Special Committee Value-added Tax Bill, 1971 debate -
Wednesday, 28 Jun 1972

SECTION 34.

Question proposed : "That section 34 stand part of the Bill."

Dr. FitzGerald

A question arises on this section which I raised on section 12. The problem arises because under the wholesale tax code a provision was made that, where the scale of trade in goods liable to wholesale tax was so large that the retail business was on a wholesale type scale, the Revenue Commissioners might require the retail to register under the wholesale tax code. This has been applied in a number of cases in regard to department stores and this raised the problem in regard to the method of payment of tax because as such stores would be selling goods on such a scale it was agreed they should be charged on the basis of purchases rather than sales, and they are so paying. This section deals with relief for stock in trade held on a specified day but omitted to make a provision for these traders. On a specified day such traders could hold substantial stocks running into hundreds of thousands of pounds and they would have to pay wholesale tax on these goods—in the absence of any adequate provision in this section they would have to pay VAT on the goods and not recover the wholesale tax paid.

This is clearly grossly inequitable. The amounts are substantial for individual stores. They could run into £60,000 or £100,000 in some cases and it is wrong that any business should have to pay double taxation because of unwillingness on the part of the Commissioners to deal with this matter. Various arguments could be made against this but, to my mind, they do not seem to hold water. The fact is that the tax is repaid on the purchases because the Revenue Commissioners require these retailers to register for wholesale purposes. If one compares the business of one of these stores with a store not operating on the same scale, one will see the comparative disadvantage.

There are various ways of achieving this relief. One would be to insert a new section—it would need to have been done after section 14 or 16—to provide that VAT shall be levied at only 5.26 per cent on any goods shown to have already borne wholesale tax. Another way would be to include in this section an additional paragraph in subsection (2) which would include a further category not already included under paragraphs (a) or (b) to cover a seller of goods accountable for wholesale tax under section 3 of the Finance Act.

They are two alternative ways and there is a possible third. Undoubtedly something has to be done about this because I do not think the Minister could sustain a position in which these firms are taxed twice. It is only by an extraordinary jumble of words that they are shown to be taxed twice. I am therefore asking the Minister to agree to an amendment at Report Stage to deal with this.

Mr. Colley

I think, if the position were as stated by Deputy FitzGerald, I certainly would not attempt to defend it, but I do not think it is quite as he thinks it is. I have received representations in this regard from the people concerned and, indeed, from some members of this Committee before we came to this stage, and the position appears to be as follows: these particular firms are, as Deputy FitzGerald said, wholesalers and retailers on a fairly large scale and, as a matter of convenience for them—not for the Revenue Commissioners, but for them—the method of collecting the tax was operated in the way described by Deputy FitzGerald. That was the practical application of what happened.

Dr. FitzGerald

Is the Minister suggesting that the Revenue Commissioners, in requiring to register, were conveniencing them?

Mr. Colley

Oh, no, but they were obliged to register because of the business they were doing. That was under the law. Legally, there is only one way they can deal with their liability for wholesale tax and that is that they pay the wholesale tax on the moneys received. Deputy FitzGerald has, I think, outlined some of the difficulties they would now have in doing that. Therefore, the practical basis on which it was done was the method described by Deputy FitzGerald, but the legal basis for it was that the Revenue Commissioners accepted estimates, as they were entitled to do under the relevant legislation. Now Deputy FitzGerald can reasonably say "That is all very well but what is the practical effect of this? Will they have to pay value-added tax on top of turnover tax?"

The legal position is as I have described it. They were, in fact, paying on the basis of estimates and, having considered the problem with which they are faced, we suggested to them that the right way of remedying this was to compare their stocks at the commencement of wholesale tax with their stocks at the commencement of value-added tax, take the difference between the two—one can assume that in all cases it would be in excess now of what it was then—and, in respect of that difference, that they would get relief from wholesale tax. This would then put them in the same position as everybody else who was liable for wholesale tax. I think that the fallacy in the argument they have put forward, which Deputy FitzGerald mentioned, is that, at the commencement of the wholesale tax, they had substantial stocks and they were unable to sell afterwards without paying wholesale tax on these stocks, and the remedy we have suggested seems to me to be the equitable approach to it. It will put them in exactly the same position as other people who registered and paid wholesale tax in the normal way.

