I move: "That the Bill be now read a second Time".
The need for this Bill arises from the adoption by the Council of Ministers of the European Communities of a Sixth Directive on the harmonisation of the laws of the member states relating to value-added tax.
The first two directives in this fiscal area, which were adopted in 1967, fixed the basic principles and main features of member countries' systems of value-added tax—or VAT as it is generally called in this country. Those First and Second Directives on VAT applied to Ireland as from 1st January, 1974. The Third, Fourth and Fifth Directives were merely of ephemeral significance.
The Sixth Directive was adopted in May of this year, after nearly four years of detailed discussions between member states—first at the level of a working party of fiscal experts, subsequently at the Committee of Permanent Representatives of member states and, finally, outstanding points of difference were resolved at meetings of the Council of Ministers. The new directive advances considerably the process of harmonisation of the VAT systems of the nine countries. While it restricts the exemptions allowable it does not attempt to harmonise the rates of value-added tax applied in the various countries. Harmonisation of rates remains of course a long-term objective of the Community which looks forward to the eventual abolition of tax frontiers between the states.
A more immediate Community objective is to complete the "own resources" arrangements for financing the budget of the Communities. This aim will be achieved when member states implement the Sixth Directive and adopt financial regulations about the mechanism of collecting own resources. The decision to replace member states' financial contributions by an "own resources" system was taken by the then Community of the Six in 1970 and was accepted by the three countries which subsequently acceded. Two of the three constituent parts of "own resources" have already been flowing to the Communities—subject, in the case of the three new members, to certain ceilings agreed at accession; these two are the agricultural levies and the common customs duties on imports from countries outside the EEC. The third part will derive from the common VAT base of assessment now to be established and will be equal to the produce of a rate not exceeding 1 per cent applied to that base. There is, of course, no question of member states having to levy two VAT taxes—EEC and national—as distinct entities from VAT "own resources" purposes. The position is that member states will continue to apply their own VAT rates and out of the revenue from those VAT rates will pay over to the Communities the required sum in respect of VAT "own resources".
I have mentioned the implications of VAT for the completion of "own resources" arrangements for financing the budget of the Communities. That budget has, of course, a central importance for the future development of the Communities. The establishment of an autonomous revenue should help the Communities's efforts to be directed more effectively.
I should now like to mention a few points in relation to the provisions of the Sixth Directive. The directive prescribes common rules as regards the various matters which could affect the amount of own resources. Examples are the definition of taxable transactions; the taxable amount; the place of taxable transactions; certain deductions from liabilities; exempted transactions; special arrangements for farming. As will be appreciated, several of the provisions are obviously the result of compromises.
Certain specific derogations are allowed by the directive subject to review; these are designed to meet particular difficulties for some or other of the member states by allowing time for them to align with the full requirements of the harmonised base of assessment. For example, those zero ratings which were in existence in member states on 31st December, 1975, and which fulfil specified conditions can be retained until fiscal frontiers are abolished within the Community but will be subject to review every five years up to that time.
For other derogations a transitional period is to last initially for five years. Among the activities in the latter category, which qualify for continued temporary exemption, are telecommunications services supplied by the public postal services; the services of solicitors, barristers, accountants and actuaries; the services of travel agents; the services supplied by undertakers; the supply of greyhounds and horses; domestic passenger transport; and admission charges to sporting events.
Unanimous Council decisions will be required before any of the derogations referred to can be abolished. However, I should mention that member states availing of these continued exemptions will have to provide financial compensation to the Communities's budget equivalent to the loss of VAT "own resources" resulting from this non-taxation.
I might also mention that the directive makes provision for the establishment of a VAT Advisory Committee on which the member states will be represented, the chairman to be a representative of the EEC Commission. The Committee are to examine questions arising from time to time in regard to the application of the Community provisions on value-added tax.
