Special Committee Value-Added Tax (Amendment) Bill, 1977 debate -
Thursday, 2 Nov 1978

SECTION 13 (Resumed).

Mr. Cogan

I want to clarify something. When we adjourned the last day we were talking about goods which are imported and the payment of VAT before the goods are cleared by customs. I understand the position is that all goods other than two-tier goods can be cleared from customs without paying VAT. Two-tier goods would be cars, radios, television sets and that sort of merchandise. The point I was making on an earlier section was that goods other than those, that is those which are exempt at point of entry, can be marketed to a dummy company. They can be imported by a company registered for VAT, cleared at customs and marketed around the country at clearance sales.

Those are very highly organised people from within and without our jurisdiction. They take over a hotel for one or two days and have massive sales on an organised basis around the country. Before they get into the tax net the company can be wound up. They use fictitious addresses and then go away. They do not pay any VAT. Those people are competing with legitimate traders who pay VAT and taxes and contribute in every way to society. Is there any way we can get around this? I am not objecting to those importing radios and television sets having to pay VAT but why not have the same enforcement right across the board?

Minister for Finance (Mr. Colley)

First of all, I want to apologise to Deputy Cogan. I am afraid I misled him and the Committee slightly on the last day. When he referred to a payment of £12,000 which he had just had to authorise I said that VAT was not payable on importation. What I said was correct except that there is one category of exception to it, which is, as Deputy Cogan has indicated, the category where there is a two-tier VAT such as cars, radios, televisions and so forth, which was what he was referring to the last day. We were slightly at cross purposes. I would like to apologise in so far as I misled the Deputy and the Committee in that regard. With regard to the other question he has raised, we are about to deal with this to some extent on amendment No. 33. If I move the amendment and explain what is involved it might help to clarify the position a little.

Chairman

Will the Minister move amendment No. 33.

Mr. Colley

I move amendment No. 33 :

In page 17, to delete lines 7 to 15 and to substitute the following

" (7) Regulations may—

(a) make provision for enabling goods imported by registered persons or by such classes of registered persons as may be specified in the regulations for the purposes of a business carried on by them to be delivered or removed, subject to such conditions or restrictions as may be specified in the regulations or as the Revenue Commissioners may impose, without payment of the tax chargeable on the importation, and

(b) provide that the tax be accounted for by the persons or classes of persons aforesaid in the return, made by them under section 19 (3), in respect of the taxable period during which the goods are so delivered or removed.".

This amendment is concerned with the provision for allowing registered traders, in effect, to import their business requirements without payment of VAT at importation subject to certain conditions. It provides that the deferment of tax at importation may be restricted by allowing it only to such classes of registered persons as may be specified by regulations. It is intended at this stage to invoke the proposed provision so as to exclude from the tax deferment arrangements those traders whose trading operations in this country are not carried out mainly from a fixed place of business here. Under this proposal mobile traders—whether Irish or not—arriving here from outside the country will be required to pay tax on their full stock at importation and on making a return of tax on their sales within the country will be allowed a credit for the tax paid at importation in the normal way.

Other registered importers will be allowed deferment of the tax payable at the importation on condition that they account for it in their next return when they will, at the same time, be allowed a tax deduction where the goods in question are for use in a taxable activity and qualify for relief. However, where a person who has been allowed deferment of tax at importation fails to account for the tax on his return it is proposed to take power in the regulations to enable the deferment procedure to be withdrawn from him by notice in writing in respect of subsequent importations and to require him to pay tax at importation.

As of now, subject to the exception I have mentioned, the position is that VAT is not payable on goods at the point of importation. Under the directive it is necessary to apply tax at importation but, for a number of reasons, including the fact that if this were applied right across the board it would affect the liquidity of a great many Irish manufacturers, what is being done is that we are providing for tax being payable at importation but at the same time we are providing for deferment for one taxable period of two months in respect of all goods coming in, but we are also providing in this amendment for regulations which would suspend that deferment in respect of certain classes of traders. It is intended that two of those classes will be mobile traders of the kind mentioned and persons who availed of the deferment procedure and then failed to account or to account satisfactorily for the tax on their next return. In those cases they will forfeit the right to deferment.

