As Deputies are aware, this debate is taken in committee. Therefore, Members will be able to contribute more than once.
Financial Resolutions 2003. - Financial Resolution No. 2: Value-Added Tax.
(1) THAT section 4 of the Value-Added Tax Act 1972 (No. 22 of 1972) be amended by substituting the following for subsection (6) –
"(6) Notwithstanding anything in this section or in section 2 tax shall not be charged on the supply of immovable goods–
(a)in relation to which a right in favour of the person making the supply to a deduction under section 12 in respect of any tax borne or paid on the supply or development of the goods did not arise and would not, apart from section 3(5)(b)(iii), have arisen, or
(b)which had been occupied before the specified day and had not been developed between that date and the date of the supply other than a supply of immovable goods to which the provisions of subsection (5) apply.".
(2) THAT this Resolution shall have effect as on and from 4 December 2003.
(3)IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).
Financial Resolution No. 1 provides for an increase to 4.4% in the level of flat-rate farmers' refunds together with a similar change in the VAT rate on the supply of livestock, live greyhounds and the hire of horses. The flat-rate farmers' refund and the livestock rate were last changed in 2001 when they were both increased from 4.2% to 4.3%. The increase to 4.4% will take effect from 1 January 2004. The Revenue Commissioners have calculated that, on the basis of macro economic data for the last three years, a flat rate of 4.4% is now needed to achieve full compensation. This change will cost €3.15 million from 1 January and €3.78 million in a full year.
The flat-rate scheme is a simplified and practical method of applying value-added tax to farming, which we use each year. It compensates unregistered farmers on an overall basis for the VAT charged to them on the purchases of goods and services. This is achieved without applying the normal VAT rules on registration, record keeping and returns. Traditionally, the VAT rate on livestock has been maintained at the same level as the flat-rate refund. This is administered more conveniently to farmers and their customers. I commend the resolution to the House.
Resolution No. 2 clarifies section 4(6) of the VAT Act 1972 in response to abuse of VAT law by certain developers who are failing to account for VAT on the sale of residential sites. While the sale of a new property is done by means of link contracts – one for the sale of the site and the other for the supply of the building services – some developers are claiming they can use section 4(6) in conjunction with other sections of the VAT Act to make the sale of the site VAT exempt. The key to the operation of the scheme is that the developer attempts to put himself in a position where he is not entitled to take a reduction for VAT incurred in the development of the site and, therefore, would not have to charge VAT on the sale of the site itself. As this is an abuse of VAT law, the Revenue Commissioners are vigorously contesting the artificial nature of the transactions involved and the validity of the claims for exemption.
The purpose of this measure is to clarify the law and to ensure that in no circumstances can a developer avail of such abusive mechanisms to pocket VAT that would otherwise accrue to the Exchequer. I commend the resolution to the House.
I welcome anything that benefits the farming community. As the Fine Gael Party realises how hard hit farmers are, we will not oppose Financial Resolution No. 1 as outlined by the Taoiseach. However, there are issues I wish to raise.
Much has been said about land leasing. While some farming organisations welcome the increase in the tax exemption limits, it is important to point out that while it increased from €5,000 to €7,500 for a five to seven year period and from €7,600 to €10,000 for leases of seven years or more, it has not been increased since it was implemented in 1996.
Having come from a farming background, the Taoiseach will be aware that there is a lot of movement within family farms, particularly as a result of the mid-term review. I regret it does not apply to fathers and sons or a relative within a family. While the measure might appear adequate initially, in real terms it will cost very little and will be of no benefit to farmers.
Last January thousands of farmers took part in the ‘tractorcade' because the roll-over relief was abolished and disease levies were doubled. There is nothing in the budget about roll-over relief. During the discussions on Sustaining Progress there was an indication that these levies policy would be reversed. The Minister for Finance allowed the Minister for Agriculture and Food to make the announcement. However, he only reversed the 25% reduction. In effect, he half reversed a bad decision made last year at a cost of just €5 million. Given that in the Estimates he is taking in €9 million for BSE testing, the Government could have been more generous and I ask the Taoiseach to look again at this measure.
On the question of stamp duty for land swaps, for convenience of operation many farmers would like to swap some of their land with somebody else. It is inappropriate that either of them should have to pay stamp duty.
This is not a great budget for agriculture. In time it will dawn on the agricultural community where it has been short sold. The leasing proposal is a Trojan horse of sorts. When the agricultural community see what is inside this whole affair it will not be happy.
