Special Committee Value-added Tax Bill, 1971 debate -
Tuesday, 13 Jun 1972

SECTION 5.

Dr. FitzGerald

I move amendment No. 1 :

In page 8, subsection (1), lines 17 and 18, to delete all words after " performance " and insert " for a consideration of any act other than the delivery of goods."

The section as drafted makes the omission of an act or a toleration of a situation taxable. This seems to me to be something which is impracticable. I do not see how you could, in fact, tax something which does not happen. I can see that there is some purpose behind this and that somebody might, indeed, refrain from doing something for a consideration and such a situation could arise. I can see the Revenue Commissioners, who are anxious to cover every possibility wanting to cover this, but the impracticability of tracking down such situations would make anything of the kind really void from uncertainty. It seems to me a mistake to attempt to legislate in a way which is not going to work in practice. I note in the British Bill there is no similar wording. The British Bill, in fact, defines " service " as something which is done for a consideration. I am also inserting the words " for consideration " and I will come back to that in a moment. I suggest it is a mistake to try to tax omissions or tolerations of situations and that this is unworkable.

The second point is that unless something is done for a consideration it should not be taxable because what can you tax? The insertion of the words " for a consideration " is necessary in order to make this sensible at all. I think a later amendment of mine, if I can find it, may be consequential on that. It would be tidier if I could find the amendment but I will leave it for the moment.

Mr. Colley

First of all, as I think Deputy FitzGerald recognised, there are circumstances in which refraining from doing certain things can be something for which valuable consideration is paid. I will come to the question of consideration in a moment, which is a separate point brought in in the amendment by Deputy FitzGerald.

Mr. Tully

They also serve who only stand and wait.

Mr. Colley

Let me give you perhaps an extreme example which does not apply so much in this country but might in the future. Take a prominent film actor who has made a number of films. I understand it is not unknown for the studio to whom he is contracted to pay him a large sum of money in consideration of his not making any more films for another five years so that they can exploit the films they have made and prevent anybody else making further films with him. This is an extreme example but this is worth a considerable sum of money and therefore comes into the category which in the normal way would attract tax.

Secondly—I think this, perhaps, might appeal to Deputy FitzGerald particularly—the second EEC directive in regard to value-added tax specifically requires that certain services of this kind be brought within the scope of VAT. The Second Directive, Annexe B, Item No. 9 is:

The discharge of an obligation not to practice in whole or in part a professional activity or exercise a right specified in the present list

So that the concept is not alone one that we can visualise but is one that is operative in the EEC and which they visualise as requiring to be covered by the VAT.

On the question of consideration, I would agree with Deputy FitzGerald that in the normal way if there is no consideration there cannot be liability to tax. But there can be certain circumstances in which the question of a liability to tax should arise. This is visualised in subsection (2) of section 5 which provides for the possibility of charging what is known as a self-service. If a company is rendering certain services to itself in such a way as to distort competition between itself and others it could well be that it would be necessary to impose value-added tax on that service in order to ensure neutrality in competition in so far as the value-added tax incidence arises. For these reasons I do not think this amendment should be accepted.

Dr. FitzGerald

On the point about the film actor I can see a very good reason for applying income tax and surtax to such a payment but, whatever it is, it is not value-added or a service rendered and it is straining language and concepts to suggest it is. When the Minister says that this is something which should be brought to tax he is perfectly right about income tax and surtax. We are not talking about them. We are talking about the adding of value in the rendering of services. For somebody to agree not to do something is not, in fact, adding value or giving value and it does not seem to me to come within the framework of this tax.

With regard to the EEC directive I wonder whether, in fact, it can be as binding as the Minister would seem to suggest because, if so, one is puzzled as to why it seems to be omitted from the British legislation. They are just as much bound by the EEC as we are. Secondly, in so far as the EEC directive is binding I would like to know why it does not appear to be binding in the British legislation, although, perhaps, I have missed something in a section of their Bill to show where it is binding, but in so far as it is binding it seems to me from what the Minister read out that it is much more specific in character and refers to very specific activities or inactivities, as we should call them in this case whereas the wording in the Bill is very much vaguer, so vague as to be impracticable of enforcement. Therefore, even if the EEC requirement is there, I would suggest the wording of the subsection would need to be amended to limit the subsection to what is required by the EEC, if something is required, rather than leave it vague and general as it is in the present wording.

Mr. Colley

I am not familiar with the British Bill, but I would remind Deputy FitzGerald of what I said in the House before, i.e., that the British approach to the VAT is not a good criterion for us because they have to move much further than we have to reach value-added tax. It does seem to me that their approach is a pragmatic one and that they are trying to reach a certain stage and are accepting, by implication, that they are going to move considerably further afterwards. If we want to use a yardstick in this we ought, as far as we can, to use the yardstick of EEC countries which at present apply value-added tax rather than the British approach which, as I have said, is governed by factors which are not relevant in our case.

Dr. FitzGerald

The British Bill is governed by exactly the same EEC obligations as ours. It is, therefore directly relevant to point out that the authors of the British legislation do not appear to have the same view of EEC obligations and I am somewhat puzzled as to why there should be that difference. I can take the Minister's point that, in areas where there is not an EEC obligation, they will perhaps not move as far or as fast as us—and we are ahead of them in the sense of having already an expenditure t�x they have not got—but the Minister's argument is irrelevant to the question of the existence of an EEC obligation, as the British provision is prima facie evidence that there is not such an obligation.

Mr. Colley

I think what I have quoted, which is from the EEC Second Directive on the value-added tax is surely better prima facie evidence than the absence or apparent absence of a similar provision in the British Bill.

Mr. T. J. Fitzpatrick

(Dublin Central): If I commission a person to paint, does that come within the value-added tax?

Mr. Colley

Yes, it would.

Mr. Tully

It all depends on what he is painting.

Mr. Gallagher

Section 5 (1) is a very broad provision. The two examples given by the Minister are not very clear to me. The first one, I would say, would fall due to taxation under another heading which probably is already legislated for, but the second example, the creation of a service that might have been given and not charged for, is a very broad interpretation. There are many occasions when advice is given or when a person will indicate how something should be done. Obviously this service was supplied from somewhere, unless someone can prove that he is an expert in all these matters. I see a danger in that, in the context in which the Minister has spoken. I would like to see this enforced only where a consideration has been paid. To attempt to apply a consideration where there is no consideration could lead to a tremendous amount of argument and disputation subequently with the authority.

Dr. FitzGerald

I would add to that the cogent point that, while the Minister has made a case of sorts for applying taxation where consideration does not pass in respect of an act, he has not and, I think, cannot make a case for applying it where something has been omitted to be done. I do not think the law of any country acts upon the concept of taxing people for not doing something they are not paid for. It is a rather wide basis for taxation. The Minister's point was that the words " for a consideration " are omitted here on the grounds that there might be a non-arms-length transaction within a company which would affect the neutrality of the operation of the tax. I can understand that point, but I am not sure that we have to introduce a dangerous principle simply to get over the problem of the neutrality of the tax. However, when the Minister in the same subsection brings together the performance and omission of acts and omits the words " for a consideration " in respect of both of them, we get into difficulty. Does that mean that not alone do we face the possibility of taxation where a consideration is paid for omitting an act and where no consideration is paid for performing an act within a company and not at arms-length, but that we also have within the ambit of the subsection as at present drafted the possibility of taxing people for not doing something for which they are not paid. That, as I have said, makes it possible for any Minister to just demand any amount of money from anybody at any point by simply saying: " You have not done something; you have not been paid for it, and I want £100,000." Obviously it is a principle of law we cannot accept.

