Seanad Éireann debate -
Wednesday, 25 Feb 2009

Vol. 194 No. 2

Tax Code.

Senator Nicky McFadden

I welcome the Minister of State, Deputy Mansergh. I ask the Minister for Finance to introduce the VAT margin scheme that operates in the rest of Europe for Irish car dealerships. New car sales for 2009 have fallen by 63% when compared to sales in January 2008 and the motor industry is losing jobs rapidly. Dealerships are closing by the week and I am aware of one that closed recently with debts amounting to €26 million. Moreover, such dealerships had been obliged to invest heavily in their premises to retain their dealerships. Prices of new cars have plummeted in recent months as dealers increasingly come under pressure to maintain their businesses. There are a number of reasons for prices to be at such a level. One is that they are not helped by the number of non-Irish registered cars in this State. I ask the Minister of State to discuss with the Minister for Justice, Equality and Law Reform ways in which the law might be upheld in respect of those people who are breaking the law. There should be Garda checkpoints etc. to prevent such people from riding roughshod over the law by driving unregistered cars in this State.

While this problem exists beyond Ireland and the industry is in trouble globally, a competitive market is needed. Competition is not all one-sided and Ireland cannot expect simultaneously to raise the level of VAT and incentivise the car industry. I believe the Government's increase in the VAT rate is killing the market. This morning, the Tánaiste stated on the radio that it is only, I emphasise the word, "only", an increase of one half of one percent. That certainly personified the measure of proficiency and adeptness she brings to her portfolio. While I hate to be so critical, the Tánaiste appears to have failed to grasp that so much of Ireland's business depends on the global market and that in particular, the policies and practices initiated by our closest neighbours in Britain seriously affect us. Consequently, it is Britain's reduction in its VAT rate from 17.5% to 15% and Ireland's increase in the rate of VAT that is causing much of the problem for our small and medium sized businesses. As for the car industry, Ireland's VAT rate is 21.5%. The reason this has not yet dawned on the Tánaiste is unfathomable.

There are other contributing factors, such as the weakening of sterling against the euro. People have realised it is cheaper and better value to buy the equivalent in Northern Ireland or in Britain. It is incumbent on the Government to find ways to encourage competitiveness. However, less is being said in respect of the car industry and just as much damage is being done. By saying nothing, it simply is being left almost to fester. It has been paralysed and while I do not wish to talk down the industry, I merely am being truthful. Were logic and common sense to dictate, in the absence of something being done, the car industry would be shattered. Moreover, jobs must be saved now. Consumers also must be able to realise they can get value for money if they buy in the Republic. As I noted, car prices must be adjusted in line with our neighbours. There is no alternative if we wish to be competitive. Consequently, we must create the correct economic conditions for this to be viable and which balances competitiveness for consumers and profits for retailers in the car industry. The focus must be on maintaining current jobs and looking to the future for new ways of creating employment.

A major problem car dealers are experiencing and on which I particularly wish to focus pertains to VRT. Members are aware that significant changes in this regard were introduced in July 2008. Dealers had purchased and had received their orders for huge numbers of cars but car sales have fallen and consequently, dealers are being forced to cut prices. However, the biggest sin is that dealers are obliged to pay VAT on their losses. My request to the Minister of State is that they simply should be obliged to pay VAT on their profits. This is a highly reasonable request. After all, were increased numbers of people in the car industry to lose their jobs, which is happening, we would be obliged to provide social welfare payments for them, which in the long term will cost a great deal more. Consequently, the focus of my motion is to ensure car dealers only pay VAT on their profits.

Minister of State at the Department of Finance (Deputy Martin Mansergh)

I am pleased to have this opportunity to contribute to today's debate and to respond to Senator McFadden's Adjournment matter concerning the introduction of a VAT margin scheme for Irish car dealers similar to that which operates in most other member states. I am acutely aware of the serious difficulties and the acute downturn facing the motor industry and will meet representatives of SIMI early next week in my constituency. The Garda Traffic Corps is fairly good at enforcement, certainly to judge by the number of times I have been stopped to have my various discs checked. I accept the danger and acknowledge that all sorts of people find themselves in difficult situations today. That said, it requires some effort of imagination to think of my local friendly car dealer queueing up for social welfare.

At the outset, it is important to clarify that the margin scheme to which the Senator refers in her motion concerns the VAT treatment of second-hand goods, in this case, second-hand cars. In this regard, we are talking about how VAT is applied to second-hand cars bought by garages and dealers or acquired through a trade-in arrangement and the subsequent resale of such cars by the garages or dealers involved to private individuals.

The margin scheme, which was introduced under the VAT directive in 1994, is applied by 25 member states. Only Ireland and Denmark do not operate such a scheme. Under the margin scheme, a dealer accounts for VAT on his or her profit margin, that is, on the difference between the cost of acquiring a second-hand car and the selling price of the vehicle. However, following strong representations from the motor industry at that time, Ireland did not implement the margin scheme but instead negotiated a derogation in the form of the current special scheme, which also is provided for under the VAT directive.