I welcome the changes announced in the budget in regard to agricultural issues. I am glad the Government has again recognised the importance of agriculture.
We are all aware of the major role farmers have played in the economy down through the years. Agriculture went through a difficult time with BSE, foot and mouth disease and so on. Rainbow coalitions were a disaster for agriculture. I thank God that in recent years we have had a stable Government that has an interest not only in agriculture but every sector of society.
It never mowed the land but closed down agriculture.
Thank God none of our Ministers in the past seven years has said farmers were rolling in it, unlike Proinsias De Rossa. The only member of the Fine Gael Party who dissociated himself from those remarks was Alan Dukes, who was not even a Minister at the time. At that time we had a Taoiseach from County Meath, a good agricultural county.
Perhaps the Deputy would return to the Financial Resolutions.
Dissociation is common over there. The Minister of State at the Department of Enterprise, Trade and Employment, Deputy Fahey, is leading a protest march in Merrion Street.
He has cheques coming out of the computer.
It is great to see a Taoiseach from Dublin who has so much concern for agriculture. I compliment him on his interest in and love of agriculture and the work he has done for agriculture since becoming Taoiseach.
The Deputy will be safe in the reshuffle.
I ask Deputies not to provoke Deputy Brady to move away from Financial Resolutions Nos. 1 and 2.
The Deputy provokes interruption.
I saw the Taoiseach plough with two horses.
The Deputy should not worry about horses. He cannot even afford an ass.
The Taoiseach knows about agriculture.
The only thing the Deputy can do is object to young couples in County Meath trying to get planning permission for themselves and their children. I will return to that issue on another day.
I advise the Deputy to return to Financial Resolutions Nos. 1 and 2.
I welcome the tax exemption limits for leased farmland of €7,500 for five to seven years and €10,000 for seven years or more. The reduction in the age limit from 55 to 40 is welcome. The VAT increase to 4.4% is beneficial to agriculture. I welcome the fact that capital allowances for farm pollution control have been extended for three more years. The decrease in disease eradication is welcome.
I compliment the Minister for Finance, Deputy McCreevy, and particularly the Minister for Agriculture and Food, Deputy Walsh, and the Taoiseach on their great interest in agriculture. I welcome all those aspects of the budget and look forward to sound agriculture in the years ahead.
There are only 39 signatories left.
In respect of the VAT rebate for farmers, has the Minister for Agriculture and Food looked at how its benefit could be maintained for farmers who are moving down in the amount they produce as a result of the decision to decouple? The change is marginal but the VAT rate is 4.4%, which is a significant amount of rebate to farmers. A farmer who is subject to decoupling and who produces more will get a higher rebate. Will the case of those who are being encouraged to phase down productivity, through the decoupling policy, be taken into account in order that the historical benefit of the VAT rebate can be maintained through the cheque in the post and that they do not suffer the full loss as they phase down? It is significant that the rate is now 4.4%.
On the other issue, will the Taoiseach explain in more detail the loophole he is trying to close? Obviously builders who succeed in not paying VAT on the site pay VAT on the house and get a rebate on the latter, so the Exchequer loses out. Is the Taoiseach thinking of those who build on one-off sites or developers who work in housing estates? I presume it is housing estates where there is no distinction between the site and the house at the point of sale and a false distinction is being made for the purposes of evading VAT on the site. Will he explain if it affects the person who sells a one-off site and where a builder comes in on a contract basis to build subsequently?
At a recent meeting in Sligo the Taoiseach took an interest in the difficulties in rural areas in regard to planning and so on. He will be aware that it is quite common for parents who have land to give a site to a son or daughter. At present that site is subject to gift tax and capital gains tax. No issue arises in practical terms in regard to gift tax because of a transfer from a father or mother to a son or daughter. While it is aggregated in the totality of gift tax that would apply, the ceiling is high and, in practical terms, it does not create a difficulty. However, the capital gains tax creates a difficulty. In circumstances where a family, a father and a mother, give a site to a son or daughter, and no consideration changes hands, the donor is subject to capital gains tax and as values increase it is quite onerous. The parents, who frequently do not have a large income, give a site and get a bang for capital gains tax when in fact there was no financial transaction.