Mr. Tully

We are going around in circles here. I understood the value-added tax applied to added value. If someone is paid—let it be a wage, a bonus or something else—for not doing something, I cannot see that value-added tax would be applicable in that case at all. It simply goes back to the question of whether or not somebody has added value by virtue of something he has done. I cannot see how there could be value-added for something he did not do.

Dr. FitzGerald

Certainly when he is not even paid for it.

Mr. Colley

Could I remind the Members of the Committee that liability for value-added tax arises only in respect of activities or, in this case, non-activities, in the course of trade. That is the first thing to remember. The second thing is that the question of having, if you like, to construct a consideration because no consideration appears on the face of the transaction is not by any means a new concept, and without it the whole system is wide open to fraud and evasion. I am sure Deputies can think very easily of methods by which one might engage in a transaction on the face of which there was no consideration but in which there was consideration in the real sense, that is, that somebody was getting some value in return for doing an act or refraining from doing an act.

Mr. Tully

How does added value come in there?

Mr. Colley

I am coming to that. It is a separate point. I am talking about the consideration at the moment, the question whether there should be consideration on the face of the transaction or not. This is not a new concept by any means, and, of course, if it happened that there was no consideration on the face of a transaction but that the Revenue Commissioners sought to make that transaction subject to tax, then the question of what the tax would be would arise and it would have to be based on the value placed on the doing of the act or the refraining from the doing of the act.

Dr. FitzGerald

By whom?

Mr. Colley

There are other sections where this is dealt with by this way, for example, of taking the open market value. In other words, the method by which the consideration has to be measured is fairly straightforward. What we are really talking about here, as far as consideration is concerned, is a transaction which, on the face of it, does not have consideration but which, in fact, has consideration. This concept is by no means a new one and without it there would be not only in VAT but in many other areas, tremendous room for fraud and evasion.

On the question of taxing a transaction or an agreement not to do something, I want to again remind you that we are talking about a transaction in the course of trade, not somebody doing something that is a once-for-all operation. It is clear enough that there are circumstances in which a person could agree to refrain from doing certain things. Let us leave aside the question of consideration for the moment and visualise a situation in which someone agrees not to do something say for a certain period and gets a very considerable sum of money in return for that. Clearly this is a transaction in the course of that person's trade for which he has been paid.

Dr. FitzGerald

But not value added.

Mr. Colley

I think Deputy Fitzpatrick is about to argue on that one but before he does so let me say that I do not think one ought to try to define this in terms of value added, one ought to do it in terms of the definitions in the Bill because we want to be precise. This is what we have to operate on.

Mr. T. J. Fitzpatrick

(Dublin Central): I am thinking of the case of the manufacturers of a particular product which would carry wholesale tax and turnover tax. If they employ professional advice this automatically will enhance the price of the product but if they do not add it to the product in their manufacturing costs but pay for it apart they can sell it at a lower price. Normally they build in the professional advice. It would carry a wholesale tax and a retail tax afterwards.

Dr. FitzGerald

Is the Deputy not speaking in terms of a particular product? We are talking here about a business which has costs.

Mr. T. J. Fitzpatrick

(Dublin Central): But this is where the costs can be avoided.

Dr. FitzGerald

It pays for services and goods received, it recovers the tax element in them, then pays tax on the value of the services on the goods it sells. If in respect of one particular item a particular cost is not charged to that, the firm must charge it to some other item and as the tax is on the overall transaction of the business I do not think the Deputy's point arises in this context.

Mr. P. Barry

It would not arise anyway because the person to whom he sold the goods would recover that cost.

Mr. T. J. Fitzpatrick

(Dublin Central): But his costings would be lower. The price of the item would be lower.

Mr. Tully

That would not arise at all.

Mr. Gallagher

It is difficult to see what the Minister has in mind. Take the case of a store or shop that decides to liquidate its goods at the best price they can get. Would that be tolerated? Could they be told that they could not sell them for less than they should be sold? There is the question of a film star who receives a sum of money for not making any further films within a period of time. I cannot see any value added there. A man is just restrained from working as hard as he might like to so as to give the film a better opportunity of wider exposure and limit the field. Would it be held that there is a value in this? Take the ordinary warehouse or supermarket with a branch in Ireland and one in England. They have a standard form of presentation of their goods. If some charge is not levied on the goods here in Ireland for the overall policy of the company as to presentation the people here would say some value ought to be added for it because some service was got there. Take even the ordinary small shopkeeper who does not employ a display artist, who does not employ people who will package properly, and you get down to setting out in some kind of order all these services. If you leave them entirely to the Revenue Commissioners you can get into tremendous argument. One is left entirely in the hands of the Revenue Commissioners as to whether one should or should not have these services. As I see it, it passes over entirely to the Revenue Commissioners to interpret and the ordinary trader must accept what they say is the proper procedure.

Mr. Colley

I think Deputy Gallagher is reading a lot more into this than is in it. As I understand him he seems to be suggesting that in effect the Revenue Commissioners say to a small trader: " You have not included the cost of your share of the overheads of the firm that supplied you with the goods. You should add that in and that should be subject to tax." I do not think that arises under the section at all. What is being talked about here is the rendering of the service which means the performance of an act or the omission to perform an act or the toleration of any situation, but what the Deputy is visualising is something quite different, an argument as to whether they are proper returns for the purpose of the tax. That is a different matter. What is talked about here is what should or should not be liable to tax. With regard to this concept of somebody agreeing not to do something, if a business firm pays another firm money for not doing something—for example, not competing with them in a certain part of the country—and pays money for that the firm is getting value for it. It would not be paying money for it otherwise.

Dr. FitzGerald

How are they getting value? They are getting value because through the other firm not acting in that way the first firm is in a position to sell more of its goods and services and to make more money on which it pays tax. One of the objections to this subsection is that it involves double taxation because nobody is going to pay money to stop somebody else doing something unless with a view to enhancing his own return and that extra return he gets will itself be taxable. You must not tax that transaction twice.

Mr. Colley

Surely that is not what you are doing. You are taxing those transactions in which he indulges which are clearly taxable. What we are talking about is the transaction whereby he pays somebody money not to compete with him.

Dr. FitzGerald

Why?

Mr. Colley

If he pays money he is getting value. To say that this is the same item for which he again is subjected to tax in the course of his normal business in selling more goods is stretching the meaning much too far and in a way that should not be followed at all.

Dr. FitzGerald

It is not stretching it at all. The only conceivable, sane and rational reason for paying somebody not to do something is that one expects to get a benefit through selling more of one's own goods or services as a result. That extra benefit when it accrues will be taxable so if you are going to also tax the payment to the man for not doing it you are taxing the same transaction twice.

Dr. O'Donovan

I think this frequently happens.

Dr. FitzGerald

The purpose of this Act is to avoid it; it is not a cascade tax, it is value-added tax.

Dr. O'Donovan

I am afraid that is highly theoretical.

Mr. P. Barry

Does the money paid not become part of the value, adding to the raw materials and, therefore, it is taxed at that source?

Dr. O'Donovan

If this be the law, that the amount paid to the other man will be——

Mr. P. Barry

Will be taxed a second time.

Dr. O'Donovan

Will be included in their calculations.

Mr. P. Barry

That is right. The Minister is proposing that 5 per cent tax will be added but is also proposing to tax, at whatever the rate is, the amount of money paid as well.

Mr. Colley

When we are talking about value-added tax in this context, the person who is trading and who pays the tax on the agreement not to compete is the recipient of the money. But a credit may be claimed for that tax and similarly the other transaction by the person who paid the money, when he pays tax on his transaction, he can claim credit for that tax and this is why Deputy FitzGerald was right in saying that it is not a cascade tax. Similarly the argument being made that we are taxing twice is not true because the people concerned can claim credit for tax.

