Financial Resolutions 2004.

Financial Resolution No. 1: Value Added Tax.

The Taoiseach

I move:

(1) THAT in this Resolution—

"Principal Act" means the Value-Added Tax Act 1972 (No. 22 of 1972);

"Act of 2004" means the Finance Act 2004 (No. 8 of 2004).

(2) THAT—

(a) the rate of value-added tax on the supply of livestock and live greyhounds and the hire of horses be increased from 4.4% to 4.8% of the amount on which tax is chargeable in relation to the supply of such goods and services, and

(b) that, accordingly, subsection (1) (inserted by the Finance Act 1992 (No. 9 of 1992)) of section 11 of the Principal Act be amended by substituting in paragraph (f) “4.8%” for “4.4%” (inserted by the Act of 2004).

(3) THAT the rate of flat-rate addition to the consideration in respect of the supply of agricultural produce or an agricultural service by a flat-rate farmer be increased from 4.4% to 4.8% and that, accordingly, section 12A (inserted by the Value-Added Tax (Amendment) Act 1978 (No. 34 of 1978)) of the Principal Act be amended by substituting "4.8%" for "4.4%" in subsection (1) (inserted by the Act of 2004).

(4) THAT this Resolution shall have effect as on and from 1 January 2005.

(5) 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).

The only resolution before the House is a VAT resolution on farmers flat-rate on livestock. The resolution provides for an increase from 4.4% to 4.8% in the level of the flat rate farmers' refund 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 budget 2004 when they were both increased from 4.3% to 4.4%.

The Revenue Commissioners have calculated that on the basis of macroeconomic data for the past three years that a flat rate of 4.8% is now needed to achieve full compensation. This represents a significant increase in the flat rate, one of the largest increases for a number of years. The increase to 4.8% will take effect from 1 January 2005 and will cost €12.93 million in 2005 and €15.52 million in a full year.

The flat rate scheme is a simplified and practical method of applying value added tax to farming. It compensates unregistered farmers on an overall basis for the VAT charged to them on their purchases of goods and services. This is achieved without applying 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 addition. This is administratively more convenient for farmers and their customers.

The zero rate of VAT generally applies to farmers' outputs, such as food, whereas many of their inputs are subject to VAT at the standard rate. Thus, under the normal VAT system, most farmers, if registered, would be continually reclaiming VAT incurred on their inputs.

The flat rate scheme which is provided for under the EU Sixth VAT Directive is a practical method of applying value added tax to farming. The scheme is designed to compensate unregistered farmers on an overall basis for the VAT charged to them on their purchases of goods and services — their farming inputs. This is achieved without applying the normal VAT procedures of registration, record-keeping and returns. The tax compliance burden for farmers participating in the scheme is minimal and, in addition, the State is relieved of a significant administrative burden.

The scheme sets out a percentage amount known as the flat rate refund or addition. Unregistered farmers add this percentage to their prices when selling to VAT registered businesses such as co-operatives and meat factories. The VAT registered business treats the flat rate amount as a normal business input in its periodic VAT return. The flat rate for 2004 is 4.4% and this is being increased to 4.8% for 2005.

An example would be where an unregistered farmer sells goods worth €100 to a meat factory on 1 January 2005. The flat rate addition of 4.8% means that he can increase his price to €104.80. The factory then claims back the €4.80 flat rate addition as a VAT credit in its normal return and there is no impact on the price of goods to the final customer due to the flat rate addition. VAT paid by unregistered farmers for 2004 is €185.36 million while the figure for agricultural sales is €3,879.88 million. The rates underpinning the calculation are rounded to 4.8%.

I commend the resolution to the House.

Mr. Naughten

I am glad the Taoiseach impressed on us his knowledge of the agricultural industry. His contribution was interesting. While time is limited in terms of our being tied to the motion before us, I am disappointed with the budget as it relates to the agricultural sector. It contains nothing in terms of farm consolidation even though the Minister spoke about it for a number of minutes. The relief on the control of farmyard pollution will not impact especially given the enormous pressure brought about by the nitrates directive, something of which my colleague, Deputy Crawford, is aware.

I am disappointed the budget introduced no change to capital gains tax in terms of the compulsory purchase of land for motorways.

An Ceann Comhairle

As the Deputy rightly pointed out time is limited and he should confine his remarks to the resolution before the House.