Dr. FitzGerald

I do not quite understand. Why is it only the excess in respect of which wholesale tax should be estimated? Why not the full amount? I mean they will have paid wholesale tax on all their stocks and the Minister is requiring them to pay value-added tax on part, at least, of their stocks.

Mr. Colley

Could I take figures? Perhaps we might perceive more clearly the effect if I do not clog the issue with figures, but let us assume that one of the firms concerned at the commencement of wholesale tax had stocks liable to wholesale tax valued at £100,000, and let us assume that the same firm on the commencement of value-added tax had similar stocks valued at £300,000: now the position would be that they paid wholesale tax on the stock valued at £300,000 which they held, but they did not pay wholesale tax on the stocks valued at £100,000, which they were holding at the commencement of wholesale tax. What we are saying is: take the difference, which is £200,000, and we will allow for wholesale tax on that £200,000 because that would represent the amount of stock on which they had been charged wholesale tax and which they have not sold.

Mr. Tully

Is that contained anywhere in the Bill.

Mr. Colley

It is not an adjustment of value-added tax. It is on foot of the wholesale tax, which worked on the basis I mentioned. The Revenue Commissioners worked on the basis of accepting estimates.

Mr. Tully

In what way would they make the claim for that? They have their special forms. You would have to make a claim for a refund on these, would you?

Mr. Kenneally

Is it a special concession?

Mr. Tully

It is a special concession.

Mr. Colley

They merely ask to have their estimates revised. The only concession involved in this was in allowing them to operate as they did. It was a concession to them; as far as the Revenue Commissioners were concerned, they were acting on foot of the legal authority—they had to accept estimates. It is open to the taxpayer at any time to request the Revenue Commissioners to reconsider the estimate, either up or down, and, if they do that now, the way it would be done would be the way I have described. It may be arguable that they have to take stock specially to do this on the day of the incoming value-added tax, but most traders will have to do this anyway. It is intended, under the regulations, to give two months before or after the commencement day of value-added tax, which would include the 31st December, which is a very common day for these people to take stock, so there should not be any excess burden on them in this and the procedure I have described would put them in the same position as everybody else.

Dr. FitzGerald

May I just explore that proposition to see if I understand it? Is it suggested that when wholesale tax commenced these traders were put into the position in which, by virtue of paying tax——

Mr. Colley

On goods purchased.

Dr. FitzGerald

——on goods purchased they were able to sell the existing stocks they then held without paying wholesale tax, say, in the month or two afterwards, whereas other traders had to pay wholesale tax on everything they sold, including the stocks they held, and these firms, therefore, got an advantage at that time. What the Minister is seeking to do now is to do no more than neutralise that advantage or not confer the same advantage twice.

Mr. Colley

That would be correct.

Mr. T. J. Fitzpatrick (Dublin Central)

How do you allow it? The mechanism is not in the Bill.

Dr. FitzGerald

It is in the wholesale tax.

Mr. T. J. Fitzpatrick (Dublin Central)

It is not in the Bill.

Mr. Colley

You are talking about the wholesale tax legislation. It is allowable to treat wholesale tax on the basis of estimates and it is allowable to review the estimates up or down. In effect, that is what would be happening here.

Mr. T. J. Fitzpatrick (Dublin Central)

The first £100,000 which they had on the introduction of wholesale tax they did not pay wholesale tax on.

Mr. Colley

Yes.

Mr. T. J. Fitzpatrick (Dublin Central)

You could say that, although they had not paid wholesale tax on these goods, neither did they collect wholesale tax on these goods because they probably sold these goods at the price prevailing at the time, without wholesale tax.

Mr. Colley

They sold after the commencement of wholesale tax and they were, therefore, in competition with people who were selling subject to wholesale tax.

Mr. T. J. Fitzpatrick (Dublin Central)

I agree, but they may not have collected it.

Dr. FitzGerald

Presumably they did not collect it.

Mr. Colley

Presumably they charged the going rate.

Dr. FitzGerald

Presumably not. It is highly improbable that they would have "upped" their prices and taken an extortionate profit or that the Minister would, in these negotiations, have permitted them so to do.

Dr. O’Donovan

Frankly, I cannot see what difference it makes. The Minister's arithmetical explanation made it quite clear to me anyway what the position was.