In informing today's discussion, it is important to outline the existing special scheme as applied in Ireland and the margin scheme which is applied by all other member states except Denmark. I will take the special scheme first. The distinguishing feature of the special scheme operating in Ireland is that it allows garages and dealers, at the time of acquiring a second-hand car, to reclaim immediately or deduct the VAT considered to be embodied in the price of the car. The car typically would be purchased by the garage or accepted as part of a trade-in arrangement. For example, if a second-hand car costs €12,500, the garage can reclaim or get a VAT credit up-front for €2,212. The State therefore is part-financing the second-hand car until such time as the garage resells it. When the car is sold on, the garage then must account to Revenue for the VAT on the full price of the car. However, if the car is sold at a loss, then an adjustment or clawback must be made. This amounts to the difference between the VAT credit originally claimed by the garage when it bought the car and the amount of VAT actually charged by the garage in the eventual selling of the car.

At a minimum, the garage or dealer must account for VAT to the tune of the up-front VAT credit received when the car was purchased or accepted as a trade-in. In the example I have just given, if the car which was bought in by the garage at €12,500 was resold for €10,000, the VAT collected by the garage on the sale would amount to €1,770. This falls short of the original VAT credit of €2,212 received by the garage when it acquired the car in the first place. The difference, which amounts to €442 in this example, represents the claw-back which must then be paid by the garage to Revenue. In response to difficulties being experienced by some garages and dealers, particularly their increasing exposure to claw-back payments, the Revenue Commissioners have granted concessionary treatment which has allowed dealers to postpone payment of the claw-back arising in recent months until 19 May 2009.

As I have already explained, under the margin scheme, the dealer accounts for VAT on his profit margin. In other words, VAT is accounted for on the difference in the trade-in price and the resale price of a second-hand car passing through a dealership. If there is no profit margin, which means the car is sold at a loss, no VAT liability arises. For example, if a dealer agrees to allow an amount of €10,000 on a second-hand car as a trade-in and subsequently resells that car at a VAT inclusive price of €12,000, the VAT due to the Exchequer is based on the margin achieved by the dealer. In this particular case, the dealer would be liable for €354 in VAT. A key difference between the margin scheme and the special scheme is that under the former, a dealer is not entitled to reclaim or receive credit for any VAT when acquiring a second-hand car, but he or she is entitled to do so under the current special scheme.

The current special scheme has provided considerable benefit down the years to the motor industry since, through the VAT reclaim mechanism, the Exchequer is part-financing the second-hand car until such time as it is resold by the garage or dealer. However, in the current difficult economic climate, the motor industry considers the margin scheme to hold specific advantages over the special scheme. We do not have a difficulty with the principle of moving to the margin scheme for the VAT treatment of second-hand cars. Such a move would bring Ireland into line with most other member states and is a development which we would be prepared to consider favourably. However, difficulties arise in regard to how a move to the margin scheme would be made. As I understand it, the motor industry is seeking as part of a transitional arrangement that the outstanding VAT credits that garages and dealers have already received in respect of their existing stock of second-hand cars be written off in full. This outstanding VAT credit could be between €70 million and €90 million.

A loss of this magnitude to the Exchequer could not be contemplated. In addition, the writing off of outstanding VAT credits already provided to the motor industry in full as proposed, even as a transitional arrangement, would be contrary to the underlying principles that apply to VAT, which is a European Union-harmonised tax. We must also remember that the current special scheme is a derogation from the normal rules granted to Ireland under the VAT directive and once a derogation is given up, it cannot be restored.

We will reflect on the issues raised and the balance to be struck on possible transition costs. The Government is certainly open to moving to the new basis in a cost-neutral way. Further discussions with the motor industry will be required to achieve that.

Senator Nicky McFadden

I thank the Minister of State for his positive and interesting reply. I am sure dealers will be pleased to learn that he is willing to engage with them on this matter. The VRT charged on cars imported from one state to another should not be at a reduced rate. In other words, the same VRT should apply in the case of an imported car and a car that is registered in the State.

In the North, no VAT is payable on a second-hand car. However, a car dealer is liable for VAT on the same second-hand car because he is engaged in a commercial venture. This gives an unfair advantage to those engaged in roadside sales and so on. Will the Minister of State comment on this?

Deputy Martin Mansergh

The question of differences in VAT rates between Ireland and the United Kingdom, and especially between Ireland and Northern Ireland, is part of a much broader and more fraught discussion. There would be a vast cost to the Exchequer, which we simply cannot contemplate at this time, in harmonising VAT rates North and South. As I said in response to a question on this broader issue that was put to me on the "Hearts and Minds" television programme, which will be broadcast tomorrow night, there have been swings and roundabouts in this regard over the years. For instance, Northerners have tended in recent years to come to the South for petrol. In recent months, people from the South are heading north of the Border in increasing numbers to do their grocery shopping. This is a broader issue to which there are no simple, short-term solutions. I am sure discussions on the various issues will take place between the motor industry and the Government without prejudice to the desire shared by me and the Minister of State, Deputy Sargent, who has arrived to take my place, to encourage an increased use of public transport.

Senator Cecilia Keaveney

I look forward to the extension of rail services to County Donegal.