Mr. P. Barry

Is that meant as a penalty?

Mr. Colley

Yes.

Mr. P. Barry

Their right to deferment would be restored at a later period?

Mr. Colley

It could be restored when they cease to be persons who have failed to pay.

Mr. P. Barry

Which means the next period again.

Mr. Colley

Yes. This is, as I am sure Deputies know, a matter of considerable concern in certain areas, particularly the areas Deputy Cogan has been talking about where without doubt the present provisions are unsatisfactory. While the amendment will not solve all the problems it will, I hope, go some way to dealing with the abuses. There are approximately six groups who stock up a big van with goods in Britain, bring the goods in and register themselves for VAT, and they are entitled as of now to bring goods in free of tax, sell them and then go back to their place of origin in Britain. The Revenue Commissioners are aware of these people; they have interviewed them and they are satisfied that in general the appropriate amount of tax is paid by these people. Those six groups may not encompass all of those Deputy Cogan had in mind, but in any event the position is that under this amendment the mobile trader whether Irish or not will have to pay tax at importation. The person who does not have a fixed place of business within the State will come within that category. Also, people who are importing goods, are registered for VAT, get the deferment of tax and are found not to be accounting for their tax fully or satisfactorily will lose this right of deferment. That is, broadly speaking, the effect of this amendment.

Mr. P. Barry

If it helps to close loopholes it is a good amendment and we should accept it, but the danger of closing loopholes in legislation is that it might affect genuine traders. I presume the Minister has looked into this.

Mr. Colley

As far as we know, no genuine legitimate trader will be adversely affected.

Mr. V. Brady

What the Minister is saying in effect is that this amendment will not change in any way the option that legitimate importers have of paying VAT on sales.

Mr. Colley

It will not affect that.

Mr. P. Barry

It does not solve the problem I referred to where a store has two kinds of furniture, one kind imported and the other of Irish manufacture. VAT need not be paid on the imported furniture until it is sold but VAT must be paid on the Irish furniture before it is sold. That affects the liquidity of stores as well. This amendment will not make any difference in the situation but it will not solve the problem for the Irish manufacturer.

Mr. Colley

It does not deal with that situation, but I will say a few words about that on the section. Deputy Barry is correct in saying that this does not help Irish manufacturers.

Mr. Callanan

I would like an explanation from the Minister on the point raised by Deputy Barry because I have been approached on it. I would like clarification of the situation where Irish and imported goods are on sale in the same store.

Amendment agreed to.

Question proposed: "That section 13, as amended, stand part of the Bill."

Mr. Cogan

This two-tiered VAT system is very much open to abuse especially in the Border areas where there are policing difficulties. There is a differential in the VAT rate of between 12½ per cent to 40 per cent, and that provides an incentive which is widely availed of to evade the entire VAT system and ordinary taxation on trading profits. The Minister should view that with concern. This is the case particularly in relation to radios, colour televisions and other goods in the electrical trade. This abuse will become more widespread with the advent of RTE 2 because in the south televisions which were not suitable for our transmissions can now use UHF transmissions with little or no modification. There is certainly a big loophole where the VAT system can be entirely evaded by smugglers.

Mr. V. Brady

It is also a question of misinterpretation of the two-tier system, is it not?

Mr. P. Barry

I do not follow that.

Mr. Cogan

In Northern Ireland or in England the VAT rate is 12½ per cent whereas our VAT rate for the same type of goods is 40 per cent. The incentive is there for anyone who wants to bring in those goods and evade the tax system. There is an advantage of 27½ per cent which is big money and the legitimate traders are very much against this being done by organised groups who are prepared to deal here, get credit here and supply goods ex-VAT.

Mr. Colley

As Deputy Cogan knows, I am well aware of the situation and he has ensured that I am by keeping at me. Yesterday I received, at his request, a deputation to discuss this topic. I am aware of the problems but the suggested solution, which relate to the VAT rate that should be applied to these goods is one to which I will be giving serious consideration. Any change in VAT rates would be a matter for the budget, rather than now. I do not quite follow Deputy Brady's interjection about misinterpretation.

