Dáil Éireann Debate, Tuesday - 24 October 2017
46. Deputy Michael McGrath asked the Minister for Finance if the Revenue Commissioners have investigated allegations of certain practices in the poultry sector that led to a systematic excess of flat rate addition payments to farmers over VAT incurred on their inputs; if the Revenue Commissioners have found evidence of wrongdoing; and if he will make a statement on the matter. [44694/17]
View answerFarmers, such as poultry farmers, who are involved in agricultural production are treated differently from other businesses for VAT purposes in that they are not obliged to register for VAT when they exceed the turnover limit for registration. They can elect to do so but the vast majority opt to remain unregistered. The flat-rate scheme was designed to compensate these unregistered farmers on an overall basis for the VAT charged to them on their purchases of goods and services relating to their activities. The flat-rate scheme sets out a percentage amount, known as the flat-rate addition (FRA), which unregistered farmers apply to their prices when selling to VAT-registered businesses (for example, co-operatives, meat factories, etc). The VAT-registered business treats the flat-rate amount as a normal business input in its periodic VAT return, claiming input credit for the flat-rate amount paid to the flat-rate farmer. In this way, farmers are compensated for the VAT borne by them on their input costs, and this simplification reduces the administrative burden for them as there is no need to register for VAT to recover VAT borne on their inputs.
A business model emerged in the poultry sector that exploits the interaction of the normal VAT system and the flat-rate scheme to engineer higher levels of flat-rate addition payments compared with the VAT borne on their input costs. The model included the use of VAT-registered entities to recover VAT on costs borne on behalf of flat-rate farmers while those farmers continued to benefit from applying the flat-rate addition to their supplies. In addition, the contra supply arrangements in relation to growing services and feedstuff that are widespread in the industry could be manipulated to increase the price of the growing service and hence the flat rate addition payment.
However, it is important to recognise that businesses are free to organise their activities, within the law, to their economic advantage, including for the objective of minimising their tax liabilities or maximising the tax efficiency of their operations. That essentially is what happened in this case; participants in the sector recognised and adopted structures and arrangements that had an obvious business rationale and which were also likely to increase the level of flat rate addition payments to unregistered growers in the sector. When this matter was brought to the attention of my Department, provision was made in Finance Act 2016 to enable the Minister for Finance to exclude sectors from the flat rate scheme where the business structures or models employed in that sector result in a systematic excess of flat-rate addition payments over input costs borne by flat-rate farmers within that sector. This measure provides a means for dealing with any sector in which systematic over recovery of VAT is engineered through the adoption of lawful business arrangements and structures and Revenue will deal with such sectors through the use of this provision.
Following the introduction of this provision (by way of amendment to the VAT Consolidation Act 2010), Revenue undertook a detailed examination of the business structures, models and contractual arrangements in place between parties within the sector. As part of this review, Revenue met with all relevant parties including the Irish Farmers Association, poultry processors and representatives of co-operative societies operating in the sector during quarter 1 and quarter 2 of 2017. Following this engagement, co-operative societies undertook to recharge growers with all costs borne on their behalf plus VAT. The undertakings given by the co-operative societies address one of the mechanisms likely to result in overcompensation for flat rate farmers in the sector and I welcome this progress. However, there is still scope for over-compensation through the use of contractual pricing arrangements and contra supplies between processors and growers. I am advised by Revenue that they will shortly undertake a programme of audit type examinations of growers to establish if there is still a systematic excess of flat rate addition payments over VAT on input costs when account is taken of the recent changes implemented by cooperatives in the sector.
I am pleased that the industry has abandoned some of the activities likely to give rise to overcompensation of growers for their VAT costs. It would serve the industry well to examine if the pricing structures they operate currently could result in overcompensation of growers for their input VAT costs and to adjust them if this is the case. If the industry could provide empirical evidence that overcompensation is not arising at current price levels or will not arise at new price levels to be implemented in the industry, it would remove the need for Revenue to proceed with its programme of interventions. I am committed to making an order to exclude the sector from the flat rate scheme if it proves necessary to do so.