Mr. Naughten

I welcome anything that benefits the farming community. The Fine Gael Party realises how difficult and uncertain things are for farmers and in that regard will not oppose Financial Resolution No. 1 as outlined. As the Taoiseach said, the rate of calculation is set down under EU VAT law. The calculation is based on the rate of VAT paid by farmers on input costs over the previous three years. My understanding is that the rate is based not on the value of VAT paid over the previous three years but on the rate of VAT over the previous three years. When agricultural and general inflation are taken into account, farmers will be short-changed in this. This resolution should provide for payment to farmers not registered for VAT because of their input costs over the past three years. However, they can only recoup this input cost through the sale of produce to a VAT registered business.

Considering this and that farm practices will change dramatically over the next 12 months due to the introduction of the single farm payment which will be separated from production for the first time, many farmers will not get the benefit of this relief although they have already paid the input VAT. In other words, they will be short-changed. They will not have the same throughput of produce to enable them to recoup the VAT already paid. While the flat rate is not intended as an aid or assistance to the agricultural sector, it is fair compensation for VAT incurred by farmers. A farmer who produces more will get a higher rebate.

Has the Department of Agriculture and Food examined how this benefit could be maintained for farmers, downscaling in production because of the decoupled payment? Can it be maintained for the many more farmers forced to produce less due to entry into REPS or through the severe criteria laid down by the nitrates directive? This is particularly apt since the EU has rejected current Irish proposals for implementing the directive.

Under the new regime, agricultural commentators expect agricultural produce prices will fall. This will be due to the lack of price support, caused by the decoupling of the payment, which will have a dramatic impact on the price paid to farmers for livestock. Cattle and other produce prices will fall. Consequently, when farmers sell on the produce, they will not get the same VAT rebate as they would have in the past. Prices will also fall because of the current round of WTO negotiations which will allow additional produce from third countries. The increasing power of the major supermarkets will force farmers to take a lower price for their produce, thereby losing out. A review of the groceries order would have a further impact on prices.

If agricultural produce prices fall, the actual value of the rebate coming back to the farmer will be lower. In real terms, they will not get the value of money paid in VAT back through the rebate system. This is compounded by agricultural inflation running at approximately 6%, twice the rate of inflation. Input costs have risen by 6% but return on produce sold has not. Consequently, farmers are losing €6 in every €100 on the value of this rebate, without considering the changes that will take place with produce prices. Many farmers will have purchased equipment for more intensive farm production during the three year VAT reference period. Equipment still has to be maintained and in many cases the repayments have to be made. If they downscale, they will be big losers in the rebate system.

This is a watershed in agriculture and the Minister for Finance and his Department should have recognised and acknowledged it in the budget. I ask the Taoiseach to review the rate of rebate considering these significant changes in the agricultural sector. It is evident from the figures the Taoiseach has quoted that the Department of Finance has not realised these major changes taking place. The Department estimates the rebate will cost €15.5 million a full year. However, based on the changes now taking place with the decoupled payment, it will not cost that to the Exchequer. I urge the Taoiseach to review this matter and increase the level of rebate for farmers. Will the Taoiseach comment on the consideration the Department on Agriculture and Food has given this and whether a further rebate could be included in the decoupled payment to address the shortfall I have outlined?

Mr. Penrose

Last year, I was disappointed the then Minister for Finance, Mr. McCreevy, only increased the rebate by 0.1% from 4.3% to4.4%. It is a practical way of compensating farmers. For once, dealing with the Revenue Commissioners will be customer friendly as it is not complex. Its simplicity adheres it to the farming sector. It is paid to compensate for inputs for which farmers pay the appropriate VAT, but because they are not VAT registered they would not normally receive a refund. However, I am concerned at the change in the ways of paying the rebate. Many livestock marts where it was often paid are closing. We better start taking pictures of these for posterity. In County Westmeath, the heart of farming country, Mullingar and Moate marts have closed. Soon we will have none of those traditional outlets. It is sad that those traditional outlets where farmers picked up this payment will no longer be available.

I advocated, as Deputy Johnny Brady knows, decoupling proposals which was decried by farming organisations at the time. One might say that is not unusual for a Labour Party member. I championed that proposal in the mid-1990s when it was not popular. I did so because I wanted to ensure small farmers, the backbone of farming, would get their due and just entitlements. It was easy when one was on the side of the large farmers' cohort to win the battles. However, I thought of the small farmer, down the boreen, who was denied payments. Many whom I knew never applied for subsidies. That is why I was eager to ensure that those people were entitled to payments. I support the Government's efforts in that regard.

I accept what Deputy Naughten has said on decoupling. However, it will mean a significant change in farming patterns and methods of production. I hope we will reach the stage where farming will be less intensive and we will win the battle for traditional output. This will allow us to penetrate those lucrative EU markets. Where we only had a one in five penetration, we must now increase that to ensure we win a bigger market share of a higher value added market. This in turn will allow us to compensate in that way. That means changing our traditional production patterns and that beef production must be focused on to ensure agriculture survives. I always argued that the traditional beef breeds should be rewarded.

