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Select Committee on Finance and General Affairs debate -
Wednesday, 26 May 1993

SECTION 83.

Amendment No. 141 is in the name of Deputy Cox. Amendment No. 142 is an alternative and it is proposed to debate them together.

I move amendment No. 141:

In page 105, paragraph (c), to delete lines 22 to 52, in page 106, to delete lines 1 to 50, in page 107, to delete lines 1 to 50, and in page 108, to delete lines 1 to 30.

I would like to draw the Minister's attention to the fact that I will be opposing section 84.

I understand that the purpose of section 83, or at least the section of it I am seeking to delete, is to ensure that a VAT payment can be brought forward to December this year and in each tax year until it is changed at some future date. The effect of that would be to generate for the State a cash flow from value-added tax that would make good some of the deficiencies that the Exchequer will now suffer as a result of abolishing VAT on imports at the point of entry for trade with other Community countries.

I asked the Minister a parliamentary question last week, and I got a reply today as to how much money would come in, according to the Department's best estimate, under section 83 in December of this year. The estimate is that £145 million would be generated in additional cash flow to the Exchequer — of course at a cost of cash flow to the business community. I know the Minister will argue that they have gained cash flow. They will if they are importers, but otherwise they will not.

If I read section 84 correctly, it seems to me that the compliant VAT taxpayer who brings forward a special advance payment into December of this year under section 83 can, in the next ordinary accounting period into next year, claim a credit or a refund against that tax. I asked the Minister how much would be returned to people in the subsequent period. The answer he gave was that, due to the change in the VAT payments, it was estimated that under section 84, £5 million would be refunded. The result is, if I were to follow that logic, that £145 million will be brought forward into December and possibly in the next VAT period £5 million would be paid back, appearing to indicate that the Exchequer had a net cash flow gain of £140 million. I may not have asked the right question and I think I got a Jesuitical answer to what was a fair question but interpreted with great sophistry by whoever sat down and looked at it.

Before I develop the point politically, I want to get a clear answer to the following question. A sum of £5 million could be returned under section 84. How much under section 84 could be used by VAT payers as an input credit against the VAT that would have been due normally in the first VAT payment period of next year?

Was that in reply to a parliamentary question?

A written one.

The answer is the whole £145 million.

I welcome the clarification. That was my understanding in plain English of the sum of the parts of sections 83 and 84. If one takes the refund and the input credit which people can get and if one takes all of the gobbledegook out of it, the plain English of this is straight forward — in December the Minister will have a law that says: "Hand over £145 million and in January or February it will be handed back again". What is actually happening is that the Minister is jumping forward by a couple of weeks — an interesting few weeks because he will have to close the books for the Exchequer before those few weeks are out —£145 million. This is not just once off. If I understand this pole vaulting exercise, this will be in perpetuity until we actually change the law at some future date.

In order to get over an apparent budgetary hiccup this year and iron out a crease, we will create the illusion that the State is £145 million richer than it is, because in January-February we will hand it all back again by one means or another, or we will forego payments we would have expected in lieu of what was paid in December. To sustain the illusion, we will polevault again next December and do the same thing. In straight economics, what the State is doing is borrowing an interest free loan of £145 million for X weeks at the prevailing rate of interest, which is worth £1 million, £2 million or whatever, and the rest of it is revolving door, Mickey Mouse, conjuring and financial engineering that does not do any good. I cannot understand the logic of a system that causes everyone to leapfrog forward everything they owe, fill out all the forms and so on and then fill out forms to get their money back again. They will do this every year because we do not want to face up to the fact that by removing VAT on imports at the point of entry we are missing a front tooth. Even if it is our First Holy Communion day, the photographs should show us with a missing tooth and we should not pretend that the badly made denture we fitted in December falls out which in January has some real cosmetic worth. It is a piece of conjuring. Why should we complicate the lives of everyone involved, the Revenue officials on one side and business on the other, with a paper shuffle? If the elimination of VAT at the point of entry causes a once for all budgetary lapse this year, just acknowledge that as the transition cost to the alternative system as a result of our commitment to complete the Single Market and so on and register it as a once for all cost.

