disadvantage of his competitors and there is a loss to revenue.

Mr. Haughey

Will the Taoiseach enlighten us as to why there is no Financial Resolution covering the increase in the interest payable by a taxpayer on VAT outstanding? Various rates of interest on outstanding amounts of tax are mentioned in the budget speech and the rate generally is going up to 1½ per cent per month. These increases affect amounts overdue in respect of PAYE, corporation profits tax, income tax and VAT. Perhaps the Taoiseach would explain why a Financial Resolution is not necessary for that increase because some of us would like to talk about it.

The Taoiseach

It does not operate until the next tax year and there will be a resolution then.

Mr. Haughey

I understand that but I have a very unworthy suspicion that the reason there is not a Financial Resolution before us today—one will be necessary before April—is to deprive us of an opportunity of criticising this very unfair increase of 1½ per cent. This increase will be a considerable hardship to small traders——

Ruairí Brugha

It will be 12 per cent to 18 per cent.

Dr. O'Connell

This is a very important point. In the present credit squeeze a number of companies are not getting their money but they are asked to pay VAT. If they do not pay the VAT in time they are charged the special interest. It will impose an enormous hardship on these people.

The Taoiseach

This does not arise here. I was about to point out to Deputy Haughey that it does not arise in this case.

Mr. O'Malley

Resolution No. 9 is, to say the least, complicated. I do not understand it and I do not think any of us here understands it—that goes for the Taoiseach also. Resolution No. 9 is the Revenue Commissioners talking to themselves par excellence. It is regrettable that two subsections like this should appear in a Finance Bill but, at least, if they appear in a Finance Bill we will have at least a month to examine them and try to find out what they mean. If we are not able to clarify any points we can get somebody who can do so. We were handed these resolutions when the Minister finished his speech this afternoon. We have been dealing with them continuously since and we have not had an opportunity to go away and examine the later ones in any detail.

We are asked to pass it into law tonight so that it will come into effect tomorrow. It is not merely plugging some minor loophole somebody discovered which enabled him to get away with a lower rate of VAT. It will raise £500,000. That is a lot of revenue. It is not £500,000 that will be spread over the entire field of VAT affected goods. It is only the Schedule Four goods. In view of the drafting of this it seems it will apply to motor cars only. It may apply to radio and television sets, but CKD parts and that sort of thing applies to motor cars.

The effect of this, so far as we can judge, will be to increase the cost of motor cars in 1975 by £500,000. That is a serious matter and we should have much longer to go into it and not have it rushed through tonight, because it is very complicated. If it is only, as alleged, purely closing loopholes, then it is not necessary to rush it through like this. Frequently in budget speeches there are references made to problems which have arisen for the Revenue Commissioners in previous Finance Acts. The Minister said today that he will put a section into the Finance Bill to cover this point.

An Leas-Cheann Comhairle

It will have to appear in the Finance Bill.

Mr. O'Malley

I know it will. If it appears in the Finance Bill the other things which the Minister spoke about, and which Ministers for Finance talk about every year, only become law when the Finance Bill is passed. But here we have something different. We are told it is closing a loophole of a most complicated nature which no Deputy understands. We are not afforded the opportunity of considering this in the Finance Bill. It will be law for some months by the time we get to it. One of the groups affected by this are people who go out of business. It is a common aspect of commercial and industrial life today that firms all over the place are going out of business, not because they want to avoid VAT or other tax but because they are going bankrupt. There are a lot of people who may be caught and be heavily penalised by this provision, which nobody here understands.

An Leas-Cheann Comhairle

I might help the Deputy. This Financial Resolution will have to appear in the Finance Bill.

Mr. O'Malley

I appreciate it will. But it may be two or three months before we have the Finance Bill and enormous damage may be inflicted on people who, through no fault of their own, will find tomorrow morning that they come within the scope of these two subsections which only the Revenue Commissioners understand.

This Financial Resolution is an abomination of the English language. It is not good enough to ask this House, without the assistance of any advice, to pass that nonsense into law now. The Taoiseach does not understand it. Would it not be much fairer to withdraw this resolution and we will have it in the Finance Bill when we will all have time to study it. If this is to bring in £500,000 in one year and it does not come into law for two months, that is only one-sixth of that sum, which is less than £100,000.