Mr. Tully

Where the question of tax twice came in was in fact that it was income and would be taxed in the normal way, whereas taxation under VAT should not apply to something like this as it is being taxed under a different heading altogether. It was the Minister who referred to it at an early stage.

Mr. Colley

That is why I said at the beginning that we are talking about this in the context of value-added tax and in that context there cannot be an element of double taxation here.

Mr. Tully

It does appear that this is introducing exactly that.

Mr. Colley

No, because anybody who pays value-added tax and is an accountable person will pass on that tax to the other accountable person who may claim it as a credit from the Revenue Commissioners. In other words, he is merely a conduit pipe—he is not actually bearing the tax.

Mr. Tully

In the normal way, that would be so, but not here, because this is a different situation. Where can he pass it on?

Mr. Colley

Which person is the Deputy talking about?

Mr. Tully

I am talking about the last fellow who receives it.

Mr. P. Barry

The recipient of the consideration.

Mr. Tully

Yes—in what way can he recover that?

Dr. FitzGerald

To whom does he pass it on?

Mr. Colley

He does so in the course of business.

Mr. Tully

Take the case of the film star.

Mr. Colley

If he is not, he does not become liable to the tax which applies only in course of trade.

Mr. Tully

The only example the Minister gave was the film star.

Mr. Kenneally

Take the case of a petrol company. Suppose they go into a small area where there is a competitor of theirs. Could they not go to the particular man who has these pumps and his sales are so many thousand gallons a week and say " we are building a new station across the road and our product is the same as this crowd's product. If you take our products, even though we cut down your sales to a thousand gallons a week, we will give you a hand-out every week ". The only reason they will do that is to enhance their own sales, and they get full whack there, and they are going to phase off what are his earnings. I think that what the Minister is getting at is the money which they pay him across the road, letting him keep his premises open but keeping his income or profit up to what it was. Is that the money you want taxed?

Mr. Colley

Yes, the money he would receive would be taxable under this provision, but he would continue to carry on his business and would, therefore, be entitled to pass on to the payer a claim to credit for the tax he suffered on that transaction. In other words, he is not in fact, paying tax; it is counterbalanced by a credit.

Dr. FitzGerald

For the purposes of the consumer he is paying tax twice.

Mr. Colley

The ultimate consumer is paying but not twice, because of the structure of the tax. It is not a cascade tax.

Mr. Tully

Maybe I have not grasped it properly, but it has been said that if there is a hand-out every week to a garageman—if he is selling X amount of petrol and replacing it with the product of another company for which he is getting a hand-out every week, in what way is it suggested that he can recover because he is selling the same amount of petrol, the handout being simply for having a particular brand? It will not affect the volume he is selling.

Mr. Colley

But the amount of tax credit which can be claimed is not related to his turnover but to the amount of tax suffered. in other words, if, on his turnover, he would pay £500 tax, but because of this special transaction, would have to pay another £500, he can pass on the second £500 to the payer who may claim it as a credit or, if he has no liability to tax in that period, he can get a refund of £500 from the Revenue Commissioners. He is not going to have to pay the tax twice.

Mr. Tully

Where is the point then?

Dr. FitzGerald

He either gets more money or he does not.

Mr. Colley

He does not get more money, but the object of this is to ensure that all taxable transactions, using the phrase loosely, as it may be subject to argument, are brought into the net. If we do not do that, we leave loopholes by which people who should be liable to tax can get out legitimately and not be liable.

Dr. FitzGerald

The Minister is avoiding the point.

Mr. Colley

I am not, not consciously.

Dr. FitzGerald

Either the revenue collects the tax—two lots of tax—and keeps it or it does not because the man who is taxed gets it all back again and the transaction is pointless.

Mr. Colley

No. The whole basis of the value-added tax, looking at the structure of it, is as I have described, that in the course of the chain from the manufacturer to the consumer somebody in the middle suffers tax on what he buys in, charges tax on what he sells, sets off one against the other and in effect does not suffer tax at all.

Dr. FitzGerald

He passes it on?

Mr. Colley

Yes.

Dr. FitzGerald

How does a man pass on to the ultimate consumer the tax paid in respect of not doing something because nobody is consuming his not doing something? How does he sell his non-action? Either he sells his non-action in some way to an ultimate consumer who then pays more, in which case there is double taxation and two lots of consumers are taxed on the same transaction or he does not. The Minister cannot have it both ways.

Mr. Colley

I do not follow the Deputy on that.

Mr. T. J. Fitzpatrick

(Dublin Central): You must perform something before there is tax.

Dr. FitzGerald

Take the case of the film star who says that he will not appear in any other film with anybody else for the next year while his film goes the rounds so that the company can make more money. He gets money, and he pays income tax on that money, but if he is going to pay VAT also on that because it is part of his trade to make films, although now it is part of his trade not to make films, to whom does he pass it on? Either he passes it on to somebody and I cannot conceive how, in which case the consumer is paying twice or different consumers are paying for the same transaction or he does not pass it on, in which case he has to carry it.

Mr. Colley

Would the Deputy follow what I think would be a more realistic example? I said, when I mentioned the film star, that it was one which did not really arise in this country. I think we can understand it better if we talk about two business firms, one of which pays a sum of money to another. Firm A. pays a sum of money to Firm B. in consideration of Firm B. not competing with Firm A., say, in the province of Munster. Let us suppose that is the transaction. In that case, let us assume there is a sum of £10,000 paid by Firm A. to Firm B. Firm B. then, as the recipient, becomes liable for value-added tax on that £10,000. Firm B., in the course of business, will ordinarily be liable to value-added tax and can claim a credit for the value-added tax paid on that £10,000 against the firm's ordinary liability for tax.

Dr. FitzGerald

The firm does not pass it on to the customer.

Mr. Tully

The firm recovers it. How would it be value-added? In what way is that £10,000 value-added? What is the value added to?

Mr. Colley

I think the Deputy will agree that it is value because otherwise money would not be paid.

Mr. Tully

It is unearned income which will be taxed under a different heading.

Dr. FitzGerald

The value-added tax does not go on incomes so why should it go on this?

Mr. Tully

This is the point.

Mr. Gallagher

A simpler point occurs to me. We will leave the film star out of it altogether.

Dr. FitzGerald

I want to go back to him.

Mr. Gallagher

We will leave out the arrangement between the Dublin firm and the firm in Munster but take the business of a public house. You decide not to trade. You have left your house and you decide not to trade and in consideration of not trading you will, say, for a period of five years, get a sum of money.

Dr. FitzGerald

From another publican?

Mr. Gallagher

Yes, from another publican. Is it the intention that that sum of money will attract value-added tax when, in fact, it only means that the business that was done in Pub A will now be done in Pub B.

Dr. FitzGerald

From another publican?

Mr. Gallagher

Yes, from another publican. Is it the intention that that sum of money will attract value-added tax when, in fact, it only means that the business that was done in Pub A will now be done in Pub B.

Dr. FitzGerald

And taxed in Pub B.

Mr. Gallagher

Yes.

Mr. T. J. Fitzpatrick (Dublin Central)

That would not be subject to value-added tax.

Mr. Tully

This is the whole point.

Mr. Colley

Did Deputy Gallagher say that the man who was getting this money was going out of business?

Mr. Gallagher

No, I said that he was closing shop and would sell out his business, say, for a period of five years.

Mr. Colley

If he is going out of business for five years he is going out of trade.

Dr. FitzGerald

That is not so, because he may have a shop beside it. He is not going to operate his public house licence.

Mr. Colley

Now, this depends on whether he stays in business or does not. If he does not stay in business the question of tax does not arise. If he stays in business then the position is that he gets this money in return for not carrying on a pub business for five years. That money which he receives is subject to value-added tax. I am afraid what I described earlier was inaccurate. I said B accounted for the tax and claimed a credit. What actually happens is that B gets this money and it is subject to tax, but he gives A, the man who gives him the money, an invoice showing the sum received plus the tax. The man who got the invoice—A—then claims that against his own liability to VAT.