Mr. V. Brady

I have experience of some light machinery where the two-tier system operates, the 10 per cent and the 20 per cent. In certain cases the particular machinery which will do a specific job can be rated at 20 per cent but on the other hand one can get a power unit with an attachment to do the same job as can be done by the first machine but it is only rated at 10 per cent. This leads to a certain amount of deliberate misinterpretation by some traders.

Mr. Colley

It will be appreciated that there is always difficulty where one is drawing a line of demarcation between one rate and another and there will always be grey areas. In general, the division includes a division based on a situation. If, for instance, a tractor which is at 10 per cent VAT has a certain attachment which will do a certain job is VAT rated at 10 per cent, whereas a machine to do that job on its own may be at the higher rate. That may be the point Deputy Brady is referring to. If he has details of cases where he feels it goes further than that, and where there is a deliberate misinterpretation for the purpose of getting the lower rate, he should furnish me with the details and I will look into it further.

Mr. Callanan

Smuggling was mentioned during the debate and it puzzles me to know how a person who smuggles can be caught for any VAT charge on either side of the Border. A smuggler would have had to pay VAT at the 12½ per cent rate across the Border but if he is caught on this side he will have to pay at the 40 per cent rate. I should like to know if the people who smuggle have paid the 12½ per cent VAT on the other side before they smuggle the goods down here?

Mr. Colley

I understand that they have but I could not guarantee that.

Mr. Callanan

Therefore, in the event of them being caught they will have, in effect, to pay a total of 52½ per cent VAT on the goods.

Mr. Colley

As I understand the position, if the person from the North is a registered person for VAT in the North while he will have paid 12½ per cent there he will also be entitled to a refund of it as part of his ordinary trading. As regards the question of people smuggling and not being liable, therefore, at all, this is perfectly true but the point Deputy Cogan is making consistently is that if the rate of 40 per cent was reduced the incentive involved would be so small as to mean that the smuggling would cease.

Mr. Cogan

The incentive is 27½ per cent and that is a very big incentive.

Mr. Callanan

Would they be in a privileged position in relation to the goods here then?

Mr. P. Barry

The point is that VAT should be reduced on all goods.

Mr. Callanan

If we decide to reduce the amount of the VAT on the goods that are at present being smuggled are we not discriminating against the people who must pay that percentage here?

Mr. Cogan

I want it across the board.

Mr. Colley

That would cost money, as Deputies will appreciate.

Mr. P. Barry

Deputy Cogan's point is in relation to smuggled goods that are being traded by legitimate traders on this side of the Border. It is my view that another arm of Government might be able to deal with this problem.

Mr. Cogan

I appreciate that the Minister can give us only in his budget speech the figure it would cost, but I maintain that because there would be more legitimate trade more people would be paying VAT at a lower rate. We would also be able to eliminate people who are evading other forms of taxation. I should like to mention that, for instance, television dealers are bound by law to submit details of their sales of televisions to the Department of Posts and Telegraphs for a licence check. There is no such liaison between those traders I mentioned earlier and the Department with the result that there is a loss of licence revenue.

Mr. Colley

I appreciate the point Deputy Cogan is making. In regard to section 13, I mentioned at our first meeting that there were two rather technical maters in relation to which I proposed to bring in an amendment on Report Stage. I stated that I would bring them to the attention of the Committee when we reached them. The first one relates to section 13 and the other to section 21. I am now advised that an amendment to subsection (3) of this section will be required in order to put beyond doubt that customs valuation procedures will apply to VAT in our intra-EEC trade as they will in our trade with countries outside the EEC. The necessary amendment is being finalised with the parliamentary draftsman and, accordingly, I should like to give notice of my intention to move that amendment on Report Stage.

Mr. P. Barry

It is not clear to me what the Minister has in mind. I presume he will explain it on Report Stage?