I appreciate it is outside the scope of this financial resolution but it could be correctly fairly easily. There are several precedents in tax law where close relatives are treated differently from strangers when property is transferred, gifts given and inheritances received. If that precedent was taken into account it would be helpful and could be corrected in the Finance Bill. Given that I have made the Taoiseach fully aware of the problem and how onerous it has become, perhaps he would nudge the Minister for Finance in the right direction when the Finance Bill is being drafted.
My constituency colleague has asked for an explanation of section 4 of the VAT Act 1972. I have much experience in this area—
Which side of it?
—having acted for many developers and for many house purchasers in the Limerick area. It is a thriving industry there. The problem has developed in recent years because VAT has become an enormous impediment to some new development. Developers go to extraordinary lengths to avoid the provisions of the VAT Act 1972 by setting up artificial systems of self-supply. The developer developing the site sets up an actual building company, tries to do a deemed supply to that building company and creates a self-supply. What should be a normal building development is taken out of the VAT net. That is an artificial arrangement and this anti-avoidance mechanism is designed to prevent that sort of arrangement from occurring.
It does not apply only to residential developments. Some of my colleagues might be aware that this practice has expanded into the commercial sector. VAT on commercial property is perhaps one of the most complex areas of tax law and these developers are spending millions of euro every year entering into a variety of arrangements to take commercial property out of the VAT net. This continues on a year-by-year basis but the Department of Finance and Revenue officials may not be fully aware of some of the schemes or arrangements because of their complexity and secretive nature. Many of these arrangements would not come to the attention of the Revenue Commissioners, due to the rules of self-assessment and others, so they require a watchful eye at all times. When the Taoiseach was Minister for Finance he was one of the first Ministers to engage in serious anti-avoidance tax legislation, for which he is to be complimented. The present Minister for Finance has continued on that route.
It is ironic that in today's debate speakers on all sides of the House accused the Minister of sidling up to the developers, to those who frequent the Galway Races and so on. In Resolution No. 2 we are asked to close one of the most significant tax loopholes, which puts paid to that accusation. I compliment the Minister on closing off this loophole and I ask him to keep a close and watchful eye on its extension into commercial property in the future.
I do not have any comment to make on Resolution No. 1 but I am curious to know the answer to Deputy Noonan's question about a phase-down of productivity and how it impacts on the new situation in respect of decoupling.
I am interested in Resolution No. 2 which the Minister described as an "anti-avoidance measure". Deputy Perry, chairman of the Committee on Public Accounts, and I have discussed this on a few occasions. Does the Taoiseach think it will have any impact on the inflation in the price of houses? As I understand it, or as it has been explained to me, this measure is intended to deal with a phenomenon whereby a house purchase is not a single transaction but conveniently involves two separate transactions, one in respect of the site and one in respect of the house. It is a significant loophole and loss of revenue to the Exchequer. On today's average house it is probably close to €20,000 which in a small development of 50 houses is approximately €1 million. I suppose one cannot describe something that is legal as tax evasion but this amounts to the same thing. Apparently it has been the practice.
The Revenue Commissioners recently announced that were those who engage in aggressive tax planning to behave more responsibly, they might behave more sympathetically. This is yet another example of how those who can employ the best tax advice available can find loopholes that effectively defraud the Exchequer of substantial moneys, as has been happening in a period of unprecedented boom. I would like to hear the Taoiseach say what, if any, impact this will have on price inflation in housing. Is there any mechanism to ensure that the developer pays the piper or to what extent can some of this be passed on to the house purchaser? That is not an argument against the motion. It has to be done and it is correct and proper that it be done. In an environment of dramatically escalating levies and developers being deprived of a boon to which they were never entitled, what is the Department's assessment of its impact on housing price inflation?
What information do the Minister and the Taoiseach have from the Revenue Commissioners on their best estimates of the amount lost to the Exchequer under this measure? I welcome what the Minister has done generally in his budget and specifically this development. I cannot see how it will impact on the price of houses but hopefully it will leverage more compliance and tax revenue. Mine is a twofold question. What is the cost of the avoidance to date? What level of tax receipts are estimated from the closing down of this loophole or avoidance measure?
Financial Resolutions Nos. 1 and 2 are minor enough but since they go in the right direction it is easy to support them. In the context of Resolution No. 1, there is no doubt, as Deputy Timmins said, that agriculture has been having a difficult time and this will benefit many farmers. However, it does not help many of those in my constituency who rely on horticulture, which often seems to be beneath the radar of the Department of Agriculture and Food. Horticulture does not receive the attention it needs, given its potential and our need for more, and it forms a low percentage of overall agricultural activity. I hope the Department's negative attitude to the establishment of farmers' markets around the country might change and that this message reaches the Minister for Agriculture and Food.