When I read these two sections in conjunction with each other I regarded them as Mickey Mouse financial engineering of the worst sort. I am not talking about it in the context of someone cooking the books, it is not that. It is just the kind of Mickey Mouse nonsense that drives people in business up the wall. Let us call a spade a spade. Nobody is going to turn around and say to the Minister, least of all me, that he is falling apart at the seams in terms of his commitment to Maastricht and so on.

As part of completing the Single Market process he has to suffer a once-off cash flow transitional cost by removing VAT at the point of entry. But for heaven's sake do not bring in this conjuring trick of revolving funds and pretend that something real is going on when clearly it is nothing but a cosmetics exercise. I can see that the Minister would get, in cash flow terms, an interest free loan worth maybe £1 million or £2 million, whatever the number of weeks and whatever is the prevailing rate of interest. That is its economic worth and the rest is Mickey Mouse.

I raised this matter on Second Stage in the House. The Minister at the time was at pains to say that this was agreed and more or less asked what was the fuss about. I checked with my sources and they were most upset by this matter. It was anything but agreed as far as they were concerned. Basically, what it means is that in 1993 13 month's VAT payment will be made in the calendar year and 12 months per annum thereafter. As Deputy Cox rightly said, the money forfeited in VAT at the point of entry is being sought by the back door back from the same traders, many of whom will not have the cash flow to provide it.

My amendment seeks to raise the threshold from £120,000 VAT liability to £300,000, so it would be only the larger corporations and companies that would have to pay it. That would reduce the impact on small businesses, which I fear will be penal. It is a difficult time of the year for some businesses because of seasonal cash flow and so on. I would like to endorse what Deputy Cox has said. I would ask the Minister to consider my amendment so that the threshold can be arranged so that it will not impact so harshly in cash flow terms on small business.

This matter was discussed and agreed with the leaders of the business community last year and this year in the course of the budget. It is the State that loses on the cash flow. Deputy Cox is attempting to say that it is the business community. We are now into May and the business community have been gaining each month. I will come back to that.

The effect of the amendment would be to abolish the requirement that large VAT remitters make an advance payment of their November/December VAT liabilities on 1 December. Deputies are aware that the abolition of VAT at the point of entry from 1 January results in a cash flow loss to the Exchequer of £200 million for this year and that loss is not sustainable in the current budget context. That is the reason for this. There is nothing convoluted, complex or difficult that people cannot understand. Everyone has understood for the last 12 months that this has been the position and it has been discussed and negotiated.

The advance payment measure, which is intended to contribute £145 million towards making good the cash flow loss, represents what was worked out as a balanced approach to the issue. It is because it gives the business community the benefit of the cash flow gain arising from the abolition at the point of entry for almost the entire year. Instead of being caught, as they would have been in a normal year, they have this cash flow gain throughout the financial year. I know Deputy Cox has a sharp brain, but he is letting himself believe that this cash flow loss is not of substantial and significant benefit to the business community in 1993. It is, and that is why they are happy with the arrangement. The text of the proposal was published last year. The business interests have been aware of the Government's intention. This was discussed in August or September.

In January 1993 the budget submission from the Irish Business Employers Confederation said that the confederation accepts the proposal outlined in the Second Stage Finance Bill, 1992, whereby large taxpayers make an advance payment of VAT on 1 December 1992 and subsequent years. The system has not changed one iota since then and in several meetings I have had with IBEC since then there has been no subsequent discussion. I am not saying there might not be some small business concerned. The traders involved have benefited from the abolition of VAT at the point of entry. The alternative scheme discussed is the monthly payment scheme, which would be more onerous for the companies concerned. Therefore, we did not proceed with that scheme. That was an alternative with which I would have lived. Since the measure affects only large VAT remitters there will be no effect on the small or medium sized traders. We are talking here about fewer than 2,000 of the total of 128,000 VAT registered businesses. We are not talking about the ordinary people paying VAT. The main VAT remitters now are using diskettes. They do not use paper. I was in a Clonmel office recently and it is paperless. We are talking about fewer than 2,000, so I think we are wasting time.

