Amendment No. 99 is consequential on amendment No. 97 and amendment No. 98 is related to amendment No. 97. Is it agreed to take amendments Nos. 97 to 99, inclusive, together? Agreed.
SECTION 109.
I move amendment No. 97:
In page 131, to delete lines 1 and 2 and substitute the following:
"109.—Section 4 of the Principal Act is hereby amended—
(a) by the substitution of the following subsection for subsection (5):".
This is a relatively minor amendment. As outlined in the explanatory memorandum, section 109 amends section 4 of the VAT Act, which deals with the supply of property. It ensures that VAT is chargeable on the supply of a site as part of an agreement to develop the property. This is an anti avoidance measure and the amendment arises directly from an appeal decision.
Two further amendments are being made to section 4 of the VAT Act. The first amendment is necessary in order to close off the possibility of a further tax avoidance scheme which has come to light since the publication of the Bill. The second amendment is purely technical. It is consequential on the change being made to section 4 (5) in the Bill. Both amendments will have effect from the date of the passage of the Bill.
Perhaps the Minister could arrange the publication of explanatory memoranda booklets next year regarding VAT on this type of property, such as those on the changes relating to urban renewal and designated areas. I will not go into detail on this matter as I am not qualified to do so. It is a very difficult tax area, which is most unclear to many people. Notwithstanding the difficulties, perhaps the Department could work on producing such booklets. It may take a year to do so because it is a difficult area. I note that Deputy Penrose is nodding his head so he must have some experience of this in his professional practice.
I will take the recommendation on board. However, I add as a proviso that I understand the whole question of VAT on property is being examined in Brussels from a European perspective. Therefore, we must ensure that we align whatever information we produce with developments in that regard.
Perhaps the Minister could briefly explain what type of property transactions are subject to VAT.
I would find that very illuminating because I have never understood this area.
I have never understood it either. I have become more and more confused about this area over the years. I am sure I am not the only one. Does anybody in the country understand it?
I share the Deputy's concern. I have a note which anticipates such a question.
Perhaps the Minister could arrange to have it distributed. It might enlighten us all.
Yes, I will arrange that. The supply, sale or long lease of property is liable to VAT where all of the following conditions are satisfied:
(1) The property has been developed in whole or in part since 1 November 1972;
(2) The person supplying the property has a taxable interest, that is, ten years or more;
(3) The person supplying the property was entitled to input credit when he acquired his interest in the property or developed it;
(4) The supply is made in the course of or furtherance of business for consideration.
Section 4 (5), which is the anti-avoidance provision, provided that where a site was sold as part of an agreement to develop the site, tax was chargeable on the sale of the site. However, an appeal decision found that if the site was undeveloped at the time of the sale, the provisions of section 4 (5) could not apply. This interpretation made section 4 (5) unworkable in certain circumstances and the amendment is necessary to close off the loophole.
The amendment will provide that the sale of an undeveloped property, in conjunction with the supply of new houses on the same property, will be chargeable to VAT. Tax will apply even though the site was undeveloped when sold. It must be emphasised that only undeveloped sites disposed of in this manner and under these exact circumstances will be taxable. Undeveloped property disposed of under other conditions will remain outside the VAT net.
The proposed amendment deems the person disposing of an undeveloped site as an integral part of an associated taxable transaction to be a taxable person for VAT. It also declares that the disposal of an undeveloped site is regarded in these circumstances as a supply in the course or furtherance of business. The net effect is that these transactions are made subject to the standard conditions under which VAT is chargeable. VAT is normally chargeable on the supply of goods or services for consideration by a taxable person in the course or furtherance of business.
Amendment agreed to.
I move amendment No. 98:
In page 131, line 5, after "other person" to insert "or person connected with that other person".
Amendment agreed to.
I move amendment No. 99:
In page 131, between lines 16 and 17, to insert the following:
"and
(b) by the insertion in paragraph (b) of subsection (6) after ‘supply' of ‘other than a supply of immovable goods to which the provisions of subsection (5) apply'.".
Amendment agreed to.
Section 109, as amended, agreed to.
NEW SECTION.
I move amendment No. 100:
In page 131, before section 110, to insert the following new section:
110.—Section 5 (inserted by the Act of 1978) of the Principal Act is hereby amended in subsection (5) by the insertion after ‘the service' of ‘has established his business or'.".