It is important that we view this as a national interest and I hope Deputy Brady will make himself more aware of the quite large agricultural sector in Dublin. He has only to talk to Deputy Glennon who will put him right on a few things. I have here an article headed "Dublin leads the field in vegetable farming", by Sean MacConnell, agriculture correspondent of The Irish Times,which might surprise Deputy Brady.
It does.
It continues, "Dublin is by far the most important producer of field vegetables and 32 percent of all growers in the State operate there." According to the article, a Bord Glas survey found, "Dublin growers account for 41 percent of total field vegetables grown in the State and 50 percent of the total farm-gate value." If Deputy Brady thinks that is insignificant, that is his problem.
I did not say it was insignificant.
It is important that Dublin is acknowledged in terms of national interest.
On a point of order, what is the rule on quotations?
There is a point of order. We will hear whether it is in fact a point of order.
I did not criticise agriculture in Dublin.
That is not a point of order. We cannot have Meath-Dublin rivalry in the Chamber.
I was complimenting a Dublin Taoiseach on his knowledge of and interest in agriculture.
I take Deputy Brady's point, but it is a surprise to me that he needs to compliment anybody. The point needs to be made that agriculture in Dublin is often overlooked and Deputy Brady is not alone in that regard. We need to make amends for that oversight.
We certainly know of another crop in Dublin, namely growing houses which is relevant in the context of Resolution No. 2. Because of oversights down the years, many farmers have had little alternative but to put their land up for sale. There are willing buyers for that land, of course. This resolution is an attempt to temper the greed that might be characteristic of some of those buyers who believe they can make a very quick buck by hook or by crook by developing some of the best agricultural land in the country.
It is important that the Government looks a little further than this resolution if it is serious about being fair to those who are in no position whatsoever to be in the developers' league. These are people who find it difficult to get one house, never mind a couple of hundred. The Government should therefore look a little more closely at the Kenny report. I hope this resolution will provoke a little further debate. The Kenny report has been taken up by many people, but unfortunately they do not have the power to do much about it. They include groups like CORI and the Green Party in terms of the Planning and Development (Amendment) Bill 2003, in which we put forward a proposal which is complementary to the resolution before us but goes further. It means that if agricultural land will be needed, according to the local development plan, it should be purchased by the local authority. When the land is rezoned, it will not be a matter of going after a developer to ensure that tax is not avoided, but a matter of the local authority having its hand on the tiller and being able to develop that land in the best interests of planning and of the community which will be living out its days there. The need for such a radical measure is indicated by this resolution, but for whatever reason, the Government has to date not got the courage to make the change. Instead we are trying to control the worst excesses of greed among some speculators when it comes to making a profit from building land.
There are many houses today which could not be bought for €200,000. However, even with a house of that price, surveys again and again indicate substantial clear profit of about €95,000 after taking into account the cost of the building land, stamp duty and other charges. With a clear profit of €95,000 for one house, someone who builds 101 houses suddenly has profits of over €1 million. That is the amount of money that is being salted away into building land by means of the developments of private entrepreneurs, many of whom support the Fianna Fáil Party, as they are free to do.
The Deputy should return to the resolution. He is wandering a long distance away from it. Many Members wish to speak and we would like to facilitate them.
This resolution, welcome as it is, will not cause sleepless nights for some of those individuals.
I support the resolution concerning the VAT anti-avoidance measure on sites. This is very important because, as we have seen, the number of developed housing units has increased substantially over the past few years – it is now reaching 50,000 or 60,000 annually. What the Taoiseach and the Minister for Finance will tell the House in response to Deputy Lenihan's question is that this is potentially a large sum of money escaping the coffers of the Department of Finance used for the budget. It is especially important in the context of the historic decentralisation programme announced today by the Minister for Finance. This programme will transform Ireland, both Dublin and the countryside, with over 10,000 Civil Service jobs being spread around.
We are again moving away from the resolutions.
I will come back to them. I was appalled that Deputy Richard Bruton, in his response to the Minister for Finance, failed to compliment the Government on its wisdom in bringing forward this programme.
I again ask the Deputy to come back to the two Financial Resolutions.
A Deputy
That is the Ceann Comhairle's job.
In fairness, in replying to the Minister for Finance one has to be balanced and accurate.
