Finance Bill, 1995: Committee Stage (Resumed).

According to the orders of the House, we are to deal with sections 105 to 151, inclusive, this morning which amounts to 46 sections, to which 30 amendments have been tabled.

Sections 105 and 106 agreed to.

Amendment No. 96 is in the name of the Minister, amendments Nos. 104, 108 and 116 are related and amendment No. 107 is consequential on amendment No. 108. Accordingly, it is proposed to take amendments Nos. 96, 104, 107, 108 and 116 together. Is that agreed? Agreed. If amendment No. 96 is accepted section 107 will be deleted and a new section 107 will be thereby inserted.

I move amendment No. 96:

In page 130, before section 107, to insert the following new section:

107.—Section 3 of the Principal Act is hereby amended in subsection (1)—

(a) by the insertion in paragraph (a) after ‘by agreement' of ‘other than the transfer of ownership of the goods to a person supplying financial services of the kind specified in subparagraph (i) (e) of the First Schedule, where those services are supplied as part of an agreement of the kind referred to in paragraph (b) in respect of those goods', and

(b) by the insertion of the following paragraph after paragraph (a):

‘(aa) a supply by an auctioneer within the meaning of section 10B or by a taxable dealer,'.".

This is the first of a package of four amendments which I am proposing in the Bill to exempt from VAT interest payments and hire-purchase and credit-sale transactions. Apart from ensuring compliance with EC law, as recently clarified by the European Court of Justice, this is an important initiative in the context of the overall impact which other VAT provisions in the Bill will have on the financial services sector. I refer to the impact of the Seventh VAT Directive provisions. I will deal with the directive at length when we reach the relevant sections.

At this stage I wish to clarify my intentions with regard to the VAT treatment of hire-purchase and credit-sale transactions. The current Irish VAT law provides that VAT is chargeable at 21 per cent on the interest portion of hirepurchase and credit-sale transactions, in addition to the VAT chargeable on the supply of the goods being sold through HP or on a credit-sale. VAT is also chargeable on the leasing of goods. The lending of money and other forms of credit are exempt from VAT.

The EU law on this matter is contained in the Sixth VAT Directive and has been clarified by the terms of a judgment by the European Court; the court held that VAT should not be charged on interest paid on HP and credit sale transactions after the supply of goods to the customer. Following this judgment, the amendments proposed will exempt HP and credit-sales interest payments.

This exemption will alleviate concerns expressed by the IFHA regarding the impact of some provisions of the Seventh Directive on this business. The directive will prevent leasing companies from claiming VAT input credit for the VAT content of second hand goods bought from dealers. This rule, which is an integral and obligatory part of the directive, will increase the cost of supplying leasing services. Even though the IFHA is fully aware of the obligatory nature of this provision, it has asked that some alleviating measures be adopted to compensate for the increased cost of leasing.

I am aware that the IFHA is also responding to several other changes happening in the financial services sector. The solution which I now propose should meet the concerns of the finance houses without affecting their Seventh Directive obligations. By making this change, I have created opportunities for the finance houses to develop attractive alternative products to leasing. This should ensure no interruption to the availability of financing for the purchase and sale of vehicles. The HP changes are not restricted to second hand cars and should benefit consumers across the board.

The Amendment is a technical amendment to clearly separate the supply of financial services from the supply of the goods in question. This is necessary to allow the services to become exempt while not affecting the taxable status of the goods. The amendment has effect from the date of the passing of the Act.

Will the amendments which are being proposed insert new sections into the Bill?

Are these amendments or new sections dealing with a totally different area than the Bill at present deals with?

So this was not covered in the Finance Bill as published. This Bill is dealing with another area——

I think it would be helpful if we had a technical explanation.

I have been advised that, even though we did that twice yesterday, there are difficulties about that. I have no problem with it——

Neither do I.

We are in a new process with the new committee system so I suppose we will be creating a precedent. I think we can proceed with the technical explanation.

With respect, there is nothing sacrosanct about a committee session.

I know, but it is only fair that I should tell the Select Committee I have been told that certain procedures are normally followed and we should be aware that we are creating a precedent.

I checked with my senior officials in the Department of Finance and there was provision a long time ago for technical explanations to be offered.

With regard to what happened yesterday with the various delegations coming in, in the 1930s moneylenders were brought in and asked about the effect of each section of the moneylenders' Bill, which seems sensible.