This amendment to section 5(5) of the VAT Act provides that as a basic rule the place of supply of services is the place where the supplier has established his business or where he has his fixed establishment. The amendment brings Irish law directly into line with EU law as set out in the European Commission decision of 31 January 1994 and confirms Revenue practice in this area. In particular, the intention behind the amendment is to ensure that cross-Border leasing of vehicles continues to be liable to VAT in the country where the vehicles are used. The amendment will have effect from the date of the passage of the Bill.
Will this amendment affect me as a barrister? As I understand it, if I supply advisory services in London, I am not liable to Irish VAT, but does the amendment mean that my business is established in Dublin and I am liable to VAT?
I will have to take advice on that matter. I have a long and complicated note which states "No".
I thoroughly approve of this amendment.
The explanatory memorandum states that this section relates to taxable persons, while section 123 deals with sports facilities and green fees, etc. What is the purpose of section 110?
It is a different matter altogether. This is an anti avoidance measure which is giving effect to a European decision.
Section 110, according to the explanatory memorandum, also refers to section 123.
I will try to assist the committee. This section makes two amendments to section 8 of the VAT Act, which defines a taxable person for the purposes of VAT. The purpose of the amendments is to bring specified sports and leisure services within the charge to VAT.
The change in subsection (a) is purely technical. Under existing law, a ministerial order is required to charge VAT on services supplied by the State or local authorities. The changes in the taxation of golf and other sports provided for in the Bill may require the taxation of local authority sports facilities. To avoid the need to issue a separate ministerial order in each case, section 8 of the VAT Act is being changed. Where local authority sports facilities are being taxed by the other provisions of the Bill, the relevant orders are deemed to have been made. The change in subsection (b) is an enabling provision. It inserts a new subsection (3) into section 8 of the VAT Act covering sports facilities in general. Under the new provision the Revenue Commissioners are empowered to make the ruling subjecting normally exempt sports services to VAT where the relevant turnover exceeds £20,000 per annum, and they are satisfied that the following conditions prevail: the exemption of the service puts a commercial rival at a competitive disadvantage or the service is actually a commercial one operated behind a not-for-profit facade.
These measures are a necessary reaction to continuing complaints from commercial operators of sports and leisure facilities. The commercial sector argues that it is being undercut by VAT free services provided by currently exempt bodies. Gyms, aerobic classes, and the like have all made complaints to this effect. The claimed distortions of competition tend to be local. Unlike in golf there is no strong evidence of systematic distortion throughout the country. Nevertheless, there may well be cases where a local commercial operator charging VAT is undercut by a community or a member-only sports club offering services to the public free of VAT. The impact on a business of unfair competition like this can be quite severe. In recognition of this the new subsection gives the Revenue Commissioners the ability to take a targeted approach to eliminating the problem. Where a distortion is evident VAT can be imposed. It is not possible to estimate the yield from this measure and in any event its purpose is not to raise revenue but simply to maintain fair competition.
This will not be generally applied?
Let me give you an example involving a local community school hall — exempt from VAT because it is a school — which runs a course open to any member of the general public, not just the parents or children of the school, and charges a commercial fee. Down the road, meanwhile, person A has set up a commercial sports and leisure centre, doing aerobic and other fitness classes. That person is tax compliant, registered for and charging VAT, as required by law, while up the road person B is undercutting person A by 10, 15, 20 or 30 per cent. On foot of complaints brought to the attention of the Revenue Commissioners, person A says "Look, whatever about the community school up the road providing a service to its members, person B is running a commercial service directly competing with me and is VAT exempt. That is unfair."
This provision, if enacted, will enable the Revenue to respond in a targeted manner, not a general one.
That is fair enough. Is this the only section dealing with golf clubs and green fees?
No, there is another one.
Section 123 is the one that deals with the general situation, so we can ask questions on that if necessary.
I welcome this measure because I have been plagued by people claiming that they are being damaged. The usual thing is similar to the pattern referred to by the Minister where in a place like a community hall athletic facility somebody comes in off the street and offers aerobic classes. The person who is trying to run an aerobic studio down the road finds that by hiding behind the community club somebody is effectively competing on unfair terms. By having a series of, say, five aerobic instructors — none of whom reach any VAT threshold and are, therefore, not liable for VAT services themselves — they can have a huge turnover between them but individually they are below the threshold. The sponsoring body or corporate umbrella under which they operate is VAT exempt. I fully support this and I have been nagging various Ministers to do something about it for a long time.
This measure may not address all the concerns to which the Deputy referred if it is carefully structured in the manner he described, because there is a threshold of £20,000.
I ask the Minister to look at that.