The Deputy should try that himself.
He has lost it.
This was an historic announcement, an historic change in our country.
Deputy Mulcahy, we are dealing with items from the past. Before us are Financial Resolutions Nos. 1 and 2 and it is important that we stay with them. There are a number of Deputies offering and it is important that we give them an opportunity.
The Deputy should sit down.
Deputy Bruton was asked if he was against decentralisation and would not answer the question.
I do not think the idea of the theme park is dead yet.
With regard to the VAT initiative, it was very distressing that all Deputy Bruton could do was criticise the allotment of €20 million to start the process. At least €20 million will result from the closure of this loophole. I strongly commend the introduction of the resolution to the House.
I cannot commend the Minister for Finance or anyone for an increase in VAT refunds. First, it is a year late. It is exactly a year since VAT was increased by 1%, which obviously changed the situation as far as the farm refund is concerned. The only increase now is €3.2 million.
I congratulate the Minister for Agriculture and Food, Deputy Walsh. He got around the then president of the IFA, now Minister of State, Deputy Parlon, and now he has clearly got around the current IFA president, John Dillon, because I heard Mr. Dillon welcoming this supposed major benefit to farmers.
He has changed his opinion already. That was only an initial announcement.
I find it very difficult. Farmers will have to pay the 22.5% increase on diesel. They got no benefit from the roll-over relief. The disease levy announced by the Minister outside this House is €5 million in total. As one of the big issues, funds for rural development were guaranteed, and there is only €10 million involved.
Deputy Crawford, again I suggest that you come back to the two resolutions before us.
I return in more depth to the matter raised by Deputy Noonan because it is very serious. Farmers will be forced to produce less. Between decoupling and REPS they will still have to maintain their machinery, which is subject to VAT. Meal and fertiliser are not VAT-related. It is important that we look at the position in the not too distant future to make sure that farmers get proper recompense. I am extremely sorry if I have breached the Ceann Comhairle's regulations, but others were able to refer back to the days of Ivan Yates and so on.
The Deputy will be aware, if he was in the House, that the Chair has pointed out to everyone who strayed away from Financial Resolutions Nos. 1 and 2 that they should return to them.
I was here. When Proinsias De Rossa MEP was Minister, he was a lot more generous to farmers than the current Minister, and the figures show it.
The Deputy did not mention the social welfare package.
All the Fianna Fáil Members have ever done was use one comment Proinsias De Rossa made on "The Late Late Show".
The Deputy may not refer to "The Late Late Show".
What about the Minister for Agriculture and Food, Deputy Walsh, putting thousands of farmers out of business, then coming up with a 0.1% VAT refund and claiming it as a big day?
One might believe that Financial Resolution No. 1 would have no relevance in Dublin South-Central, but it does. They are great horsemen in Dublin South-Central. The Taoiseach opened the great equine centre in Cherry Orchard where a number of young men are learning the trade. There is a regular business in the trade of horses in Smithfield. In the Ashgrove area of the Coombe, which is also in Dublin South-Central, there are a number of people who have horses and who operate the carriages around St. Stephen's Green. These carriages may come under the heading of "horses for hire" within the resolution. They are ambassadors for the country and an excellent part of the tourist trade. These horses should be looked after by the agricultural sector. I would like to see some improvement in the carriages and to have them covered by the taxi regulations.
They would love that.
It might be going too far to class their drivers as flat-rate farmers. The horses are thoroughbreds of a kind and are very valuable. I am sure some of them would come within the VAT net.
The economy is doing well, tourists are returning to Ireland in droves and the flat-rate farmers of the Coombe are doing well. I am sure they would be prepared to pay the extra 0.1% VAT that might apply to their trade. I commend the resolution to the House.
That is not an imposition, it is a relief.
It is a refund.
It would probably be more relevant in Dublin South-West where there are sheep farmers.
There was a time when horses used to pass my window regularly but not any more, thank God.
That is right. That is because of the actions taken by various Governments and councils to deal with that problem.
With regard to Financial Resolution No. 2, I commend the Minister for Finance on doing everything possible to do away with the type of tax avoidance schemes used by wealthy developers who make considerable profits from property development.