I now turn to the implications for the Irish VAT system of the provisions contained in the Sixth Directive. Some services which are at present exempt from Irish VAT must be made liable to the tax. Those businesses which render these services will have to register for VAT, where their turnover exceeds £300 in a two-month VAT accounting period, and, in those circumstances, will be liable for the tax at the appropriate rate—which is ten per cent—in respect of their charges to the public. The main services affected are: the services of auctioneers and house agents; non-academic teaching—for example in driving schools; the valuation services of chartered surveyors; certain agency services but excluding agency transactions in relation to banking, insurance and finance which will continue to be exempt; admission to agricultural, commercial and industrial shows, fairs and exhibitions as well as to zoological gardens; and the natural or artificial insemination of livestock. The traders providing those services will be entitled to claim from the Revenue credit for input VAT—borne on their purchases —which at present they have to bear without recovery from the Revenue. They can also charge VAT to their customers who, if VAT-registered, may claim credit from the Revenue for such input VAT.
As regards the ending of certain exemptions, these result effectively from the fact that the directive affords authority only for a limited number of specified exemptions, temporary or permanent. In order to come into line with the directive we have therefore to terminate those I have mentioned. There can be no question, at this stage, of our picking out exemptions which we might desire for one reason or another. We are constrained by the directive as are our eight fellow-member states. As I mentioned earlier the directive results effectively from many compromises.
There should be no significant difficulties or hardship. Reference has been made in the media to the position of cattle marts. Their position under VAT will not differ from that of the 50,000 or so other VAT-registered traders of widely-varying turnovers. All such registered traders must keep full records of their business transactions which affect their VAT liability. The requirements are those which have been deemed necessary for VAT purposes since 1972. There can of course be no question of abridging VAT records requirements for those now coming into the system of the tax.
Still less could there be any question of devising a special VAT code in order to avoid any embarrassment for would-be evaders of any tax—whether VAT, income tax or other taxes. As Deputies will be aware the income tax code provides separately for Revenue powers of examination of records.
As regards the effect of the application of the tax to marts' fees, the size of the effect can be gauged from the facts that the rate of tax applicable will be 10 per cent and this will be levied on fees representing 1 per cent or 2 per cent of the value of the through-put at marts. Thus on £10,000 worth of stock sold at a mart the amount of VAT arising in respect of the auction fees would be of the order of £10 to £20.
A list of the categories of services which will qualify for exemption in future, and which does not of course include those I have mentioned, will be found in section 19 of the Bill. Another activity which will become liable to VAT under the Bill is the provision of services by agricultural contractors. This change results from a revised definition of "farmer" which is in section 6.
Farmers, as now defined, will of course retain the right to opt out of the VAT system, that is to refrain from registering for the tax and they may also render agricultural services which are incidental to their activity of farming without incurring an obligation to register for VAT. Another change required in order to conform to the basis of assessment prescribed by the directive is the replacement of the two-tier VAT which applies to certain goods under our existing arrangements.
Two-tier VAT rates apply to cars and motorcycles, television sets, radio sets, gramophones and records and some other goods. The arrangement can best be described by an example. In the case of television sets, for example, a rate of 40 per cent VAT is levied on a sale by a manufacturer to a wholesaler. The latter when he subsequently sells the set becomes liable for VAT at 10 per cent of the price charged by him to his customer; normally he would be entitled to set-off against that liability on his sales the full amount of input VAT borne by him on his trade purchases; however through a special restriction applying to these two-tier goods he is allowed credit for input VAT at 10 per cent only. This has the result that VAT at 30 per cent of the manufacturer's price is effectively "trapped" in the price of goods. The system is therefore commonly referred to as "two-tier VAT". The first tier is the element of tax which is trapped, on a sale by a manufacturer to a non-manufacturer; this tier is 25 per cent for cars and motorcycles and 30 per cent for the other goods. The second tier, for all the goods, is 10 per cent and this is levied at all subsequent stages of distribution. Both tiers are ultimately borne by the consumer.
Under the directive a single VAT rate must apply at all stages of distribution of goods, and, in general, traders must have the right to deduct input VAT in full. The VAT rate which it is proposed to apply in future to the cars, televisions and the other goods referred to is the 10 per cent rate—which of course applies already to a wide range of goods.