Where a group of people collude and where it is, in fact, the one service and marketed as one service but there are five operators so that they get in under the VAT thresholds, I am sure the Revenue have existing powers to load them.
I am sure they do.
Where it is manifestly a device to evade what would otherwise be a VAT threshold, we will certainly look at it. The point is that where you have such cases — clearly you do, and we might share some similar cases given our constituency — it is grossly unfair. As I said, this is designed not as a revenue collection measure but as a fair competition equality one. Anybody who has a complaint can now bring that directly to the Revenue Commissioners and this provision will for the first time gives Revenue the powers to intervene in a way that they did not have before.
In that context, I hope that if any club or community centre says that there are five trainers or five separate individuals providing this service, the Revenue Commissioner will operate on the basis that the whole club is providing the service.
I understand what the Minister is trying to arrive at in this section and I commend him for making an effort but a balance has to be struck which is difficult in this area. No one wants to put out of business the local hall in some rural town where the local GAA club gets somebody to run fitness classes for local ladies. On the other hand by doing that people in that business are being put out of their legitimate businesses. Like the Minister and Deputy McDowell, I met such organisations and received representations from them. They gave me some alarming figures which demonstrated that about 38 fitness clubs have gone out of business in Dublin in the past year or so because in halls throughout the city such individuals are charging a few pounds an hour. Some of them are doing it as a business but some are not. Legitimate clubs, as part of their services, also have people in to provide fitness and leisure classes. It is very difficult to strike the balance in this area.
The Minister made an effort through the Finance Bill for the Revenue Commissioners to decide what a competition distortion is. It must be a first for a Finance Bill to include a provision asking the Revenue Commissioners, on foot of a complaint, to decide whether there is competition distortion. Perhaps the Minister would consider doing it another way. Some years ago an anti-avoidance measure was brought in regarding liquidator sales, for example. It was felt that if a liquidation sale of equipment was being held in an hotel and if the people buying the equipment were from outside the State, there was an obligation under the Finance Acts making the hotel or institution responsible for making a return if required by the Revenue Commissioners to get over that problem. Maybe an extension of that type of thinking into some section of the Bill is required. I see great difficulties because the Minister is doing his best to try to eliminate distortion but nobody wants to have the job of ringing up the Revenue Commissioners to say that in the hall down the street some people are operating a service. The Revenue then has to investigate and the person who complained would be found out, so you would have all types of difficulties. I commend the Minister for making an effort. I do not know the answer to the overall problem but I know that many legitimate firms have been put out of business as a result of unfair competition. On the other hand, we do not want to stifle initiative.
We have quite a number of speakers on this section and I ask people to be brief because we have a lot of sections to deal with.
Over the last couple of years, because of personal experience in dealing with golf clubs, I have seen the effect of non-commercial clubs on commercial ones. I am glad that something has been done. Of course, everyone will want to have VAT removed and while that cannot be done it now provides a more level playing field.
A level golf course.
Yes, for beginners. With regard to the 12.5 per cent tax, green fees are referred to. Does that apply to membership fees in the commercial clubs?
It arises later, in section 123.
We can discuss it then.
This responds to the complaints referred to by Deputies McDowell and McCreevy. It is an enabling provision which can be triggered off in the first instance by a complaint by someone who feels aggrieved who can go to Revenue. The Revenue is not there necessarily to enforce competition legislation but to enforce this European provision. This allows Revenue to do this in a way in which it was not possible in the past. There is also an appeals procedure so this is in accordance with all normal requirements.
I understand the raison d’�tre of the section but I am concerned that local authority golf clubs are now included because people who use those facilities are not from the deep pocket brigade. Even though the facility must earn in excess of £20,000 in turnover before being in the net, I am concerned.
While this is a targeted measure, it is unusual that Revenue will have to evaluate where distortion arises. There may be a plethora of appeals because everyone who will be subject to this tax will exercise the right to appeal. Legislation should not be introduced without setting out the factors to be taken into account, otherwise it becomes subjective. What one person in the Revenue Commissioners sees as distortion may not be seen that way by another.
As Deputy McDowell said if four of five people provide sporting or fitness services, it will be difficult to encompass them within a club if they are sub-contractors providing a service. I do not suggest this will provide jobs for legal people in the future but I can see problems arising.
I will reserve my comments for section 123 because as I understand it section 110 does not relate to golf clubs.
I will allow a discussion on both.
Thank you, Chairman, but there is no point talking about my concern until it arises.