Dr. FitzGerald

The invoice is passed on to the person to whom payment is made.

Mr. P. Barry

That is not the person who makes the payment.

Mr. T. J. Fitzpatrick

(Dublin Central): Let us take the case of two shops. I buy one shop and close it down. Do I pay value-added tax on that? Up to now we were giving money not to do business but I am going to buy this business and close it up. What will happen that transaction? Say it is £6,000. If I give £5,000 to a man not to trade for five years is that subject to value-added tax?

Mr. P. Barry

Deputy Fitzpatrick's point is that if he receives the £6,000 the way he receives it is an invoice for £5,000 with a tax element of £1,000 and the person who gives him the money claims a refund of tax.

Mr. Colley

That is correct but in the situation described by Deputy Fitzpatrick where he is actually closing down a premises that is a capital payment not in the course of trade. It would not be liable for value-added tax where he is actually closing down. It is only in the ordinary course of trade that the liability to value-added tax occurs.

Dr. FitzGerald

Then we will come back to the terms of payment. The man who receives the payment sends an invoice : " To not operating my pub—£5,000 plus £250 tax." What happens the tax payment? Does he have to pay that? He is providing a service.

Mr. P. Barry

No, the man who provides the money.

Dr. FitzGerald

No, the person who normally provides the service pays the tax.

Mr. Colley

He pays the £250. The man who receives the money is liable for the tax.

Dr. FitzGerald

To whom does he pay it? Is it to the Revenue Commissioners?

Mr. Colley

Yes.

Dr. FitzGerald

How does he get it back?

Mr. Colley

By way of either a set-off against A's ordinary liability for tax or, if that is not sufficient, by way of refund from the Revenue Commissioners.

Dr. FitzGerald

He pays tax. How does he get it back again? He is not selling anything.

Dr. O'Donovan

He is in business generally. He is only closing up part of his business.

Mr. Colley

If he is not in business it does not arise.

Dr. FitzGerald

He has not anything extra to claim back because he is not selling something extra. Normally what happens is that you do not mind paying tax on materials you buy because you are going to add value to them and sell them at a higher price. O.K. you get a refund of materials and you pay tax on what you sell. In this instance there is only half of this transaction in question because as the transaction is in respect of doing nothing rather than doing something how can he claim any extra money back as a result?

Mr. Colley

As I said earlier to Deputy Tully, the amount of tax that you can claim back is not related to the business that you do. It is related to your right to claim a credit for tax paid.

Mr. Tully

So, if the pub is attached to a small shop—I have one in mind—where the turnover of the shop is only about £4,000 a year and the turnover in the pub is say £150,000 and the owner of the shop agrees that he will not operate the pub for a period of two or three years. He gets a handover of £10,000 for that and he can write that off on his small shop. In fact, he has his turnover tax paid for years to come and he is collecting at the same time. We should be trying to stop that rather than making it possible for him to do that.

Mr. Colley

It is not a loss of tax to the Revenue Commissioners. We may go off at a tangent if I give an example which is off the point of the discussion but which will illustrate what Deputy Tully is talking about. You can have a situation in which an accountant might install a computer in his office. The amount of tax payable on that could be very substantial. He could have himself registered and claim credit for that and it could far outweigh the ordinary tax liability he would have—far too big for a set-off. In that case he would be able to claim a refund from the Revenue Commissioners. As I say, I do not want to go off at a tangent. I am just illustrating that point. It is not really relevant to the amendment.

Dr. FitzGerald

I am sorry about getting back to this as I know I am misunderstanding the point.

Mr. Tully

We were talking about dealing with section 9.

Mr. Colley

I will try to deal with this difficult point. The point to be remembered, which may be helpful to the discussion here, is that there is a service rendered, whether it is a negative or a positive one. If you have two grocers side by side and one pays the other and says: " You do not sell bread and I hope to increase my sales of bread. You do not sell bread and I will pay you so much a week." There is a service rendered to the person who pays the money. That is the general thing. The person pays money for a service rendered to him and that payment for a service is precisely the same as a payment for any other service. In other words, if you pay money for a service to another accountable person, that accountable person can give you an invoice which will entitle you to a tax deduction. Therefore, as between the two grocers, if the payment is made to another grocer and he is an accountable person, grocer No. 1 will give an invoice showing tax to grocer No. 2 He will give it in the form of a receipt for the money paid and grocer No. 1 will get a deduction for that.

Grocer No. 2 then becomes liable to tax himself on that money he received. Could I say that the wide definition, as I understand it—and that is copied to a very large extent from the Dutch law, and they have been operating it successfully for some time—is to avoid a case where somebody might say: " I got paid money but I did not render a service." Somebody might have to prove positively that you did, in fact, do something. By and large, if money passes and there is a repetitive rendering of a service or there is the negative aspect, the refraining from doing something, then the two will be equated and they will be the same.

Mr. Gallagher

I do not see the value-added tax being applicable, certainly in relation to the negative side. If the consideration is nil and somebody fortuitously goes out of business, the Revenue Commissioners may well decide that there is no agreement here. If a man decides to go out of business because he is bankrupt or near bankrupt, somebody may say: " We do not believe you. We are going to put a value on that because it is of benefit to somebody else." There is no agreement but it may happen that the Revenue Commissioners may say to the person who took the premises, whether it was a house or a rented shop: " There is goodwill attached to it so we are going to make a charge for this goodwill even though you paid nothing for it." As I interpret this provision it is fraught with danger and difficulties and tremendous additional work for the Revenue Commissioners. I would respectfully suggest that, apart from employing staff to disentangle it, there would be little value to be derived from it.

Mr. Tully

I assume what the Minister is trying to do is to prevent a loophole being left. While that is perfectly justifiable, it might perhaps create more problems than it would avoid. I think this is something that would have to be looked at very carefully. Perhaps Deputy FitzGerald's wording does not fill the bill, but from what we have been saying here it does seem to require tightening up. I suppose all of us have had our views on this and on other sections changed by listening to other people's views, and I am quite sure the Minister and his officials have also got a slant on these matters which they had not got before they came in here. Whether it has changed their minds is another matter.

Mr. Colley

It seems to me there are two things involved in this amendment. One is the concept of applying value-added tax to what are called negative services; and the other is the question that a transaction should have consideration on the face of it before it becomes liable to tax. They are two separate and distinct things.

Dr. FitzGerald

When you put the two together you get a quite intolerable situation, that people are liable to tax for not doing something for which they are not paid.

Mr. Colley

That would suggest that it would be open to the Revenue Commissioners to think up a figure out of thin air and say that was the value of the transaction.

Mr. Tully

It has been done.

Dr. FitzGerald

The purpose of the subsection is to enable them to think up a figure.

Mr. Colley

No. They would have to relate whatever tax they were assessing on this to the value of the transaction.

Dr. FitzGerald

How assessed? If there is no consideration passing, how can you know what the value of doing nothing is?

Mr. T. J. Fitzpatrick

(Dublin Central): Can you render a service by doing nothing?

Dr. FitzGerald

That is the point I am contesting.

Mr. T. J. Fitzpatrick (Dublin Central)

Services are subject to tax?

Mr. Colley

Yes. As I said earlier, the basis on which the consideration would be assessed would have to be what would be the value of that service, be it positive or negative, in the open market, if it were rendered.

Dr. FitzGerald

How could you assess in the open market the value of not doing something for which nobody is paid.

Mr. Colley

No. If nobody was actually paid, then it is not taxable.

Dr. FitzGerald

It is.

Mr. Colley

No. You must distinguish between not being paid and not appearing to be paid.