Mr. Kenneally

Would there be many firms involved?

Dr. FitzGerald

Half a dozen, I am told.

Mr. Colley

There are about six, but there are a number of small ones as well.

Mr. Kenneally

There would not be that many really. It would not create a problem.

Mr. Colley

As I said, what we are aiming to do is not to create a problem but, rather, to solve a problem and put them all on the same footing.

Dr. FitzGerald

Yes, but I am slightly sceptical. I would like to be convinced. Is it really the case that when this thing started the Minister made an arrangement with the larger firms to put them at a competitive advantage vis-a-vis the smaller firms by enabling them either to make bigger profits or else to sell their stocks cheaper whereas the smaller firms were not in a position to do that. It seems to be inherently improbable that the Minister should have agreed to that at the time.

Mr. Colley

As I have said there are six large firms but there are quite a number of small firms operating the same arrangement.

Dr. FitzGerald

They could not be very small.

Mr. Colley

Small relative to the six large ones.

Dr. FitzGerald

In one of the publications on the wholesale tax the figure of £100,000 was mentioned although that does not appear in the Act. It may appear in some of the regulations. We are talking about firms which are reasonably large when we talk about a scale of activities running up to £100,000 in goods liable to wholesale tax.

Mr. Colley

So far as the Revenue Commissioners were concerned their objective was not either to shove up the price of goods unnecessarily or to give a competitive advantage. Whatever the effect of it was, what is now proposed should counter-balance whatever happened at that time.

Mr. Tully

May I make a comment here? I do not think we should worry very much about the people who will have £100,000. The six will make sure that if one penny is due to them they will get it. I would be worried about the small man who might be stuck with a couple of thousand pounds or a couple of hundred pounds worth of goods. The tax involved might be pretty small but it would mean a lot to him. I would be interested to see that he can recover this without too much bother or expense.

Mr. Kenneally

This will not be carried on all the time.

Mr. Colley

It is a once-for-all.

Mr. T. J. Fitzpatrick (Dublin Central)

I think the Minister is very fair if he says he can recover it in the wholesale tax. Other people could have done the same thing.

Dr. O’Donovan

So far this evening we have made great progress. We are now getting back to where we were at the beginning of the discussion on this Bill.

Mr. Colley

I appreciate Deputy O'Donovan's concern but I know that a number of members of the Committee have been lobbied on this subject. If the position were as described by Deputy FitzGerald originally in putting this forward it would be a matter of serious concern to us. While I am not advocating that the Committee should go on unduly long, it is important that members of the Committee should understand what is involved in this.

Mr. T. J. Fitzpatrick (Dublin Central)

Could the Minister explain it once more? I am rather confused as to how they would get it back.

Mr. Colley

They would ask for an adjustment of the estimates on which their liability for wholesale tax was based and the Revenue Commissioners would say: "In order to achieve that adjustment of the estimate, give us your figures of stock at the commencement of wholesale tax and give us your figures of stock at the end of wholesale tax, that is, the commencement of value-added tax." We take the first figure from the second figure and we allow the amount of wholesale tax relative to that difference.

Mr. T. J. Fitzpatrick

(Dublin Central): That is fair enough.

Dr. FitzGerald

It would be fair enough if we were absolutely convinced that at the beginning of this whole thing these firms got an advantage over all other firms through being able to sell goods on which they had not paid wholesale tax when smaller firms had to pay wholesale tax, but I seem to detect a certain hesitation on the Minister's part——

Mr. Colley

I submit that the question of whether or not there was an advantage is irrelevant strictly speaking. What we are talking about is their liability to tax, i.e. wholesale tax, and what will happen under value-added tax. Apart from any question of competitive advantage or disadvantage, what we are suggesting will achieve a situation in which they will pay the precise amount——

Dr. FitzGerald

Maybe I put it badly. I am trying to illustrate my slight incredulity at the fact that the arrangement described by the Minister could have been made at that time. One of its by-products would have been this remarkable competitive advantage and it is not like Ministers for Finance to put large firms in that position vis-a-vis small firms. I am wondering whether it is correct to say that at that time they were put into the position that they did not have to pay tax on their sales for some period after the starting date because they escaped wholesale tax on the stocks they then held when smaller firms had to pay the wholesale tax on everything they sold after that date. Is that a correct statement? I find it a very surprising position. If the Minister assures me this is correct, that is fair enough. I am so surprised at it that I should like to be absolutely certain I have understood it. If that is not the position then, in fact, it would be unfair not to remit the tax in full. Unless they got an advantage at that time and were let off the wholesale tax on all their stocks, and other firms were not, I do not see any case for what the Minister is now proposing.