It would be remiss of me not to acknowledge that this is a larger increase than any other year. Farming inflation runs ahead of normal inflation. This appears normal when one considers that prices for oil and diesel have had a significant impact in the past 12 months. The value of this increase will not be as significant as it would appear on paper. I acknowledge it will be €15.5 million in a full year. Deputy Naughten asked if it can be included under the single farm payment system where the lesser value would be compensated. This is worth examining. However, I wonder if it can be accommodated under the existing scheme. I have grave doubts that the EU Agriculture Commissioner will allow such an arrangement.

I looked at the material on farmers in receipt of the flat-rate and the information regarding construction. I see the Minister for Agriculture and Food is in the House. There will be serious pressure on farmers to comply with environmental and pollution directives, especially the nitrates directive. While doing so will require significant expenditure, funds are no longer available in farming to meet costs of this nature. Is there any possibility that the grants system will be changed to support farmers who must comply with the directives to provide us with the environmental standards required to penetrate the European markets I described earlier? We should help our farmers to obtain a 50% market share and to take them over. It can be done but only if we implement an integrated package of environmental enhancement. Can the income restraints and eligibility criteria of the capital grants system be changed to accommodate this process?

There are some farmers in the midlands who train horses to supplement their incomes. Does the rule still apply whereby 10% of farm income is taken out of the equation and deemed to be allocated to the training operation? Perhaps one of the officials could clarify the matter.

I welcome broadly that more substantial increases than last year's have been made. They had to be. I wondered how the former Deputy McCreevy could behave in so Scrooge-like a manner in this area over recent years given that he came from a heartland of farming activity, which was something I thought was dear to his heart.

Mary Coughlan

We are looking after the poor farmers.

Mr. Sargent

I welcome the opportunity to speak on the resolution. While it suggests a need for a wider debate, I realise we are limited here and will have a chance to speak on the budget more fully tomorrow.

In the context of agriculture generally, the resolution is narrowly focused. Given the fine body of officials who are present to give the Minister advice on any aspect of it, I assume it was well-thought out and comprehensively prepared. The resolution will be cold comfort to anybody who is trying to make a living in agriculture and the food industry. Farm gate prices have been decreasing and the current scenario is quite stark when compared with that of 1954. The resolution will be of cold comfort to farmers who remember receiving 50% of the final price of a product and are nowadays lucky to get 12%. Perhaps this explains why it is so difficult to make a living in farming and why so many are leaving the sector.

There is a great deal more to be done to rise to the challenges with which we are presented in agriculture. I hope the Minister will be open to many of the ideas farmers are communicating to me but which do not appear to be getting through in Government. With the requirement to export 80% of produce, farmers are being asked to compete with very low wage and, sometimes, low standard producers in other countries. Whether it is viewed as an opportunity or as a requirement to be met under duress, change is inevitable. Change will arise mainly in the context of energy costs, which are currently internalised in agriculture to a great extent, a strategy it will be very difficult to maintain.

Is it possible to expand the resolution to take into account the potential and need to develop local food economies which have been allowed to decline? We spoke about this subject during Question Time recently. Deputy Penrose also referred to the closure of marts, which appears to be a trend. The trend will continue only as long as the energy regime remains in place and exports continue to be a viable way of disposing of agricultural produce. When energy prices increase, the local market will become much more necessary and viable. One hears this point being made time and time again by Darina Allen and other food specialists who find it is more difficult to operate here when they compare their businesses with those in other countries.

The nitrates directive will be among the more immediate challenges for operators in the non-organic sector. I point the Minister towards a recent copy of the New Scientist which set out recent American research which has resulted in much more accurate methods to measure the nitrate requirement of land than we have traditionally used. I urge the employment of these methods to assist farmers to put exactly what is needed on their fields rather than engage in a process of estimation which can make it difficult to comply with the nitrates directive.

The resolution constitutes an opportunity to make these points in a wider context. It does not contain much which indicates the context in which it arose. Even the Taoiseach's introduction dealt only with the bare facts surrounding it. While the resolution points to the need for a wider debate which we cannot have today, it is useful to consider New Zealand. New Zealand has often been compared to Ireland in the context of agricultural policy. It ceased to use subsidies and went down the decoupling route much sooner than we did. While to some extent there has been pain, those who have survived have done so on the basis of their own merits. It was interesting to read in the paper recently what Darina Allen said about Heinz in Dundalk being treated in exactly the same way as a local cheese maker in west Cork. That requires attention.