The Bill now before the House has two objectives which I will outline briefly before giving the background to them. The main objective is to make the necessary changes in our VAT law in order to bring that law into harmony with the Sixth VAT Directive which was adopted by the Council of Ministers of the European Communities on 17 May 1977. This was the sole objective of the Bill as initiated in Dáil Éireann last year.
Since then, the Bill has been amended by Dáil Éireann to meet a further objective, namely, the implementation of the two VAT proposals in the 1978 budget. These two proposals were an increase of about 50 per cent in the turnover thresholds above which traders must register for VAT, and the restoration of the 1 per cent VAT recoupment to VAT-registered customers of unregistered farmers. In the first case, it was necessary only to make appropriate amendments to section 6 of the Bill. In the second case, however, implementation required the addition of four new sections to the Bill as initiated. These new sections are sections 11, 17, 18 and 22 of the Bill now before the House.
I might conclude the brief outline of the purpose of the Bill by referring to the remaining two new sections which were inserted in the Bill by Dáil Éireann. These are sections 20 and 31 of the present text of the Bill and both are essentially technical provisions. Section 20 adjusted the time limits for VAT assessments, and so on, following the death of a taxable person, to take account of the introduction of capital acquisitions tax and the lodgment of documents for the purpose of that tax. The 1978 Finance Act made a similar change for income tax assessments and so on. Section 31 is designed to ensure that, despite the nature and extent of the amendments to our existing VAT law being made by the Bill, there will no breach in the continuity of VAT.
I will now proceed to some background information. It is now more than a decade since the Commission of the European Communities initiated moves towards the harmonisation of VAT systems in member states, as part of a general programme designed to end tax barriers between member states. Ever since the Commission has been concerned, in increasing detail, with securing greater uniformity in the scope and base of application of VAT. It has also the intention that, ultimately, differences in VAT rates between member states would be harmonised. With such a complex tax as VAT, clearly, full harmonisation must necessarily be a very lengthy process. This has been borne out by events.
The broad structure and general principles of the common EEC VAT system were set down by the First and Second VAT Directives which were adopted by the Council in April 1967. Those directives have applied to Ireland since 1 January 1974 and our existing law reflects them.
Further impetus to EEC VAT harmmonisation was given by the Council Decision of 21 April 1970 which stipulated that an integral element of the "own resources" basis of the Community's budget should be the yield from a charge, of not more than 1 per cent, on the VAT basis of assessment in each member state determined in a uniform manner according to Community rules.
The Sixth VAT Directive which was adopted in 1977, goes a long way to providing those common VAT rules. Member states which implement that directive will pay over to the Communities, out of their national tax revenues, VAT "own resources" thus calculated on the uniform VAT assessment basis, in lieu of financial contributions based on relative shares of the EEC gross national product. Member states do not have to levy a special VAT for "own resources" purposes and no increase in the national VAT rates is thereby called for.
Given the very wide scope of the directive, immediate and full harmonisation of the basis of assessment for VAT would give rise to severe practical and political problems for member states. Without some give and take on all sides, the directive could not have been adopted. While Council adoption of the directive signified member state's agreement to eventually adopting the harmonised VAT base set out in the directive, the directive specifically provided for transitional periods of at least five years for alignment by member states in particular areas, notably in the case of VAT zero rates and certain VAT exemptions.
The Bill provides for some new zero-ratings required by the Sixth Directive. I might also mention that until tax barriers are removed within the Community, each member state can retain in force the zero ratings which it had in force on 31 December 1975 and which fulfil specified conditions, These zero-ratings will be reviewed every five years. The first such review will not arise until 1982. A unanimous Council decision would be required before Ireland would be obliged to end its VAT zero-ratings for food, personal clothing and footwear, electricity and so on. Zero-rated turnover is of course part of the harmonised VAT basis of assessment for calculation of the "own resources" VAT element and member states will be paying over to the Communities the appropriate calculated sum in respect of zero-rated and other turnover.
A unanimous Council decision would also be required before Ireland would be obliged to end its VAT exemption for telecommunication 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; passenger transport within the State; and admissions to sporting events. These exemptions benefit from an initial derogation of five years and also fall for review in 1982. Since VAT taxation, and not VAT exemption, is the agreed ultimate Community aim in these cases member states continuing to exempt those activities during whatever transitional period is decided must make appropriate compensation to the Communities "own resources".