Dr. FitzGerald

I am talking about where there is no consideration, where no sum of money is paid.

Mr. Colley

On the face of it.

Dr. FitzGerald

No, none is paid in any shape or form. The Minister is talking about non-arms length transactions and there is no sum of money paid and this sum of money is not paid in respect of something not done. On what grounds can you give the Revenue Commissioners the right to levy taxation in those circumstances? There is no limitation; there is no appeals system. The Revenue Commissioners can tax anybody in the country for anything they do not do. The provision is much too wide.

Mr. Colley

There is an appeals system.

Dr. FitzGerald

On this point?

Mr. Colley

On any assessment under the value-added tax code.

Dr. FitzGerald

I am not sure that it covers this point.

Mr. Colley

The Deputy is talking about non-arms length transaction between two companies. Clearly if you take the case where there is a non-arms length transaction to do something the value of this can be assessed. There is no problem there. If it is not to do something, this can also be assessed. If money were being paid for this one could assess what it would have been worth. The only difficulty here is that money did not pass because it is not an arms length transaction. Again this is not a new concept at all in taxation questions or dealings within companies.

Dr. FitzGerald

The section as drafted is not simply designed to catch the particular transaction the Minister has in mind. It says that a service is rendered and, therefore, tax is payable, in respect of the omission of an act. It does not require consideration to pass. Therefore, under this the Revenue Commissioners are entitled in respect of any omission of any act to determine a tax although no consideration passes. It is the double effect of these two together which creates a clearly intolerable situation. You can make some case for taxing an act when a consideration does not pass, and you can make some case for taxing the omission of an act if a consideration passes——

Mr. Colley

All in the course of trade, remember.

Dr. FitzGerald

——but it is when you put the two together that you get absolute nonsense. I do not think anyone can justify giving the Revenue Commissioners power to tax people for not doing something and not being paid for not doing it.

Mr. Colley

I think the Deputy is oversimplifying it when he says " not being paid ". " Not being paid " is not correct.

Dr. FitzGerald

Where no consideration passes.

Mr. Colley

But that is not the same thing. There need not be consideration on the face of a transaction, but that is not to say that people do not receive value for the act or the omission. Deputy FitzGerald is talking about where there is no consideration on the face of the transaction. A non-arms length transaction between a parent company and a subsidiary is a very good example. On the face of a transaction between the parent company and the subsidiary there may be no consideration, there may be no money passing, but that is not to say that there is no payment. Of course there is.

Dr. FitzGerald

How.

Mr. Colley

Surely Deputy FitzGerald is very familiar with this.

Dr. FitzGerald

There is nothing here to say there must be a payment. This leaves it open to the Revenue Commissioners to tax somebody in a case where they do not do anything and where they are not paid and where no value passes.

Mr. Colley

If there is no value how can they tax it?

Dr. FitzGerald

That is my point.

Mr. Colley

They cannot tax it if there is no value.

Dr. FitzGerald

By putting an imaginary value on it.

Mr. Colley

They can only do that on a basis of evaluation. If there is a row about how they value it there is a method of appeal. They cannot just put an imaginary figure on something that has no value.

Mr. Gallagher

Take the case of a merger of two large companies. Is it suggested that the vending company pays tax on the consideration it receives for selling?

Mr. Colley

That situation is excluded from liability to tax under section 3, subsection 5 (b) (iii) which reads:

in connection with the transfer of a business or part thereof to another accountable person.

That does not become liable to tax.

Mr. P. Barry

Could I go back to the example of a firm performing a service for a subsidiary company for which it does not charge and then the profits and the VAT in its purchasing of goods for the subsidiary company and its selling. Are they enhanced?

Mr. Colley

Yes, whichever way it works.

Mr. P. Barry

And because there is a bigger gap the value added is greater and they pay more tax. Is that correct?

Dr. FitzGerald

That is the double taxation point again.

Mr. Colley

No, when they are both accountable persons they are, in effect, not paying tax. They are just acting as a conduit pipe and passing it on.

Mr. P. Barry

Are they not paying tax on the value added? The tax they will be charged will always be less than the tax they will charge.

Mr. Colley

No, the ultimate result of the VAT is to apply to the consumer tax at the final stage at the rate set out here. There is not a question of the intermediate people actually paying tax. They are collecting tax and passing it on.

Mr. P. Barry

But what they are collecting must always be greater than what they are paying?

Mr. Colley

No, there can be circumstances in which they would be setting off more than they are liable for and getting a refund. The point that I think Deputy Barry is getting at is that each of them is paying tax as they go along but the fact is that the whole incidence of the taxation is going to be at the rate of 5.26 per cent——

Dr. FitzGerald

The purpose is that ultimately the consumer will pay tax on the full value added on what he buys.

Mr. Colley

He will pay the appropriate rate on the price of the goods or services he receives.

Dr. FitzGerald

And this is achieved by taxing all the value added all along the line at appropriate rates. In this instance, the value added of the parent company is enhanced by virtue of the non arms-length nature of the transaction of the subsidiary. They pay additional tax because their value added appears larger than it really is. If you now purport also to tax the subsidiary on the amount of the true value added, which it has not shown, and do not simultaneously reduce the tax on the overstatement of value added by the parent company you are taxing the same value added twice and the consumer will pay more.

Mr. Colley

One has to consider the whole structure of the VAT. I think Deputy FitzGerald misunderstands it because whatever the rate of tax, whatever the amount of tax paid by an intermediary, it is deducted from a later liability for tax and the actual amount of tax ultimately received by the Revenue Commissioners is the appropriate rate on the finished product at consumer level. Whatever happens in between does not increase the amount of tax available to the Revenue Commissioners.

Dr. FitzGerald

It does if you impose it twice on the same amount of value added. Either the purpose of dealing wih a non-arms length transaction is to collect more money from a firm which has not fully stated the value added, either you do that and correspondigly reduce the tax payable by the other firm, or you do not correspondingly reduce it. If you correspondingly reduce it, the total amount of tax paid is identical to what you would have had anyway and there is no point in the transaction. If the tax is paid twice, then the consumer pays more. Either the consumer pays more in which case there is some point in the transaction, though it is inequitable, or he does not pay more and there is no point in shifting the burden from the subsidiary to the parent company or vice versa in this transaction. It is not like the income tax or sur tax, where the shifting of the burden from one company to another can affect liability for tax between the two companies. In this instance it does not arise. You are taxing the value added anyway. I do not understand the purpose of this.

Mr. Colley

The first thing you have to grasp is that it does not matter at the intermediate stages whether a person involved in the chain of transactions is paying a higher or a lower level of tax. It does not matter in the sense that the consumer is eventually going to pay the appropriate rate of tax on the price——

Dr. FitzGerald

As long as tax is paid twice on the same value added.

Mr. Colley

No. It does not matter what happens, in the end the appropriate rate of tax on the consumer price is the amount of tax received by the Revenue Commissioners. Whatever happens in between, that is the ultimate result.

Dr. FitzGerald

I accept that but either you are not taxing the same value added twice or you are.

Mr. Colley

I think the Deputy is missing the point. He is talking about applying VAT twice. If that is true what he is really saying is that the price to the consumer is being increased.

Dr. FitzGerald

That is my point.

Mr. Colley

But it is not being increased as a result of the tax.

Dr. FitzGerald

It is if you are taxing value added twice.

Mr. Colley

The structure of the tax is such that that cannot happen. Any tax charged in the course of the chain of production and distribution is set off, it does not matter how high or how low it is, along the line so that ultimately the tax payable is the appropriate tax on the consumer price.

Dr. FitzGerald

The Minister is not taking my point. What is the purpose of fussing about whether it is an arms-length transaction or not, what does it matter whether X per cent of the value is added by the subsidiary or the parent company if, at the end, tax is paid on the full value added anyway?