Deputy Rabbitte referred to house prices. The price of houses is largely dictated by supply because demand is fairly level. By 2004 it is expected that 62,000 houses will be built in Ireland, five times higher than the rate of house building in the United Kingdom. That supply will help to keep the price of houses down. Developers will vie with each other to sell houses where there is low demand. This is an opportune time to put this resolution in place. It is also a reprimand to the tax avoidance practitioners whose trade will be diminished to such an extent that they will become an endangered species in the not too distant future.
I commend Financial Resolution No. 2 to the House.
I welcome the increase in the farmer's flat-rate refund. It is overdue as it has not been increased since 2001. It will keep farmers' income in line with the various costs imposed in recent years, especially last year's 1% increase in VAT. In discussing a later resolution we will see the contribution made by VAT increases in diesel and petrol to costs in the agricultural trade and other industries.
The reduction in the age from 55 years to 40 for the purpose of land leasing is welcome. Will the Taoiseach consider further reducing the age to 35 years because installation aid is paid for farmers up to 35 years and there is a small number of years between 35 and 40? This should be considered in the Finance Bill.
I am glad Deputy Ardagh is interested in agricultural matters. He was not so interested when the tractorcade protest came to Dublin. He was wheeled out by the Fianna Fáil press office to say it was wrong for the tractorcade to come to Dublin.
That matter does not arise out of either Financial Resolution No. 1 or No. 2.
What measures will be taken to ensure that the average increase of €20,000 to the Revenue Commissioners from developers will not be passed on to the customer? It has always been a problem in the building industry that attempts by the State or local authorities to raise revenue from the house building industry are passed on to the customer. It is important that this problem be taken into account and the necessary measures taken to ensure that this cost is not passed on to the customer in the form of higher house prices. I agree with Deputy Conor Lenihan, who asked about income forgone to the Exchequer. Have studies been made by the Revenue Commissioners or by the Department of Finance to establish the extent of that money? I am sure it is substantial. For that purpose this is an important measure, provided it is not passed on to the customer.
Deputies Johnny Brady, Mulcahy and others complimented the Taoiseach. In a few months' time when the Cabinet reshuffle takes place, as predicted by the Tánaiste, I am sure that the kind words of Deputies Brady and Mulcahy will be taken into account by the Taoiseach.
A Cheann Comhairle, you will be pleased to know that I do not intend to detain you long on the subject of Financial Resolution No. 2. A substantial amount of funding will accrue to the Exchequer from its implementation. In that light and given that it is now a year since the first-time buyer's grant was abolished, would it be possible to redirect some of that funding back into the economy in the form of a first-time buyer's grant? The budget has delivered nothing by way of housing other than this measure. There are 48,000 applicants on the social housing waiting list and that number could probably be trebled. It is unfortunate that the opportunity was not taken in the budget to address this major social need.
Which resolution are you addressing, Deputy?
Financial Resolution No. 2, a Cheann Comhairle.
That does not apply, Deputy.
I am talking about the money accruing to the Exchequer from Financial Resolution No. 2.
Financial Resolution No. 2 refers to VAT.
That money cannot be separated at that point.
We are not discussing how the money is spent, Deputy. That is a matter for another day.
The Minister will not know what to do with the money. I am only trying to give him some direction and advice as to how best he might distribute it for the well-being of the people.
There will be an opportunity during the general debate tomorrow to raise those points.
I thought you were going to say, "during the general election", a Cheann Comhairle.
I am concerned that a number of Deputies are offering and time is limited. I would like to give Deputies an opportunity to speak to Financial Resolutions Nos. 1 and 2.
That is fair enough. I want to hear the other Deputies as well. I will finish on this point. It is outrageous that something was not done about the housing crisis, the major crisis facing the country. An opportunity was missed in the budget. Now that a few bob is coming to the Exchequer, I hope that money can be used to address the issue.
I welcome Financial Resolution No. 2. I compliment the Government on putting incentives in place to encourage house development. We are building 63,000 units this year and the projections for next number of years—
I must make the point I made to Deputy Morgan.
I just wish to impart some knowledge to him. In recent years builders have made large sums of money. How much was lost to the Exchequer and how much is it anticipated will accrue to the Revenue in the near future as a result of Financial Resolution No. 2?
What is the estimated return from this anti-avoidance measure? It is extraordinary that this loophole existed during an unprecedented boom in the building trade, especially in Dublin. When purchasers assumed they were paying VAT on the entire purchase price, they were in effect only paying VAT on the house itself. It is quite an extraordinary omission by Revenue that this loophole was not closed. Will the Taoiseach indicate what are the expected gains from the closure of this loophole?