I have never denied that the measure being introduced is to cover the budgetary shortfall. It was felt that adherence to the budgetary criterion was essential and would continue. There is no difficulty. It is a cash flow system. Instead of paying it on 19 January they will pay it in December. What I said in answer to the parliamentary question was that section 83 of the Finance Bill will give rise to cash flow gain to the Exchequer in 1993 which is estimated at £145 million. I said that the amount will be credited in total against the November/December VAT liability of the traders concerned. The bulk of the advance payment will be dealt with in accordance with the mechanism established by section 83 (a) of the Bill. That is where the £140 million will go back with only a small amount under the section 84 mechanism. That is on the basis that there is £145 million in. It would all go back, but it is on the basis that £140 million will be going back to people who still owe us money and the £5 million would be going back to people who are due a refund. I am not going to argue whether it is clear or not.

I am sure it was only a slip of the tongue when the Minister said it was a waste of time in the course of that response.

I meant my going on.

There is not a fundamental argument here. I want to go back to basics on this. It is my first time to sit down to try to question the logic of some of the things in a Finance Bill. VAT at the point of entry was introduced in, I think, 1982. It helped to pave the way during some election — I have forgotten the details — but was it the time the Government collapsed?

The children's clothing.

The challenge to the then Opposition, of which the Minister was a member, was how would you do the thing differently since the Government had collapsed on the budget and there was need to find tens of millions. Then this scheme of VAT at the point of entry was dreamt up. I want to go back to basics and first principles on this. What happened on round one? The State brought forward payments that might normally have been paid at a later date — in other words, when it started the State gained a once for all cash flow benefit. In that year it gained and thereafter there was no net gain, but there was a once for all cash flow gain. The logical corollary of that is that when the Sate stops this scheme there is a once for all cash flow loss. That is very basic. This is not a political point. You bring in something and you gain once for all. When you discontinue it you lose once for all. Nobody can berate you for losing the run of yourself or letting the national finance go down the tubes, because you switched off a tap and you suffered the consequences — the water stopped flowing. What you are trying to do here is create an illusion that a big part of the water that stopped flowing is actually flowing, although it will flow out again next year.

We have agreed to facilitate the Minister with an adjournment.

IBEC are satisfied.

IBEC are not sitting here at this table and they are not legislating. It is bad law. The basics of this are that the State was the beneficiary of a once for all cash flow gain when this was brought in and commensurately they suffer a once for all cash flow loss when it goes out. Nobody can berate you for completing the Single Market and for suffering the cash flow loss, but why are we going through this and creating the illusion every December that we have more money in than we have got and then we give it back? I do not understand the logic. It is cosmetic; it is not economics.

The "cosmetics" are a matter of £200 million.

No they are not. It is an interest free loan. The Minister should ask when he is out for his break.

It is £200 million cash flow and if we did it the way Deputy Cox is saying — he is correct in his analysis — we would be borrowing that £200 million this year and as we have continued on for a number of years with the gain we would now be continuing on with £200 million of a loss.

And the economic cost is the interest paid for the number of weeks you are borrowing the money. The economic cost is a few million pounds

If you can come to an arrangement at the same time as the hot money is coming back, we could start from scratch.

I would like to hear the Minister's economic analysis. I am contending it is a few million pounds not £200 million.

I have outlined it and explained it; it is a cash flow loss. It was a cash flow gain for several years. We have explained how it is going to operate. It is not causing any great difficulty for the Revenue Commissioners or for the 2,000 people who will have to operate it. If, at home some time in the future, we manage to hit on hundreds of millions of pounds, we can just roll it out of the system, but we cannot afford to do that at present. We cannot afford to forget about £200 million.

The Minister is living an illusion with £200 million.

Sitting suspended at 4.12 p.m. and resumed at 4.35 p.m.

Apropos my point, the Minister read from an IBEC budget submission and I acknowledge that IBEC obviously did agree to his proposal. IBEC would be representative of the larger elements of Irish business. It was the small businesses and their accountancy representatives who were in touch with me. They would not necessarily feel obliged to agree with what IBEC had agreed. Overall, the Minister did not respond to my specific point about raising this threshold from £120,000 to a higher level. Perhaps he might consider that. Having heard the drift of the arguments I tend towards opposing the section.