The Taoiseach

Once it is mentioned in the budget speech that a tax avoidance device is being used there is an obligation on the House to close this loophole. That is the purpose of the resolution and there is nothing new in resolutions of that sort. If the device is not prevented by the passage of this resolution people could still get through the loophole which exists. I appreciate Deputy O'Malley's comment about relatively complicated resolutions like this, but that is nothing new at budget time.

The Value-Added Tax Act was passed in 1972 and the language used in that, as well as in all such Acts, is particularly complicated. As mentioned, the House will have an opportunity of discussing this in detail when the Finance Bill is being discussed. In the meantime there could be further evasion if this resolution is not passed and there could also be further unfair competition between certain traders who have availed of this loophole to the disadvantage of their competitors.

Mr. Brennan

Why was it necessary to have this resolution?

The Taoiseach

I am advised if we did not have this resolution, once attention was drawn to it, there could be considerable further evasion.

Ruairí Brugha

Deputy O'Malley was right in saying this was circulated only this afternoon and we have to take all the Revenue Commissioners present to us on trust. The fact that it will come in the Finance Bill might not mean a lot because it could be passed during an all-night session, as the previous one was. Deputy O'Malley is right in saying it seems to be almost a pointless exercise because most of us do not understand it. We have to take either the Taoiseach or the Revenue Commissioners on trust.

Mr. T.J. Fitzpatrick

(Dublin Central): If I import parts for a car or a television set and they are imported assembled they can carry a duty of 35 per cent. If they are dismantled they could be sold at a much lower rate, possibly 19 per cent and I could see how it would be possible for me to claim VAT at the 35 per cent when I am submitting my VAT statement to the Revenue Commissioners. It is only there I could see a certain amount of abuse. I would have my invoice in at the high level and would be retailing it at a level at which I would be allowed the lower rate.

Mr. O'Malley

There has been no satisfactory answer to the point I made and I must accept that what I said is true. Does the House feel it is good enough that something like this should go through in these circumstances when the 142 of us do not understand it? Perhaps the two who are not here understand it by now. We do not get this type of complicated amendment in Financial Resolutions. We get them in the Finance Bill and we have a month or more to examine them and be advised on them. We are being asked to pass something here which none of us understands. If the Revenue Commissioners want to rush this type of thing through, would they not have the courtesy to circulate some sort of document explaining in normal English to the Members of this House what this means? I am not opposing this in principle because I cannot in all honesty oppose what I do not understand. I am opposing the principle of passing it when no Member of this House knows what it is about. The House should make a stand on that point now. It is all right to pass these things in a Finance Bill when you have had a chance to go through them, but it is a different matter now.

The Taoiseach

The Minister was quite specific in the course of his budget statement. He referred to three avoidance devices:

It follows therefore, that if the manufacturer's price is fixed at an artificially low level the loss of tax can be appreciable. It has come to my notice that some manufacturers are selling at artificially low prices——

I mentioned this to Deputy Fitzpatrick.

——to their own subsidiary wholesaling company so as to avoid much of the tax. In order to put an end to this device which is unfair to competitors and deprives the Exchequer of necessary revenue, I propose to provide that in such cases the value on which tax is chargeable at the manufacturer's level must be the open market price.

The second avoidance device to be countered arises out of the cessation of manufacturing or assembly. As the VAT legislation stands, there is a doubt as to whether, if manufacturing ceases, stocks which are on hands are subject to the higher VAT rate. As in the case of the other VAT avoidance device, this practice is objectionable, as apart from the loss of revenue, it gives the people involved an altogether unjustified advantage over competitors.

The third VAT matter on which it is proposed to take action concerns a doubt which has arisen about the application of a provision in existing VAT legislation. The existing section of the Value-Added Tax Act, 1972, was intended to ensure, in a case where materials are supplied for the manufacture of goods and where the tax rate for the finished goods exceeds the rate for the materials, that the Exchequer would receive in total the amount of VAT appropriate to the finished goods. The doubt I referred to is whether the existing legislative provision applies in cases of importation of materials where no tax would be payable at that stage by a person registered for VAT.

Mr. Lalor

The Taoiseach has endeavoured to explain the need for this, and I would refer to the last sentence he quoted: "The doubt I referred to is whether the existing legislative provision applies in cases of importation of materials where no tax would be payable at that stage by a person registered for VAT." As Deputy O'Malley says, there is difficulty in analysing what is in the Bill itself; the last paragraph the Taoiseach has just read out is supposed to be straight language, but I could not understand what it means. I thought I would get the explanation in the section, but that was worse.

Question put and declared carried.