The overall approach to implementation of the directive, as provided for in the Bill now before the House, is to keep the necessary changes to the minimum. Every effort has been made to avail of provisions of the directive which would allow favourable arrangements to those traders whose activities have to be brought within Irish VAT for the first time. The substantial increase in all VAT registration thresholds which is also being made at the same time will reduce somewhat the impact of the required EEC changes. This approach seems to have been duly recognised by traders affected.
I now turn to the changes required in the context of the Sixth Directive.
Senators will note that much of the Bill is taken up with a revision of terminology and phraseology in our existing VAT law in order to comply with the directive.
As regards matters of substance, the principal change is the termination of some Irish VAT exemptions because these are not permitted by the directive, even for a transitional period. As I said, the directive, is the product of compromise. Accordingly, the present VAT exemption must end for the following, to name the main areas affected: certain services of auctioneers and house agents; non-academic teaching such as driving schools; valuation services of chartered surveyors; certain agency services but excluding agency services in relation to banking, insurance and finance which will continue to be VAT exempt; admissions to certain shows, fairs and exhibitions, but excluding, for example, annual agricultural shows run by non-profit making bodies. The traders who are engaged in those activities which now become VAT taxable will be entitled to claim, from the Revenue, the general credit for input VAT—borne on business purchases—which at present they have to bear, without recovery from the Revenue.
Another change required by the directive is the replacement of our present two-tier VAT rates for cars, motorcycles, radios, TV sets, gramophones and records. The two-tier arrangement involves a "trapped" VAT of 25 per cent or 30 per cent respectively at the manufacturer/import level only and 10 per cent VAT at all stages of distribution. EEC VAT law only allows for a straight VAT rate applicable at all stages of distribution. In future, therefore, only a single 10 per cent VAT rate will apply at all stages of distribution. The VAT revenue thus foregone will be made good by appropriate changes in excise duties. Consideration is being given at present in consultation with trade interests to the details of the new excises required. It will be appreciated, of course, that any question of changes in the overall level of taxation on the goods in question would be a matter for consideration in the budgetary context.
A third change required by the directive is the formal charging of VAT on imports. This will have two important results. First, it will mean that in future the same penalties as apply to false declarations in relation to sales and VAT due to Revenue will apply to false declarations in regard to imports. Second, it will permit the collection of VAT at importation from certain persons. The directive permits deferment of accounting for the VAT on imports for their business by VAT-registered persons until those persons make the VAT return for the period in which the importation took place. Such deferment will be allowed only to persons who are trading in the State from a fixed place of business. It is intended that such persons would lose their right to deferment if they fail to account for VAT satisfactorily. Thus, all mobile traders coming into the State with goods will be required to pay VAT on those goods at the point of importation and, on making their next VAT return in relation to sales within the State, would be allowed a credit for the VAT paid at the point of importation.
There are some other minor changes required by the Sixth Directive which I propose to mention on Committee Stage.
The Sixth VAT Directive requires a new definition of "farmers" for Irish VAT purposes but does not affect the right of farmers, as so defined, to remain outside the VAT system should they so wish. Most farmers in fact have stayed outside the VAT system. Broadly the new definition will only exclude persons who are not engaged fulltime in farming as generally understood, involving occupation of land and ownership of livestock and so on.
The directive allows member states to have special arrangements to compensate those farmers who do not opt into the VAT system for VAT borne by them on purchases of farming inputs. VAT-registered customers can obtain a special flat-rate VAT credit in respect of their purchases from unregistered farmers. As I have already mentioned, section 11 of the Bill and related sections restore the 1 per cent flat-rate VAT credit which obtained here until 1976. The bringing of marts into the VAT system at the same time as the 1 per cent flat rate credit is being restored will involve the marts in the preparation and handling of documentation showing the 1 per cent addition. This should help to ensure that the benefit will reach the farmers for whom it is intended.
The Bill on enactment will come into operation on a date to be specified by order by the Minister for Finance, except for section 29, which will come into effect on enactment of the Bill in order to allow the Government to make at the appropriate time the necessary excises order under the Imposition of Duties Act.
As Senators will appreciate, this is a rather technical Bill. I have tried to make clear the broad purposes involved without going into too much technical detail. Having regard to the need to change our VAT law to meet EEC obligations and to fulfil the VAT changes announced in the 1978 Budget in regard to farmers and small traders, I commend the Bill to the House.