I was enjoying a short break upstairs when I heard one of my colleagues refer to horses in the Coombe and in the equine centre in Ballyfermot. A horse has not been seen at the fountain in James' Street since Dan the milkman's time 30 years ago. I do not see the relevance of the contribution made by Deputy Ardagh and his reference to horses in the Coombe.
I will bring the Deputy on a tour of his constituency.
There has not been a milk horse in the Coombe for 30 years, not since Dan the milkman.
(Interruptions).
Allow Deputy Mitchell without interruption. Please return to the resolution, Deputy Mitchell.
With regard to the anti-avoidance measures for the reduced rate of VAT on sites when houses and sites are sold together, will the Taoiseach inform the House what effect this motion will have on the 13 organisations including Threshold, the Society of St. Vincent de Paul, Focus Ireland, the Jesuit Centre for Faith and Justice, the Irish Refugee Council, the National Youth Council and others? What I know about the Coombe is that there are mothers there who stay in bed and breakfast accommodation with their children because they cannot get a house.
The Deputy will have the opportunity to discuss this during the debate tomorrow. He should deal with the resolution.
When Deputy Ardagh gets off his imaginary horse in the fountain—
Does the Deputy know how to speak to a resolution?
He is a master of digression.
Allow Deputy Mitchell to make his point without interruption.
—will the Taoiseach inform the House how many of these people and their children in bed and breakfast accommodation and how many of the homeless and those with large families who call to our clinics every week—
Sorry, Deputy, that does not arise under Resolution No. 2. You have made your point.
It will not only have no effect on the horses in the equine centre or in the Coombe, it will have no effect on the homeless people in the Coombe. If Deputy Ardagh's clinic was as busy as mine in the Coombe, he would know that. That is the reality.
On Resolution No. 1, I will explain to the House how the scheme works. The scheme sets out a percentage amount known as a flat-rate refund or addition. Unregistered farmers add this percentage to their prices when selling to VAT registered businesses, such as co-ops, meat factories or whatever. The VAT registered business treats the flat-rate amount as a normal business input in its periodic VAT returns. A simple example is an unregistered farmer who sells goods worth €100 to a meat factory on 1 January. The flat-rate addition of 4.4% means that he can increase his price to €104.40. The factory claims back the €4.40 flat-rate addition as a VAT credit in its normal return, so there is no impact on the price of goods to the final customer due to the flat-rate addition. It is a very simple mechanism and is worked out by formula every year.
On the point made by Deputy Noonan, if the farmer produces less, through decoupling or whatever, he will receive less flat-rate addition. Nothing can be done about that because the VAT system cannot be changed. If a farmer produces less, then he claims less. Deputy Noonan asked a question about the capital gains tax issue which was not relevant but I will reply to his query.
I presume I am not permitted to discuss the leased land exemption measure. However, I will say that, while it has been stated that it is of no value, the cost of the measure is estimated at €8 million in 2004 and €13 million in a full year. That is a sizeable proportion of the full farmers' tax, so it is clearly of benefit. I merely wish to correct the error rather than deal in detail with the issue.
On the matter raised concerning disease levies, it was stated that the Minister for Agriculture and Food raised this issue outside the House, so I will mention it within the House. The Minister has announced his intention to seek the agreement of the House to reduce the disease levies by 25%. That will be of considerable benefit and addition.
He raised them by 100%.
Deputy Crawford raised the issue of VAT. The flat-rate refund to VAT on registered farms is examined every year in the context of the budget. It is not, however, customary for me to comment on possible changes which may arise. The flat-rate addition is a simple administrative system to compensate farmers not registered for VAT for the VAT they incur as part of their farming activities. I have given an example. The flat-rate figure takes account on a regular basis of changes in the VAT rate.
Under EU VAT law, the adjustment of the flat rate can only be made on the basis of retrospective macroeconomic data for the previous three years. It is taken in on a three year basis. The flat rate is not intended as an aid or assistance to the agricultural sector. It reflects a fair compensation for VAT incurred by farmers and should not affect their business decisions. The comment on the VAT measure was not a fair one.
A number of Deputies, including Deputy Noonan, asked about VAT on property. The VAT property measure does not apply to the building of a one-off house. It is on a site and there are no linked contracts.