I appreciate what the Minister is doing but I fundamentally disagree with the other speakers. To follow what Deputy Penrose said, to my knowledge the revenue raised in this area at present is negligible. I would have preferred the Minister to remove VAT from these activities. There are much wider implications relating to questions of health and social deprivation, in many areas where these facilities are provided.
The provision uses a sledgehammer to crack a nut. I am not aware of a plethora of privately run organisations outside Dublin or what income they generate; perhaps one or two generate substantial moneys. I am concerned because the people who use local authority facilities are by no means all wealthy. In many cases these facilities are used by unemployed people who want to take a healthy attitude to living.
Rather than enact this technical and subjective provision, why not remove the VAT? To give an example from Waterford, we have removed rates on all sporting organisations to take a positive community lead in developing them giving access to a wide range of people.
How did the Deputy do that?
We gave them a grant for the equivalent of the rates.
Did you employ a barrister?
No, Waterford Corporation cannot afford expensive barristers fees, as the Minister knows. There is a bigger question. I appreciate what he is trying to achieve but he should do the opposite to what he is doing. I disagree firmly with what others have said.
In response to Deputy Cullen all those who wrote to me would love to have been exempted by the Department of Finance also. They were told the EU would not allow it.
There are wider implications.
There is more leisure time and there are more people unemployed. I agree with Deputy Cullen that we should seek to make this affordable to more people, some of whom get into trouble because they have nothing to do. Deputy Penrose mentioned local authority facilities. Local authorities cannot reclaim VAT because they do not pay it. Will they be able to reclaim for this?
Yes, for related activities.
In other words the costs of developing and maintaining a golf or pitch and putt course can be offset in the future, although it cannot be at present - so they may make money.
I appreciate the provision is technical and I am the first to admit that law on VAT is quite complex. However I assure Deputy Cullen this will have no effect and will not be triggered where there is no distortion of competition. In an inner city community where someone provides this service VAT free and no-one else in that area is providing a service which is being undermined by the first service, there will be no disruption to that activity. The issue will only arise where someone registered for VAT and providing a commercial service can clearly demonstrate their trade is being undermined by the other service. What has happened, as Deputy McDowell can testify, is that people developed a business and a market and someone next door undercut them.
Aerobic instructors moved from community centres and took clients with them.
I thought those were the market forces the Deputy wanted to encourage.
They are unfair market forces.
Deputy Cullen asked why these services were not exempted from VAT. We do not have that discretion because VAT legislation is European legislation which we have to administer. We are trying to give the Revenue Commissioners a light hand, with discretionary powers which would only be triggered if a bona fide person whose livelihood and business was seriously undermined. The Deputy’s colleague said 37 of these clubs disappeared in Dublin in the last few years. There is a VAT threshold before this would be effective so local community operations in unemployment or low income areas would not be in this league.
What about local authorities? My local authority built a public regional sports facility and has reinvested every penny and borrowed to build new facilities. We generate more than the threshold, perhaps up to £70,000. For that we have developed a par 3 golf course, tennis and basketball facilities, etc. Much of the funding for that is generated by people hiring the hall for indoor five a side soccer nights. We generate £50,000 or £60,000 and we employ staff. It is a permanent set which we will now develop into a major 18-hole municipal golf facility and replicate other facilities in different areas of the city. We desperately need this revenue if we are to continue reinvesting in communities, in particular, deprived communities. Will the Minister assure me that that sort of revenue will not be affected? If someone opens up a comparable facility up the road and, when this Bill is enacted, decides to object, where will we stand?
It seems there are two options. If there is no competition distortion, then it will not be touched. If there is competition, one option - this would be subject to confirmation and Deputy McDowell might offer legal advice on it - would be for the local authority to establish a limited company and register for VAT. I am assuming that the centre in Waterford is not registered for VAT.
It is very difficult to do that.
The local authority has the powers under local government legislation. I would certainly favour that because then the authority would get all the benefits of being registered for VAT.
The end result could be that the local authority might be able to reduce its prices and, therefore, intensify the competition.
How would the private enterprise compete with the local authority enterprise? There is a similar situation in Galway. There is no way that private enterprise could compete with that. We are struggling, like Deputy Cullen in Waterford, to keep our enterprise going.
I agree with the Minister. What I understand, having listened to him, is that wherever there is competition, this section will be applied.
There is slight confusion. Some Deputies referred to golf. We are not talking about golf: we are talking about sports facilities.