When VAT on imports at the point of entry came in, it was probably devised, in political, economic terms, on the back of an envelope so I decided to mark its departure by doing a sum on the back of another envelope while having a cup of coffee.

The Minister made the point, which I take, that there is a significant cash flow also to the Exchequer because we are in the internal market and doing away with VAT on imports at the point of entry. This is the corollary to the significant cash flow which, ten or 11 years ago, the Exchequer gained by bringing it in. One matches the other, not in money amounts, but in terms of logic.

My second point is that it is inconceiveable that a rational, financial community observing Government policy would regard the once-off phenomenon of a cash flow loss this year as being anything other than what it is, a once for all adjustment, not to be repeated in any other year, and therefore not a fundamental problem for Exchequer arithmetic.

The third point is that it would be wrong to confuse cash flow with the basic economics of the matter which seem to be as follows. Let us take the example that the Minister loses, say, £200 million — I am just taking that figure as an example because it is a nice round figure. For argument sake, let us say VAT at the point of entry brought in £200 million, so when the Minister does away with VAT at the pont of entry he losses a cash flow of £200 million. By bringing in this provision cash flow is up £200 million, so it balances out. If the Minister had the use of the £200 million for four weeks at a 10 per cent rate of interest the economic worth of that would be £1.5 million, over six weeks it would be £2.3 million and for eight weeks, £3.08 million. Those are the economics of the matter.

No analyst I know is so stupid as to confuse a once for all adjustment with some profound crisis for the Exchequer. If everyone agrees to it, if IBEC likes it or is happy to live with it, and the 2,000 key taxpayers will be paying it so be it. I simply do not understand, however, why a Government should fear that there is some loss of the integrity of its financial management process because there is a once for all cash flow change, when the fundamenal economic effect is somewhere between £1.5 million and £3 million.

The Minister is involved in interest free borrowing through the processes described in section 83 and section 84, or its logical economic equivalent, but why, having done it this year, will we do it every year in perpetuity? We have a once for all adjustment, VAT on imports at point of entry disappears this year. That should be the end of the story. Next year we will ease through the transition stage with this measure the Minister is proposing, but the net economic cost to the Exchequer is something between £1.5 million and £3 million. Irrespective of what one says about cash flow, that would be the basic cost.

I will stop arguing with Deputy Cox on this point. He has made his point, but I think he will accept my point. The Government accounts are prepared on an annual cash receipt basis and therefore if the required sum is not brought to account in the year in question the books of the Exchequer for that year will show a £200 million deficit, or whatever the sum is. That will be reflected in a deterioration in the Exchequer borrowing requirement for the year. It is the Government's judgment on this matter and the case I would put to the Government on the basis of the analyses of the figures before the end of the year, when we are looking at this would be that that would not be seen in the market as something once off. The markets tend not to see that things are once off.

I am sure they would understand a plain explanation from the Minister of what we have just been discussing.

That is the first point. Neither do I think we can afford to do it. I do not think it would be well received. The financial analysts are never impressed by arguments. I will not mention other countries but there are at least two or three countries that had major difficulties this year trying to convince the analysts that they were well within the figures when in fact things happened that put them outside the figures. One can look at what is happening in those countries. Two of them have had a lot of difficulties, one more than the other, and in one of them the Government almost broke up. That is my argument. I can understand the Deputy's point that one could say it has to happen some time; it is an exception and one could then explain it.

The other point I want to make is it is not a question of paying the interest on the £200 million, the £400 million or the £145 million for a month because if it goes on to the borrowings the interest on the money must be paid indefinitely.

That is not so, Minister, because you would be borrowing £145 million less the following year when you will not be making the credit against VAT payments in the January-February billing period.

That is the same point. It will happen again in 1994. The same situation will arise again. Deputy Yates asked about raising the threshold to £300,000. That would reduce the expected yield by £15 million.

It is only the big companies that are affected. Under 2,000 of the 138,000 companies that pay VAT are affected. They are not small companies. I cannot say they are all IBEC members but by and large they would be. That is why I went to a lot of trouble to discuss this with IBEC on numerous occasions.

Amendment put and declared lost.
Amendment No. 142 not moved.
Question "That section 83 stand part of the Bill" put and declared carried.
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