Mr. Colley

The first point to be clear on is that it does not matter what happens in the intermediate stages as regards whether the tax charged is high or low. It does not affect the consumer price or the amount of tax.

Dr. FitzGerald

Then there is no point in worrying——

Mr. Colley

That is my second point, as to whether one should worry about what happens in between. As between two accountable persons, it does not really make any difference whether the rate of tax is wrong, if they are charged too high, apart from some possible effect on liquidity, because what A pays B gets credit for. If both are accountable there is no problem. But if one is not an accountable person, if he is, say, a final consumer, it is important whether the tax rate is right or whether the amount of consideration on which tax is charged is right. If either is wrong, the Revenue will be out of pocket.

Dr. FitzGerald

What the discussion comes down to is that in the case of a non-arm's length transaction between an accountable and a non-accountable person, who are in cahoots with each other in some way, in respect of not doing something for which the one rendering the service, who is not doing it, is not paid—it seems to me to be an abstruse case on which to base the whole subsection.

Mr. Colley

If there was the case of a doctor, if one could think of this, not prescribing a particular drug for his patients—this is certainly an outrageous example but it nevertheless illustrates the point—should that doctor be charged or should he not, if there were some adjustment in that type of case involving a manufacturer of another drug. There is one accountable person and the other is not accountable.

Dr. FitzGerald

The doctor is not accountable?

Mr. Colley

The doctor is not. He could make a payment again to somebody in that way where he could get no deduction but the recipient could be a taxable person and should be liable. That is the kind of end result that this is intended to meet, where on one leg of the transaction there is not accountability and on the other there is.

Dr. FitzGerald

The fact that the example chosen is one which is somewhat inconceivable in operation does suggest we are wasting a lot of time on an attempt to cover an eventuality which nobody is able to visualise arising. I do not see the point of it in the circumstances. The Minister has attempted to say why it will not do any harm to do this but he has not convinced me that there is any good done as a result of it.

Mr. Tully

I would be prepared to accept that it is for the purpose of closing loopholes. The only thing about it is whether or not the cure is going to be worse than the disease, whether somebody is going to be adversely affected by leaving the section in as it is rather than somebody getting away with it if the amendment is accepted.

Dr. FitzGerald

As it stands, it does leave it open to the Revnue Commissioners to levy taxation on things not done and not paid for and this is a principle which we cannot concede. Even if there was a good reason for it, we could not concede it, but no reason is given.

Mr. Colley

It is not true to say that people can be taxed on something where they do not receive money or money's worth.

Mr. Tully

Again and again people under the income tax code find this sort of thing happening, where somebody comes along and says that a certain amount has been assessed against them, without any evidence whatever being produced, and then after everybody has gone to a lot of trouble, it is proved that the assessment has been incorrect and entirely without foundation. If it can happen in the case of an ordinary workman earning a minimum of £20 a week, what could happen if the same authority is given in this case? That is what is worrying me about it.

Dr. FitzGerald

The amount of work and trouble which people could be given by this is enormous and the best example we can get of what it is designed to prevent is that of the doctor not attending his patients.

Mr. Colley

I do not think that is a fair point to make. It was given to illustrate exactly what was involved, but it is only a debating point to say that it is the best example.

Mr. T. J. Fitzpatrick

(Dublin Central): If I were giving service to a company and they agreed to pay for me and my wife on holiday in the Bahamas for three months and if they bought a house and gave me the use of it, this would be a case in which I could say that no money passed to me but still I would be getting a certain value.

Mr. Tully

That would be taxable in the normal way.

Mr. T. J. Fitzpatrick

(Dublin Central): No.

Mr. Colley

Banks and insurance companies are exempted businesses under this, and accountants are exempt but may elect to be taxable in certain circumstances. One could visualise a transaction between these kinds of people which certainly would be of practical importance under this section and without this section. In those cases value-added tax would not be paid. It seems to me that we have an obligation to ensure, as far as we can that there is equality of treatment and the only way we can do it is by a provision of this nature. I think we have established now—I hope—to everybody's satisfaction that as between accountable persons, this makes no difference. It is only in the case of the transaction between an accountable and a non-accountable person that this becomes of importance. I have mentioned some of the categories of people who are not accountable and I think that should give us cause to realise that there could be cases of some substance which would not become liable to value-added tax but which should on the face of them be liable, if we do not have a provision of this kind.

Dr. FitzGerald

We still have not had a concrete example. I know that I am bad at understanding things without a concrete example, and talking about banks and accountants is all very well, but I am still not clear as to the kind of transaction likely to occur. Somebody is going to be not paid for not doing something but gets value for not doing it, as between an accountable and a non-accountable person in such a way as to avoid tax. Could we have one concrete example of that happening?

Mr. Colley

Is the Deputy bringing in the question of consideration into his example as well?

Dr. FitzGerald

The simple case covered by this subsection where somebody does not do something and is not given a consideration, but who, in the Minister's words, receives value which is not a consideration, he is a non-accountable person while the person making the payment is accountable.

Mr. Colley

May I point out to the Deputy that in the previous sections which deal with the delivery of goods, rendering service and so on, there is no mention of the word " consideration "?

Dr. FitzGerald

Does the Minister suggest that we go back and amend it?

Mr. Colley

No. I am suggesting that the use of the word in this particular section is really inconsistent with the whole basis on which the Bill is drafted, for the reasons I have given. I am trying to remember from the dregs of my memory of legal definitions what this concept of consideration means, and my recollection is that it is a very wide definition and there does not have to be consideration on the face of a transaction for a consideration to be there.

Dr. FitzGerald

That is exactly why the introduction of the word " consideration " would not vitiate the Minister's purpose but to ensure that this will not be used in an objectionable way for taxing people for not doing something they have not been paid for. In the Act of the British Parliament, the words " for a consideration " are included and I do not see why it is suggested that there is this enormous room for evasion and we must tighten it up when the British Revenue are not bothering about it. I am unconvinced of the need for this and we have not yet had one concrete example of the kind of thing that might happen in practice and of where, if we do not have this, somebody would avoid tax. If we could have one concrete example, I would be prepared to consider the matter.

Mr. Colley

Is the Deputy arguing that we ought to delete the reference to not doing certain acts or suggesting that we should put in the reference to consideration or is he suggesting both, in the light of the discussion we have had?

Dr. FitzGerald

I am open to suggestions.

Mr. Colley

I am not clear on what exactly is the case he is making now.

Dr. FitzGerald

It seems to me that both of these were necessary. The Minister is making a case for omitting the word " consideration " where there is an action done and he has separately made the case for providing for the case of an omission where there is no question of one. My objection is by the drafting of this the two are put together into the one subsection as the result of which somebody can be taxed for not doing something he is not paid for. I have a particular objection to that.

I can see the Minister has some point on both of his legs but when he tries to erect something standing on the two legs together the thing collapses. Perhaps the answer is to separate this into two separate subsections, one dealing with acts done and the other dealing with omissions. In the case of omissions there should clearly be a consideration as a bare minimum.

Mr. Colley

Does the Deputy not accept that there could be transactions which do not have a consideration on the face of them but in which in fact there is value received?

Dr. FitzGerald

I accept such a transaction could exist but in most of the cases we talked about——

Mr. Colley

May I interrupt the Deputy for a moment as I want to follow up that point. If he accepts that, how can he justify applying what he says to let us say, agreements not to do something. As I understand it what the Deputy was suggesting is that we might separate these two concepts and we might provide in the case where there was an agreement to do a certain act that that would be sufficient just to provide that but in the second subsection where we would deal with an agreement not to do a certain act, to refrain from doing something, in that case we ought to apply the question of consideration.