I will reply in some detail because many Members asked me to explain how it operates. Deputy Rabbitte asked about the impact of the measure on house purchases after budget night. The measure only affects those developers using the avoidance scheme. It is not clear how many developers are involved but it does not affect the majority of developers who properly account for VAT on the sale of developed sites. Only purchases of property from developers using the avoidance scheme are affected. The impact on these purchases depends on the contract involved. The change will not affect one-off housing if the house is sold separately without a connective contract for the building of the house.
On the question of what would be the impact on purchases with different contracts, there are three different scenarios: contracts already concluded, as referred to by Deputy Perry; contracts entered into but not finalised on budget night; and contracts not entered into. The measure has no impact on the purchaser. The change is effective from tonight.
Deputy Conor Lenihan asked what was the impact on the VAT yield. The scheme, were it allowed to continue, would represent a potentially significant loss of VAT which, instead of accruing to the Exchequer, would accrue to developers. The extent of the use of the scheme is not known. However, in one case, Revenue estimates the potential loss of VAT could amount to €18 million. It is difficult to quantify the yield arising from this measure as Revenue is contesting the validity of the exemption claim of developers. In many cases, people operate outside the VAT system. They are not registered. It depends how people use it.
It is potentially an important closure. The normal position on the sale of a site is that it is common practice for non-tax reasons to structure the sale of a new house or apartment as a site sale agreement and a building agreement. Solicitors advise clients to contract in this way as the purchaser's rights under a building agreement are stronger than the rights under a straightforward house purchase agreement. In particular, the purchaser is entitled to avail of the house builders' guarantee scheme and that is why people operate that arrangement.
Under normal circumstances a developer develops a site in the course of his business for disposal to a customer. The building company is entitled to deduct VAT incurred in the development of the site, including any construction costs incurred. It then charges VAT at 13.5% to the final consumer on both the sale and the site of the purchase. The basis of the avoidance scheme that is being closed in a few hours' time is that some developers have been treating sites which were sold together with associated house construction contracts as VAT exempt under a certain interpretation of section 4(6) of the 1972 Act. In effect they were using this approach to avoid having to account for VAT on the sale of the site.
If a house developer purchases undeveloped land and contracts with a builder to develop the site – by, for example, levelling or draining the site – this then becomes developed land when agricultural land is adapted materially. After it is developed, the developer contracts to let the site to the builder on a short-term basis. The short-term letting of property is a VAT exempt activity. The developer presents the short-term letting as its primary purpose and puts forward that case. This is an attempt to avoid the significant amount of VAT on the later sale of the site by opting not to take deductibility on the small amount of VAT charged to him for his initial redevelopment. The short-term letting is the key to the operation of the system. So the site is developed, supposedly for the purpose of an exempt activity, in a short-term letting. This is the basis on which the developer claims that he is not entitled to recover VAT arising on the development of the site, so he never comes into the system. The short-term letting of the site on a short lease to the building company is merely an artificial mechanism which is used in his attempts to remove the developer's entitlements to reclaim VAT. By not claiming what he would be entitled to, which is VAT incurred on the developed site, the developer contends that because of this short-term letting, he can rely on section 46A of the Value-Added Tax Act to claim exemption from VAT on the sale of the site. Obviously, after a period, when he has developed the site, the purchaser is presented with contracts to the effect that he or she buys the site from the developer and building services from the builder. The developer does not account for VAT on the sale of the site to the purchaser, as no VAT has been recovered by him on his input. Therefore, the Revenue strongly, and rightly, opposes that interpretation.
And there is not a horse in sight.
We are now closing it off in this way for obvious reasons. The financial resolution, which we are asking Members to support, prevents developers claiming exemption from VAT on the sale of a developed site when it is sold in connection with a construction contract. I do not think I need to go into all the issues surrounding that.
As regards contracts entered into but not finalised on budget night, this is a question of what is a contract. If the contract is silent on VAT there should be no new charge arising from the measure. If the contract states that the price agreed includes a reference to vary the amount of VAT, the developer may try to pass on the VAT. The complete answer to the question will depend on the individual contract but I imagine that in these contracts, when the developer follows his own logic, he is trying to stay outside the VAT net altogether. Since the developer's dodge is to keep VAT out, I do not see why he would try to include it; it would not make much sense unless his approach is even more arrogant than trying to defraud the system. That is the position as it stands but if it was to pick up, one scheme alone would be sizeable. I imagine it will not be the only one because, clearly, all these matters will become known.
Question "That Financial Resolutions Nos. 1 and 2" be agreed to, put and declared carried.