I am not talking about golf. I understand, from what the Minister said, that where there is a distortion of competition, the section will apply. Does the Minister not see a difficulty in rural areas, where one town might have a private facility and could legitimately claim that there was distortion with the result that the other facility in the town would be obliged to pay VAT, whereas in a neighbouring town there might be no competition and the community facility would be exempt from VAT? Will this not cause another problem?
The aggrieved party would have to lodge a complaint with the Revenue Commissioners, who would have to satisfy themselves that the case was made. An appeal mechanism is also provided.
Can a local authority go to the Revenue Commissioners and ask to be registered for VAT?
It can set up a company under existing local government law.
Under this section, does it not have to set up a company?
No.
The Revenue Commissioners can say it is liable for VAT for a particular service. Can a local authority actually do the reverse and ask to be registered for VAT?
It cannot voluntarily register for VAT under existing legislation. A local authority is not eligible to be registered for VAT and is not in business. I remember when I was a member of Dublin City Council discussing this at some length with the City Treasurer, Mr. Redmond. Local authorities have a competitive disadvantage in relation to certain services. The way to do it - and the powers are in the legislation - is to set up a company in the normal way. Such a company is in business and, therefore, benefits from VAT inputs and outputs.
I accept the point the Minister is making but, if is that simple and in the interests of local authorities, they would have all done it long ago. I cannot think of the precise reason it has not been done. While the Minister is well intentioned, I am becoming deeply concerned. I can see a situation, as mentioned by Deputy Penrose, where one has an official of the Revenue Commissioners in the local area, who is well disposed to such activities and who, if he was a sporting person, would take a positive attitude. It is equally possible that he might have no interest in sport and view it as bothersome and would not be keen on making a judgment. That is not trying to be unfair: I do not want to put people in that situation. I know many employees of the Revenue Commissioners and I have discussed the issue of golf courses with them. They wonder if the reverse would be far simpler and far more encouraging than the approach being taken.
Let us leave the question of golf aside for one moment.
I am leaving it aside.
Under European Union VAT law, local authorities are required to be exempt. That is covered by section 4 (5) of the Principal Act. However, they are required to be taxable where their treatment as non-taxable persons would lead to significant distortions of competition. In those circumstances, the Revenue Commissioners have to be satisfied that there are significant distortions of competition and there is an appeal mechanism in place in that regard. The Deputy is opening Pandora's box.
Does it not, in fairness, have to be a two-way street? The Revenue Commissioners cannot come the heavy with local authorities when they have an advantage and not concede to them when they are at a disadvantage. It has to be fair. In the vast majority of cases, local authorities are paying VAT and not receiving rebates.
Again, to refer to my experience on Dublin City Council, there is nothing to stop the local authority, in this instance or in the example Deputy Cullen referred to, setting up a company registered for VAT to get all the advantages of being in the market-place for that service. There is no distortion of competition of a VAT related nature. I recommend that local authorities do it.
On balance and having heard all the arguments, we should pass this section and review it in a year's time. The Minister's intent is a noble one. It is hard to balance the arguments on this issue. We do not want to distort competition and put legitimate operators out of business by unfair competition. On the other hand, we want to recognise the points made by Deputy Cullen, the Chairman and others. It would be no harm to go along with the Minister's intention for this section and it can be reviewed after a year. The Revenue Commissioners are being put in the position of having to decide many issues. The Minister has made a fair attempt to balance a difficult situation. There are competing interests on this issue. I am satisfied that the intent is good, I recognise what others have said and I would like to see how the section works.
It will probably only work by having the subtle effect that anyone thinking of using GAA clubs and rugby clubs for VAT-free competition with existing facilities will think twice about it.
I would be happy to come back next year, assuming I am still Minister for Finance, and give a report. Deputies are free to seek information in relation to it. It might have a deterrent effect, as Deputy McDowell said. Deputy McCreevy's proposal is reasonable. If we enact it now, we will certainly review the section at the end of next year, give a report on its operation and make whatever changes might be considered necessary.
Would it be more realistic to say two years?
Yes.
I am informed that, because of the way VAT is charged, this provision will not apply until 1 January 1996.
I suggest that the way it will apply will have no effect on local authorities and such groups. It will have an effect where there is a fear of somebody setting up an enterprise and someone else complains that they would not be liable to VAT. They would be liable to income tax and it might put individuals off doing it like that. I suggest it would have such an effect, knowing how people operate.
Let us conclude on this subject with the Minister's undertaking that we revisit this issue in two years' time.
Amendment agreed to.