There are other problems which we will not go into now.

I invite Mr. Seán O'Shea of the Revenue Commissioners to offer a technical explanation.

The Deputy is correct that this is a new measure in the Finance Bill which was not there when it was published. Its effect is to exempt hire purchase from VAT. To give effect to it they have to pick off four areas in the VAT Act to make the appropriate changes.

That would result in a loss of revenue to the State. Are some of these amendments compensating on the other side? With some hire purchase agreements to do with the sale of vehicles and so on, the goods' costs are shown less the trade-in price. I know that will be changed. There is then VAT on hire purchase charges which is now being done away with. That should, in my view, bring down the cost of leasing. However, the Minister said it would not make any difference to the costs. I cannot understand why it does not bring down the cost. I heard the Minister clearly saying that he had to make other changes to ensure it did not raise the cost.

No, what the Minister was saying is that the Seventh Directive is making various changes to the treatment of second hand goods and so on, but one of the effects of the Seventh Directive is that it will affect leasing. There are other factors which also affect leasing, such as the Consumer Credit Bill. Hire purchase will probably emerge as the alternative to leasing in the financial area and the Minister is making hire purchase more attractive as a package. This will help to offset the effect which the Seventh Directive would otherwise have on the leasing area.

According to some of the comments by experts in the VAT area, the Bill made changes in the treatment of second hand vehicles, etc, which I can understand. However, I cannot understand why, if hire purchase interest is to be excluded from VAT as the result of a court case in the European Court, that of itself does not bring down the cost of leasing to the person who is not in a position to recover the VAT on leasing — it makes no difference to people who can recover it against tradable activity. The Minister clearly said it did not and that he had to adjust it some other way. I know his intention is to have no net increase so I cannot understand why he does not bring it down for people who are not in a position to recover it.

There are two things happening here, one is what we are doing to hire purchase as it is. That would result in a cost of £3 million in a year if there was no change in trading patterns. In other words, if the hire purchase sector remained at its current size, it would cost the Revenue Commissioners £3 million to implement this measure. What is happening independently of that is that the leasing sector, as such, will probably change because of a number of factors, one of which is the Seventh Directive.

Another major factor is the impact of the forthcoming Consumer Credit Bill which will have the effect of probably moving business which is in the leasing sector at present into the hire purchase sector. In that case, there would probably be a cash flow benefit in the year of introduction. From the point of view of the individual customer, in the full life of the hire purchase term, it will reduce the cost because he will no longer be charged VAT on his hire purchase interest charges.

That is what I thought.

I understand; this is evidently a technical point — the pattern of the market is likely to shift away from leasing in favour of hire purchase.

As a result of the Seventh Directive.

And the Consumer Credit Bill.

Is it to do with other things?

Yes, in this area. As a result, the overall net effect in terms of revenue will be slightly positive; at worst it will be neutral and at best positive. This provision will have the effect of reducing the cost because there will no longer be VAT on the interest component of the payments.

May I ask a couple of questions?

If the Deputies and the Chair will bear with me, I have three other speaking notes in relation to the other amendments which are being taken together which might clarify some of the questions which might arise.

Amendment No. 104 is the second in the package of amendments to which I referred earlier in the context of making interest payments on HP and credit sales transactions exempt from VAT. The amendment contains a measure which is designed to close a potential loophole. Without this provision, it would be possible for a trader offering goods on HP directly to a customer to artificially reduce the cost of the goods so that the amount subject to VAT was depressed while the cost of the tax exempt HP charge was inflated. In effect, this amendment provides that in such situations the open market price of the goods is subject to tax. The amendment has effect from the date of the passing of the Act.

Amendments Nos. 107 and 108 amend section 11 of the VAT Act which deals with rates. The amendments are the third part of the package of measures to exempt interest charges in hire purchase and credit sales transactions. They revoke section 11(5) of the VAT Act which provided that interest charges are liable to VAT at the same rate as the supply of the goods in HP or credit sales transactions. They also come into effect with the passing of the Act.

Amendment No. 166, which I am informed is the key amendment, alters the First Schedule of the VAT Act which lists the exempt activities. This amendment is the final part of the package of measures with regard to hire purchase. The effect of the amendment is to exempt interest on HP or credit sale transactions from VAT. It also comes into effect with the passing of the Act.

Would the Minister explain how VAT is calculated on HP and how it will be calculated after this? If the interest element is ignored, for how much VAT will the trader be liable? Perhaps the official would like to answer.