Dr. FitzGerald

I am not suggesting that what I am now suggesting is a very satisfactory solution at all but I think, as drafted, it is so unsatisfactory that something is required. I doubt very much whether my approach is the best one. I would like to suggest that the Minister might perhaps have another look at this.

Mr. Colley

I can certainly undertake to do that but I always feel when I undertake to do that that there may be an implication in it that I am going to come up with something better. If I can I will but I cannot undertake that I will.

Mr. Gallagher

There is a point here which occurs to me. Does it make allowances even for what I might deem a gratuitous service or is somebody going to get hold of this and say: " put a value on that whether you pay for it or not."

Mr. Tully

That is exactly what we are applying to this.

Mr. Gallagher

That is what I am coming at.

Mr. Colley

The particular kind of situation that Deputy Gallagher is thinking of is dealt with in section 10.

Mr. Gallagher

Is it?

Mr. Colley

Let us not discuss section 10 until we come to it.

Dr. FitzGerald

Is the Minister suggesting that Deputy Gallagher's objection is met by section 10 or that it is aggravated by it?

Mr. Colley

No. What I am saying is that the concept which he has just referred to is dealt with in section 10 as to when and in what circumstances that kind of transaction should be taxable, what he referred to as a gratutious performance of services.

Mr. Gallagher

I am looking to see if there is a list of these type of things and I would be more inclined to go with the Minister. In fact it is left to the Collector-General, as it were, to decide what they are going to do and this is something I am not in favour of.

Chairman

Can I take it that the Minister will undertake to have a look at Deputy FitzGerald's point, that he will try to clarify that a little more.

Mr. Colley

Yes.

Dr. FitzGerald

Could he perhaps also informally transmit to us a practical example of what it is that the Revenue Commissioners fear, an example which we can grasp and understand. I have not got that clear and I know it is unfair to ask people on the spot to give examples without time to think. One practical example is worth an hour's discussion.

Mr. Colley

Could I say in that regard that we do not visualise this section being of any practical importance perhaps for quite a number of years. Some experience on the continent in the EEC shows that it is of practical importance there in different circumstances which will almost certainly apply here in the years to come. This is one of the difficulties we have in producing a practical example in our terms at the moment. Subject to that I would certainly undertake to try to produce some examples that will illustrate this.

I also want to say that while I am certainly prepared to have another look and see if we can produce anything better than this I want to draw attention to the fact that when Deputy FitzGerald analysed the thing for himself he suddenly came up against the difficulties that I am up against when he saw—I take his point—that the two legs separately stand up but when you put them together he reads a great deal more into it. On the other hand, if you take one of the legs away you are left in considerable difficulties.

Dr. FitzGerald

I accept what the Minister says but a difficulty arises partly from this word " consideration ". The Minister has kept saying that there may not be consideration but the value is given nonetheless. If that concept were introduced in some sense that value was given——

Mr. Colley

They are the lines on which I am thinking in regard to achieving any improvement. Something on those lines might yield a satisfactory solution.

Dr. FitzGerald

That would be helpful. Another suggestion I would make is that the EEC directive did seem to be much more specific in its terms. Is there much reason for us going beyond what is in that directive? Could we not tie this down more tightly to the kind of wording that is in the directive? Would the Minister look at it from that point of view?

Mr. Colley

Yes, although I would remind the Deputy that I read out only item 9 and that particular item referred to discharging an obligation not to practice in whole or in part a professional activity or exercise a right specified in the present list. The present list is fairly extensive but I take the Deputy's point.

Amendment, by leave, withdrawn.

Dr. FitzGerald

I move amendment No. 2 :

In page 9, to delete subsection (5).

The reason for this is that my difficulty can be met better by an amendment to delete this subsection. The reason for this is that in its present form this could be very onerous in the particular subsection. I am trying to think of an example of this and I am faced with the same difficulty as the Minister faced. We will take somebody installing central heating for example. As far as I can see from this the central heating equipment could carry a rate of 16.37 per cent. The effect of this amendment would be if somebody installing central heating has an installation cost which is less than half of the central heating so that the central heating equipment comes to no more than two-thirds of the total service rendered than the service rendered in installing it will be liable to tax at 16.37 per cent instead of 5.26 per cent. This would seem to me to be an undesirable increase in taxation and it is not the purpose of this Bill to increase taxation. Therefore, as drafted this is much too loose and opens up the possibility of increasing taxation, especially where you have the two tax rates. It may not apply in quite this way as the 30.26 per cent tax rate because the additional tax there is imposed at the wholesale level only. Where something is done, where a service is rendered which involves movable goods liable to 16.37 per cent rate there is a difficulty here. At the very least some redrafting is required to get over this difficulty and possibly the thing should be deleted.

Mr. Colley

This applies only where there is the same rate for the goods as for the service, and it is designed to produce a formula that is easy to work and will avoid the taxpayers being thrown back on complicated legal decisions. Where there is a different rate applying, then there is provision for an apportionment, and in the case of goods it could be 5.26 or 16.27 per cent.

Dr. FitzGerald

I do not think that is right. It seems to me that when there are two different kinds of goods at different rates what the Minister says is correct, but where goods are at one rate and installation services at a different rate, the Minister is wrong.

Mr. Colley

In the case visualised by Deputy FitzGerald, the installation of central heating, normally the position would be that you would get a contract price for the whole job, including goods and services. In that case if the value of the goods exceeded two-thirds of the contract price, this section would apply, and it would apply whatever the rate for the goods would be. Where you have a contract for the supply of goods at different rates—as you know, some at 16.37 per cent and some at 5.26 per cent—there is provision for apportionment of those.

Dr. FitzGerald

I know that.

Mr. Colley

But in the case visualised by Deputy FitzGerald, in the normal way I think that the two-thirds would almost always be exceeded. We have experienced difficulty with turnover tax where there is one rate of tax for the supply of goods and a different rate, usually a lower rate, for the supply of services. There is difficulty when there is a combination of the two, as to how the tax should be applied. There is the option of having an apportionment, with so much of the price applying to the supply of the goods and so much of the price applying to the services, and each of them can be taxed separately; or it can be determined that the whole lot is for the supply of goods or the whole lot is for the supply of a service. At present we find it difficult, particularly in the building trade. If a wardrobe is supplied it is liable to turnover and wholesale tax, whereas if it is built in by the builder is it liable only to the tax applicable to the materials used. The purpose here is to give an easy formula to the ordinary person—and it is the ordinary person who will be making his return and there are two elements, namely, the cost price of the goods that go into the contract and the full contract price. If the cost price of the goods exceeds two-thirds, then the whole lot is taken as a supply of goods and we forget about the service altogether. If it is two-thirds or less, then the whole lot is the supply of the service and it is charged at the proper rate which is normally an effective rate of 3.16 per cent on an installation job.

Dr. FitzGerald

With respect to the explanation given, it simply confirms my point, that the effect of this is to raise the level of taxation on services involved in the installation of goods to the level at which the goods are chargeable where the goods constitute two-thirds or more of the total cost of the contract. I do not see any reason why we should be raising the taxation of services in that way. No reason has been given for this. It is not suggested that we do not know what the value of the goods is, because you have to know what the value of the goods is for the section to work. If you know what the value of the goods is, why not go on charging for the goods at the tax rate for the goods and for the services at the tax rate for the services?

Mr. Colley

I agree entirely that it would be more accurate if that could be done but the purpose of it is to avoid apportionments of that type in the great majority of cases, and the two-thirds has been pitched at what the Revenue Commissioners at least think is the kind of figure that will allow the service rate to apply in virtually all these jobs except the very special ones where the service is a minor part of the supply of goods. For instance, I buy a refrigerator and it is part of the contract that the electrician would install the plug and plug it in. The point there is that I should reasonably pay the price applicable to a refrigerator, that it should not be governed by whatever service element is in the cost. If the two thirds does, in fact, bring the great majority of these, where there is a substantial service element, into the lower rate and merely leaves the ones where the service element is relatively small, then it seems to make the tax easier to operate.