Mr. Colley

I think it is necessary to understand that this would be a build-up over the period since the commencement of the wholesale tax.

Dr. FitzGerald

The increase in stocks?

Mr. Colley

And the increased value of the concession would not have operated straight away to the extent that the amount of wholesale tax it will now be found necessary to refund will have built up over the whole period.

Dr. FitzGerald

I am talking about the original situation. The Minister seems to be suggesting that when this thing started these firms that were required to register for wholesale purposes by being given the opportunity of paying, or by being required to pay, wholesale tax on their purchases were exempted from wholesale tax on sales of goods in the period immediately after the start of wholesale tax, sales of goods which they held in stock at that time, whereas smaller people had to pay on all their sales including those which they had held in stock. Did that actually happen? Are we sure that is what happened?

Mr. Colley

Deputy FitzGerald is mistaken in thinking of large firms getting this concession and small firms not getting it.

Dr. FitzGerald

Why?

Mr. Colley

There are far more than six small firms involved.

Dr. FitzGerald

When I talk about large and small firms I mean firms large enough to fall under the £100,000 ruled by the Commissioners and small being those that did not. I am not talking of six versus the rest.

Mr. Kenneally

I think this was due to the fact that in the turnover tax regulations it was agreed by the Revenue Commissioners that they would take their tax on an estimate.

Dr. FitzGerald

Wholesale tax?

Mr. Kenneally

Any firm could have opted for that when the regulation came into effect.

Mr. Colley

When the Revenue Commissioners saw this problem in 1966 they saw it in a rather different light from the way it is presented now. The problem they saw was that traders had a certain amount of tax to pay every month. The main purpose of the negotiations at that time was to arrive at that figure with the minimum amount of trouble. Some of these firms had a definite wholesale branch. Others were wholesalers in the sense that they sold to people who resold the goods. They made the point that it would be virtually impossible for them to calculate their wholesale tax by reference to sales, but that it would be a relatively easy matter to calculate their tax by reference to purchases and that the result would be the same.

The point which was not sufficiently appreciated either by the traders or by the Commissioners at that time was that an equitable result would not be achieved if there was a build-up of stocks and the tax was charged by reference to purchases. In other words we would be getting tax on a build-up of stocks which were not sold. Subject to that, if the stocks were costed, normally there should be no differences in the calculation of stocks by reference to sales reduced to the wholesale or to cost price and to the purchases in a particular period. The amount of money paid each month should be the same either way.

As we see it now if a person accounted for tax in the ordinary way, that is on the basis of the money from his sales, reduced to the wholesale value, and another person accounted for it on the basis of his purchases you would get the same result if you adjusted the second person by reference to his opening and closing stock. If you take opening stock, add purchases and deduct closing stock you get the cost of sales. That is the accountancy involved. Therefore, in the second method by adjusting stocks in this way, we would have got tax over the whole period on the cost of their sales. For the person accounting in the other way, the straightforward way, we would have got tax on the wholesale value of the actual sales and the two should approximate. They should be very close together.

Dr. FitzGerald

I have not understood most of that.

Dr. O’Donovan

It is quite clear to me. It is now 10 o'clock. The Deputy should think it over for the night.

Dr. FitzGerald

I think we should clarify this now before we forget all about it and have to start again.

Chairman

We agreed to finish at 10 o'clock. We are meeting from 10.45 a.m. to 1. o'clock tomorrow and from 3 to 5 o'clock if necessary.

Mr. T. J. Fitzpatrick (Dublin Central)

I want to get one thing clear. If a man had £100,000 worth of stock when turnover tax started and he has £100,000 worth of stock now, there is no rebate?

Mr. Colley

There is no rebate.

The Committee adjourned at 10 p.m. until 10.45 a.m. on Thursday, 29th June, 1972.