I am assuming that there are two separate elements to this transaction. If a dealer is selling a washing machine and arranging hire purchase through a finance company, the VAT on the washing machine will still apply and no VAT will arise on the hire purchase interest charges.

What happens if the dealer is also acting as the HP company? That is what I cannot understand.

In the case of the ESB, which sells goods and also arranges the financing, it will have to charge VAT on the value of the good being sold but it will not charge further VAT on the interest charges which arise.

What I cannot understand is this: if they pay VAT on the value of goods sold or hired out under the hire purchase agreement, do they have to pay that immediately after they part possession with the goods?

Yes; it is as if it was two separate transactions.

What happens if one leases, for example, a refrigerator to somebody?

One is not supplying the good as such in leasing but letting a person have the use of it; it is a service. That would be subject to 21 per cent VAT.

The leasing charge. The leasing company still owns the refrigerator. It has not actually supplied it to the customer. It has given them the use of it and, ultimately, its use will revert to the leasing company — a refrigerator is not a good example but I will stick with it — and it may sell it on to somebody else.

The same person.

I want to be clear on this. The effect of this is that the leasing agreements will be fully chargeable to VAT at 21 per cent and payments of that kind, but there will be no VAT charged on the interest in a hire purchase agreement. Will this significantly tilt the scales in favour of hire purchase agreements?

It is one of a number of factors that will do so; it will certainly make hire purchase more attractive.

There is VAT charged on leasing interest but no VAT charged on hire purchase interest? Is that a result of the Seventh Directive or of the European Court case?

Or of the leasing charge of the leasing service?

Is VAT charged on the leasing charge?

Yes. The leasing charge includes interest but it can also include an element of depreciation.

There is no VAT charged on the interest of a hire purchase agreement?

When a person went to a registered trader to trade in their old car against a new one, VAT was charged on the net trade-in price, usually on a hire purchase agreement, and on the added hire purchase interest as well. These would be regarded as three separate transactions under the new arrangements. The taking of the secondhand vehicle will be one activity liable for VAT while its sale at its real price would be another — it is referred to as the marginal system. Is my interpretation correct and, if so, does it have a beneficial or negative financial effect on the customer?

That is a long question and I am not sure I got all of it.

First, what we are talking about here is hire purchase interest. This is not the result of the Seventh Directive but of the European Court ruling. We are exempting the interest charges. Leasing has nothing to do with that. The Sixth Directive requires us to charge VAT on leasing as against hire purchase.

Other elements of the Deputy's question concerned the treatment of tradeins and the marginal scheme arising from the Seventh Directive; it might be better to refer to this when we get to the relevant section. Indeed, it might be worthwhile if the Minister were to read into the record for the benefit of Members a general overview of what the Seventh Directive is about so that when we come to its component parts it would make more sense.

Before the Minister comes to that point, and it is a worthwhile suggestion on how it could be done, I want to ask whether this amendment was made known to those in the industry? Were they made aware of it being brought forward?

They were not aware of it because we cannot anticipate the Minister bringing something forward——

Was it brought forward as a result of the court case?

Yes, but they would have an interest in it; I imagine they would be interested to hear it because they are in the business of providing finance in whatever form is the most productive for them.

May I suggest that the Minister should have a discussion with the interested parties between now and Report Stage because they may not have been made aware of this. From what Mr. O'Shea tells me, the net effect of this is not that advantageous but it may be, and I am not competent to know whether it would be advantageous from this level.

May I also suggest that the Minister — and this is not a criticism of him or his officials because from my experience of Finance Bills, I know that some amendments have to be brought in at a late stage — produce an explanatory memorandum? I know that has been suggested to previous incumbents in this and other Departments, but it would be a help. I know deadlines have to be met, but it should be done for a major provision like this.

Deputy McCreevy's question of whether the trade has been made aware of this is a valid one. They were aware of the court ruling——

Then they would have been anticipating it?

——and have asked for a measure to respond and to give effect to its consequences, but until such time as this committee had disclosed it, the officials were not able to say what they could do because they could not anticipate what the Oireachtas was likely to do. They have asked for this measure. They are not aware that it is in the Bill or is being proposed, but they will not be unhappy with it and I would invite Deputies to satisfy themselves on that account.

Are there any administrative implications for business? How will one disaggregrate hire purchase repayments from interest? Will it cause any administrative problems?