I might perhaps mention that some existing restrictions on deductibility by traders of input VAT borne by them will continue as heretofore. They are applied for anti-evasion purposes and are allowable under the directive. Examples are the non-deductibility of input VAT borne in respect of cars and petrol where these are not stock-in-trade.
It will be apparent that a reduction in VAT revenue will be caused by the abolition of the first-tier of the special two-tier VAT arrangement. The revenue thus forgone is to be made good by appropriate excise duties in relation to the goods now in question; the excise changes will be designed to match the incidence of the existing first-tier of VAT on these goods. Provision of the Bill relating to the replacement of the two-tier VAT are contained in sections 9, 1 and 24.
I now turn to the position of public authorities in relation to the VAT system. At present, Irish law provides a general exemption for services provided by the State or a local authority. The construction, repair and maintenance of roads, harbours and sewerage works by public authorities are zero-rated activities so that local authorities can recover VAT borne on their purchases of inputs for these services.
The Sixth Directive provides that public authorities are not to be considered as taxable persons when they perform services of a governmental nature, except where exclusion from taxability would lead to distortion of competition. In any case, they are to be considered taxable in relation to a number of specified services listed in the directive, subject, however, to some transitional derogations.
The overall effect is that very few services currently provided by the State or by local authorities would fall to be taxed. Accordingly, it is proposed to exclude these bodies from accountability for tax, except in those cases where the Minister for Finance, after appropriate consultations, by order otherwise provides. It is the intention that such orders would be made only where demonstrable competitive distortions would otherwise arise. Section 6 provides for the making of such orders.
Ae regards the present Irish zero-rating of the construction, repair, maintenance, and so on of roads, harbours and sewerage works provided by the State, local authorities or harbour authorities, the retention of these provisions would be incompatible with the directive. Accordingly, the Bill proposes to end these zero-ratings. The result would be to impose some extra costs, due to VAT, on local authorities' road and sewerage works with a corresponding benefit to the Exchequer. There would be little or no effect on the outlay of harbour authorities because most of their turnover is zero-rated and will continue to be so. The question whether any compensatory adjustment should be made as between the Exchequer and local authority finances will be considered as a separate issue.
Under section 11 of the Bill provision can be made in regulations for remissions or refunds of VAT in certain circumstances. For example, while in the ordinary way the zero-rate for exports may be claimed only where the goods involved have been exported by the seller, cases may arise which do not meet these requirements but in which it would be desirable to remit VAT. Accordingly, the section provides for regulations to be made to allow remission or repayment, subject to conditions to be specified, in cases where the Revenue Commissioners are satisfied that the goods have been exported or are to be exported.
The Bill also restates, in conformity with terms used in the directive, the existing Irish provisions relating to VAT rates. This is done in section 9. That section also brings together existing provisions for reliefs in relation to certain cases of mixed goods. In general when different goods are sold as one package, the VAT rates for the package is the highest rate applicable to any of the constituent parts. This is necessary to counter evasion. However, there are reliefs from this rule for certain cases.
The various other provisions of the Bill, which are mostly of a technical nature not involving any significant change, are indicated in the explanatory memorandum circulated with the Bill.
As regards commencement, section 26 provides that the Bill when enacted shall come into operation on such day as the Minister may by order appoint. It is the intention to specify a date which shall be the first day of a two-month VAT accounting period. The House will appreciate that businesses affected by the Bill will have certain preparations to make for complying with the requirements for VAT; it is of course desirable that they should have adequate time to familiarise themselves with any changes which will affect them and have preparations put in hand.
The Sixth Directive as adopted prescribes 1st January, 1978, as the latest date for its implementation by member states; however the practical position as it is developing is that few of the member states may be implementing the directive promptly at the start of 1978.
In all the circumstances I think it is necessary to keep the matter under review for the present. Our starting date cannot be earlier than 1st March, 1978, therefore, and may be later; adequate notice will be given to enable traders affected to finalise any preparations necessary in their circumstances.
I think that is all I need say now about the provisions of the Bill which I commend to the House.