Mr. Colley

Yes. I am merely giving notice now of my intention to table the amendment for Report Stage. This section contains the provision for the application of VAT at importation. It substitutes a new section for section 15 of the 1972 Act. While the effective position will remain essentially unchanged there will be some minor changes in procedure in order to conform with the directive. For example, at present tax is not charged on imports of goods by a registered person for business use except as we said earlier where the goods are subject to the two-tier VAT rate, such as cars, radios, TV sets and so on. Only the manufacturers and assemblers of goods of that kind are allowed to import them VAT-free. Under the Bill, tax will become chargeable but there is a provision in such cases for deferring accountability for the tax to the normal VAT return for the period in which the importation takes place. At that time the taxable person normally becomes entitled to a matching credit so that the entries in the VAT return are self-cancelling. The section also provides for remission of tax in accordance with regulations in certain cases.

I should point out that although there is no effective change being made here, there is a change being made which could be of importance, namely, that under this provision importers of goods although they get a deferment of VAT on importation will be obliged to include the goods in their returns to the Revenue Commissioners. There is reason to believe that this will improve the situation and possibly even the returns as a result, but certainly will give more control to the Revenue Commissioners and greater ability to check up on what is happening regarding importation of goods and what happens to them after importation.

Mr. V. Brady

I think this is already being done. Importers have to state the value of the imports during the preceding period.

Mr. Colley

While what the Deputy says is correct I think the position is that at present the details required are fairly general. The information which will be required will be much more detailed and because technically imported goods are now becoming subject to being charged tax where they have not been up to now—even though in fact it will be deferred—the various penalties applying to evasion of the charge to tax will apply to failure to give the returns and it is felt that the position will be considerably strengthened in regard to the information available to the Revenue Commissioners as a result.

Mr. McCreevy

Is it intended to amend the VAT return form?

Mr. Colley

Yes.

Mr. McCreevy

There is a section there already applying to imported goods. What change is envisaged in that? It is complicated enough as it is for the ordinary trader.

Mr. V. Brady

As far as I can recall, the section at present relates to specific rates of VAT on imports, for instance so many thousand at 10 per cent, so many at 20 per cent and so on. If the Revenue Commissioners are to require very detailed additional information, it could cause problems for the ordinary business firm.

Mr. McCreevy

In that connection, it is not even made at present. I cannot see what additional information will come from this. There is a form at present and the making of VAT purchases make it imperative that you keep a record of imported goods. What extra information will be brought in?

Mr. Cogan

Is it to avoid mis-description of goods or cargoes?

Mr. Colley

Partly that and partly because the amount of detail required at the moment does not enable the Revenue Commissioners to check up adequately on what happens to the goods afterwards. There is a suspicion—I put it no further than that—that in some cases there is understatement in relation to goods imported and it is hoped that this provision in section 13 will achieve a situation where there will be less opportunity for such understatement.

Mr. McCreevy

It is then intended to require specifically on the VAT form greater information on these goods? Will it apply the same principle as to goods that are purchased within the State, that usually you just put down the name of the supplier and the VAT people can check the invoice against this? Is it intended to require greater detail about the goods, that we will have to name what is on the invoice for the VAT return?

Mr. Colley

The Deputy may take it that the detail required would be somewhat greater but will not be such as to interfere unduly with trading operations. We would attach more importance to the fact that much greater penalties will now apply to a misstatement of the position on the form than apply at present because it is being brought into the charge.

Mr. McCreevy

I suppose the reasoning behind it is that until now there was no VAT credit effective for imported goods and so it made no difference whether you put them in on the form or not. That is effectively the position.

Mr. Colley

Yes, the Deputy is now getting close to it.

Mr. McCreevy

I understand that. However, since VAT will now be charged on those goods, it will be in the taxpayers' interest to put them on the form.

Mr. Colley

Exactly.

Mr. McCreevy

But one would not leave it out. The only reason one would leave it out perhaps—I am not saying the majority of VAT payers leave out those matters, perhaps an odd person does—would be that one would be getting no money back for it.

Mr. Colley

There is a built-in incentive now to be more accurate.

Question put and agreed to.