I am not sure I understand the question.

VAT will be charged on the main part of the repayment but no VAT will be charged on the interest?

Under hire purchase agreements, it is not the principal but the sum that is repaid. A lump sum is paid for the privilege of holding onto the goods and a final instalment is paid. Therefore, there is no differentiation between interest and repayment of principal.

When one enters into a hire purchase agreement, the finance house will give a schedule of payments and it will clearly separate the element going towards the cost of the goods from that of the purchase. From an administrative point of view, it will not be difficult to distinguish the part being liable for VAT because they are goods and that part being exempt because they are interest charges.

Is there a danger that the hire purchase element will be reduced and the interest decreased?

The effect of one of the amendments is to avoid that.

I understand hire purchase to be an agreement for the bailment of goods under which the property may, can or will transfer to the hirer at the end of the agreement. A payment on a hire purchase agreement does not necessarily have to be broken up into interest and principal elements. A person just has to pay a sum each week to the hire purchase company. You are correct in this, Chairman. One cannot talk about hire purchase charges——

It is leasing charges.

This committee was set up to tease out these points.

If one makes a charge in the gross amount, for example, £10 a week, somebody does not disaggregrate that into interest and principal. That may be in the mind of the hire purchase company but the hirer just has to pay a sum every week.

That is as the person taking out the hire purchase agreement would see it, but in the agreement in which they are entering, the hire purchase company will have to pay the VAT to the Revenue Commissioners up front; that is the way VAT is structured. The charge arises at the start of the agreement.

The hire purchase company has to pay VAT on the goods.

The hire purchase company will see that it has valued the goods and the flow of payments for the interest at a certain figure. Therefore, the VAT liability on their goods will be such and such; it will have none on the interest. It will put this together and then will come up with a schedule——

I follow that, but does the hirer, the person who has the goods under this new scheme, have any VAT deduction?

It depends on the status of the hirer.

Can he offset some proportion of the money he pays back each month if he is registered for VAT?

Can he claim it up front?

He would claim it up front if he is registered for VAT. Let us say the VAT amounts to £50. He would get from the hire purchase company a VAT——

What VAT is £50? This is the question I am asking.

The VAT on the goods amounts to £50.

That is broken up into instalments and made available to——

Let us say something costs £100 and VAT is at 21 per cent. The amount involved now is £121, plus the interest on £121. Then over, say, 52 weeks, you divide——

Mr. O'Shea will explain.

Because of the nature of VAT in this particular type of transaction, the charge arises up front. If you are talking about a taxable person and if the nature of the goods he is hiring is such that he can claim deductibility, he has his charge up front and claims deductibility up front.

Perhaps we are all at cross-purposes. I am talking about the hirer's VAT affairs.

Is the Deputy talking about the company?

No, the other person. The hirer is the person who gets possession of the goods under the agreement. He makes a weekly payment to the finance company under the hire purchase agreement. Is he entitled to any VAT credit of any kind in respect of his weekly payments?

Yes. Remember the hire purchase is exempt, so we are talking about the nature of the goods he is hiring and his status. If his status and the nature of the goods are such that he would be entitled to deductibility if he bought these goods, then he will be entitled to that VAT.

At what stage?

Is it on an instalment basis?

We will assume that he gets it up front. Half-way through the agreement his goods are seized and returned. What happens to the VAT when he does not complete the purchase?

That does not have any implications for VAT.

It does not?

No. VAT has been paid and deducted.

And if the company resells to a third party, VAT is payable again, presumably.

Yes, but if——

Hold on a second, of course it does. There is a loophole here which could be easily exploited by unscrupulous persons.

It depends on the nature of the goods and the nature of the person buying. In the case of a motor vehicle, the VAT on it would not be reclaimable but if a transport company bought a motor vehicle for cash, that company will get the VAT back in the first month. If the motor vehicle is bought under a hire purchase agreement, the VAT is credited up front as well. If that company, being VAT taxable, sells that particular lorry half way through the hire purchase agreement, it would have to charge VAT to the person to whom it sells it and account for that. The company would have to continue the hire purchase agreement.

What happens if it is seized by the company?

With all due respect, we do not want to get into very complicated territory.

The committee does.

The position is that this is essentially good news.

If it is essentially good news we will say no more.