Dr. FitzGerald

I had not read this to mean that where the rate is less than two-thirds the lower service rate applies, and that if, the central heating equipment, taking the example I gave—involves, say, 62 per cent of the cost, the 5.26 per cent rate applies to the whole contract, including the cost of the central heating equipment. Is that the case?

Mr. Colley

Yes. That is correct.

Dr. FitzGerald

Could I be shown just how that operates here? As worded it gave me the impression that it is only designed to operate one way, to the benefit of the Revenue Commissioners. That is what is bothering me.

Mr. Colley

If the installation job is the special kind of service that qualifies for the building rate, then under section 10 the effective rate is 3.16 per cent. This is the one to which we referred in the House.

Dr. FitzGerald

Therefore the position is that where it is a building contract of any kind, including the installation of central heating, the tax rate on the equipment is 3 per cent in the ordinary way?

Mr. Colley

Provided it is two-thirds.

Mr. Tully

And anyone who wants to have a big installation job done and does not ensure that the cost of the installation is more than two-thirds should have his head examined.

Dr. FitzGerald

What you do to avoid the tax is to jack up the service charge sufficiently to get over the two-thirds and then you get the tax rate down.

Mr. Colley

If they do you will have the Revenue Commissioners down on you.

Mr. Tully

They cannot if the Act does not allow them.

Mr. Colley

This figure of two-thirds is designed to ensure that the vast bulk of this kind of transactions will come at the lower rate.

Mr. Tully

It does appear as if this is one case where the Revenue Commissioners are showing heart and I suggest we should allow the provision to go through without any further discussion.

Mr. P. Barry

Both things will be invoiced separately and both will be at different rates of tax no matter what.

Mr. Colley

This avoids lots of complications for taxpayers as well as for the Revenue Commissioners; they can handle it but it is more difficult for the taxpayer.

Dr. FitzGerald

I seem to have picked a bad example in the building sphere. May I now launch the attack on another front? Supposing the rendering of a service involves the installation of something which bears the 16.7 per cent rate.

Mr. Tully

Could the Deputy give us an example?

Dr. FitzGerald

I was going to say television sets but that is the 30.26 per cent rate and does not arise.

Mr. Colley

If you required some kind of survey before you decided how you would lay out your shop and goods as well and you required these at the same time or from the same person then you have the type of situation where the services are chargeable at 5.26 per cent and the goods at 16.37 per cent. If there was a single price quoted for the service and the supply of the goods the question of proportion would come in. The 3.16 would have no relevance because it would not be a building or an installation job.

Dr. FitzGerald

In those circumstances, if the cost of the goods was two-thirds or more, then the service would also be charged at the 16.37 per cent rate?

Mr. Colley

Yes.

Dr. FitzGerald

Surely we should confine this case to building and not get involved in other instances?

Mr. Gallagher

I have been examining this somewhat more deeply with regard to the tax on new houses. I have a note here. VAT taken as 60 per cent of 5.26 per cent, less VAT already paid on materials consumed in the building of the house. Am I to assume that that is the position or will one accept the published selling price or the actual contract price of the house?

Mr. Colley

That works out at approximately 3 per cent, which is estimated to be the amount of tax that is borne at present by way of turnover and wholesale tax.

Mr. Tully

You are dividing what you get now and you produce this figure?

Mr. Colley

Yes. In the case referred to by Deputy FitzGerald I think it is a question of the balance of advantage because even in the examples given, if the situations were reversed and the cost of the goods were less than two-thirds, then what would normally be charged at the higher rate will be charged at the lower service rate. It is a balance of advantage and we have no doubt that the balance is very much in favour of the taxpayer by doing this and that by trying to get an exact figure in each transaction you are going to create much greater difficulty for the taxpayer than by using this formula.

Dr. FitzGerald

The relevant section 10 (8) led me to believe that the danger I referred to would only be avoided where there was an installation of movable goods in connection with the delivery of immovable goods, in other words building materials installed in a house, or something like central heating. Is it the case that the same thing will operate even where that does not apply? What I am worried about is, even in the case that has just been mentioned that might operate in one way only, favouring the Revenue Commissioners, that is that if the goods are over two-thirds then the services carry a higher rate, if they are under two-thirds you do not get a similar benefit and the whole transaction is at the lower rate.

Mr. Colley

If I understand the Deputy correctly it is a question of whatever rate is applied to the transaction applies to either the goods or the services depending on whether it is above or below two-thirds.

Dr. FitzGerald

That applies whether it is goods installed in a dwelling or not? The only reference at section 10 (8) is to do with installing goods in a building. What provision covers other cases?

Mr. Colley

Section 5.

Dr. FitzGerald

This section only says that if it is over two-thirds the higher rate applies to both. It does not say that if it is below two-thirds the lower rate applies to both.

Mr. Colley

The service would be at the lower rate. If the lower rate is to apply, that is in respect of the services, that can automatically only be the lower rate. This deals with the case where the higher rate can apply. If the higher rate does not apply under this provision, then automatically it is the lower rate which applies.

Dr. FitzGerald

I am not sure I understand. My understanding, given that I have only been referred to section 10 (8), is that in cases other than the installation of goods in a dwelling, if the goods constitute over two-thirds of the total value then the whole transaction is charged at the higher rate but if they are less than two-thirds then each pays at its appropriate rate and there is no corresponding benefit in the average down to the lower rate in those circumstances. If I am wrong perhaps my attention could be directed to the section which makes me wrong.

Mr. Colley

This subsection deals with an agreement for the rendering of services.

Dr. FitzGerald

Other than the delivery of goods.

Mr. Colley

It is section 5 (5) (a). It deals with the case where the value of movable goods supplied under an agreement for the rendering of services exceeds two-thirds of the total consideration. It provides that in that case the higher rate will apply but in any case other than that—I take Deputy FitzGerald's point. He wants to know where specifically does it say——

Mr. P. Barry

The lower rate applies except in the case where it is over two-thirds.

Dr. FitzGerald

It does not say that here.

Mr. Colley

The argument as I understand it is as follows. This applies to an agreement for the rendering of services. If it stopped there and did not go on to talk about the two-thirds and so on under the Third Schedule the appropriate rate for the rendering of services is 5.26.

Dr. FitzGerald

The rendering of services is defined in 5 (1) as being an act other than the delivery of goods. If the service we are talking about is of installing goods and the cost of the goods is 60 per cent of the total and the cost of the service is 40 per cent you cannot say that part constituted by the value of the goods is the rendering of the service because they are being installed. This has been precluded by the terms of the section 5 (1).

Mr. Colley

No. It says:

Where the value of movable goods supplied under an agreement for the rendering of services . . .

Dr. FitzGerald

Where?

Mr. Colley

Section 5 (5) (a), on page 8.

Where the value of movable goods supplied under an agreement for the rendering of services . . . .

That visualises the supply of goods under an agreement for the rendering of services. If it stopped at that point then under Schedule III the appropriate rate would be 5.26 per cent, which is the rate chargeable on services.

Dr. FitzGerald

How could that be when that part of the service which is constituted by the goods being installed is itself explicitly defined as not being a service by the terms of section 5 (1), which says that the service is an act other than the delivery of goods?

Dr. O'Donovan

It is the delivery of goods.

Dr. FitzGerald

Delivery here has a technical meaning.

Mr. Colley

I am satisfied that it means what we think it means but I can see Deputy FitzGerald's difficulty in wanting to have it spelled out. I will see if we can spell it out more clearly.

Amendment, by leave, withdrawn.

Section agreed to.

Section 6 agreed to.