This is quite a serious point and I do not think it should be taken glibly. I can see a situation where this would be exploited by unscrupulous people. A person buys goods worth £1,000 plus 21 per cent VAT. He gets the VAT deduction which is greater than the amount of the first payment and then he lets the goods be seized and he is at a profit. It is easy to exploit this provision.

I do not understand that, Chairman. I buy goods from you for £1,000.

Let us say £10,000.

Take it under a hire purchase agreement.

I am registered for VAT and I get a receipt from you which I can pass on and I get the VAT deduction. I have entered into an agreement to pay £1,000 per month.

You get your VAT repayment up front and VAT is at 21 per cent; you get £2,100 but your first month's repayment is only £1,000. An unscrupulous person could make a profit after a very short time.

If you abandon the hire purchase agreement.

Yes, but if I do not continue to pay you, I lose the goods.

You are without the goods, but you have received your VAT rebate which is greater than the money paid out.

The Chairman is talking about a collusive agreement. Effectively the hire purchase agreement supplies the lorry to the company, which takes it out for a month and hands it back to the company having received the VAT rebate.

The VAT rebate is greater than the amount he paid in the first place.

The Revenue Commissioners have been paid the VAT.

By the seller of the goods.

The person who would lose in that case would be the hire purchase company.

Yes, but in this case he would not lose.

He would not willingly enter into it.

No, he would not, but there are people who could enter into an agreement, fool the seller and make a profit from it.

The people who would be exposed would be the hire purchase companies, not the Revenue Commissioners.

Yes, but it should be of concern to this committee that we do not set up a situation where the whole arrangement is undermined by setting up a faulty system.

We are not proposing to change the hire purchase legislation at all. We are simply talking about the element of VAT in relation to hire purchase agreements.

Is it the case that at the moment the VAT rebate is given up front on the total purchase?

So that people can receive the rebate before they pay the VAT, or a substantial part of it?

That has been the situation since VAT was introduced in 1972.


There has been no change.

Just so that the Chairman and I will understand, a hire purchase charge is effectively regarded as an interest loan, it is just as if you got money from the bank and bought it.

That is exactly it.

I am reading the explanatory memorandum regarding the directive and I would like clarification with regard to the third important feature of the directive, a special scheme for second hand motor cars which allows motor dealers to claim residual tax to be included in the price of a second hand vehicle which they buy into stock.

We will come to that point later on.

Fair enough.

With the permission of the Chairman I will clarify the situation now. Part III of the Bill is concerned with value added tax. Deputies will have noticed that a large number of amendments being proposed to the VAT Act are implementing the Seventh VAT Directive. Although there is fairly comprehensive summary of the directive in the explanatory memorandum of the Bill, it would be helpful for me to outline some of the principles involved at this stage.

The Seventh Directive deals mainly with second hand goods which are goods bought by dealers from people who receive no deductibility on purchase and consequently charge no VAT on the sale to that dealer. These people are essentially private individuals or exempt persons who are not in a position to pass on a VAT credit to the dealer in the transaction. The directive provides that when the dealer sells the item he may calculate VAT on the basis of his profit margin only, instead of charging VAT on the full value of the goods as is the case at present.

The directive also does a number of things. It introduces a similar scheme for goods sold by public auction but instead of the profit margin, the auctioneer's commission is the basis for calculating the VAT. It allows motor dealers to claim the residual tax contained in second hand motor vehicles bought from persons who received no deductibility on purchase.

It allows reduction in the rate of VAT chargeable on certain works of art, collectors items and antiques when they are imported or when works of art are supplied by the artist or his successors. We will expand on some of these as we go through the Bill.

It allows you to claim back VAT on a motor vehicle.

Are we happy with that?

I give my car to a motor dealer for £1,000 and there is £210 imputed value.

Yes, it is a bonus.

At the moment you can get a trade-in and that is being abolished so it is not a great bonus.

Perhaps the Minister could clarify that point. Am I correct in thinking that some years ago, long before the seventh directive, the Revenue Commissioners entered some compensatory arrangement with motor dealers to get over the problem regarding trade-ins? Perhaps my memory fails me, but I think there was some such arrangement.

I am informed by my colleagues that this will not interfere with that arrangement.

When was that arrangement made?

It was made in 1988. It will not disrupt the basis of that arrangement.

Amendment agreed to.

The acceptance of this amendment involves the deletion of section 107. Is that agreed? Agreed.

Section 107 deleted.

Section 108 agreed to.