Financial Resolution No. 1: Excise — Beer. - Financial Resolution No. 7: Value-Added Tax. – Dáil Éireann (25th Dáil) – Wednesday, 25 Jan 1989

Financial Resolution No. 1: Excise — Beer. - Financial Resolution No. 7: Value-Added Tax.

The Taoiseach

I move:

(1) That in this Resolution—

"the Principal Act" means the Value-Added Tax Act, 1972 (No. 22 of 1972);

"the Act of 1988" means the Finance Act, 1988 (No. 12 of 1988).

(2) That the rate of flat-rate addition to prices of agricultural produce or agricultural services supplied by unregistered farmers be increased from 1.4 per cent to 2 per cent, and

that accordingly, section 12A (inserted by the Value-Added Tax (Amendment) Act, 1978 (No. 34 of 1978) of the Principal Act be amended by the substitution of "2 per cent." for "1.4 per cent." (inserted by the Act of 1988).

(3) That the charge of value-added tax on livestock be increased from 1.4 per cent to 2 per cent of the taxable amount or value of such goods, and

that accordingly, section 11 (1) (inserted by the Finance Act, 1985 (No. 10 of 1985) of the Principal Act be amended by the substitution in paragraph (d) of "2 per cent." for "1.4 per cent." (inserted by the Act of 1988).

(4) That this Resolution shall have effect as on and from the 1st day of March, 1989.

(5) It is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1927 (No. 7 of 1927).

This resolution proposes to increase from 1.4 per cent to 2 per cent the flat rate compensation for farmers together with a similar increase in the VAT rate on livestock. The changes will take effect from 1 March next. In his Budget Statement today the Minister for Finance explained the reason for this change. Perhaps I could outline it again very briefly. As most Deputies will recall, the rate of refunded VAT for unregistered farmers was reduced by the Minister for Finance from 2.4 per cent to 1.4 per cent because, by and large, farmers were not paying their appropriate contributions in the form of levies of one kind or another. To compensate the Exchequer for the fact that these payments were not being made by farmers the rate of refunded VAT was reduced. During 1988 the farming community did pay up very substantially in so far as these particular duties and levies are concerned. As a result the Minister for Finance decided that it would be reasonable and fair to somewhat restore, not totally, the rate of refunded VAT for farmers. It is being increased from 1.4 per cent to 2 per cent. At the same time there is a similar increase in the rate of VAT charged on livestock to unregistered farmers.

Mr. Noonan

(Limerick East): At the outset I would like to say that a farmer, like any other trader, is entitled to claim a refund of VAT as a matter of law if he registers. It would be a great imposition on small farmers if they had to register. This catch-all mechanism of a rebate to farmers, through the price of their produce, is one in principle we favour. It would be undesirable from both an administrative and a farmer's point of view if all farmers were to be forced to register for VAT purposes. Two budgets ago this rate of VAT rebate stood at 2.4 per cent. When the then Minister for Finance, Deputy MacSharry, reduced the rate of VAT rebate he tied the reduction directly in with the difficulties in collecting levies from farmers. I do not purport to quote him but, to paraphrase him, he said at the time he made the reduction that it was in effect part of the stick and carrot approach to the payment of tax and levies and that this was the stick. He said specifically that he was reducing it in the first tranche because farmers were behind in their payments of the youth employment and training levies. More explicitly last year he tied it directly to the health levy. He said that, because the take in levies from the farming community was so far in arrears in toto, he was deliberately going to bring it down, but he added a commitment that he would restore it if the arrears situation improved. We had our own views on this and argued about it but as far as it went, it was a fair enough decision.

During the amnesty the levies were paid, and they were beyond the expectations of the Department of Finance. This was a rough and ready scheme at the best of times because it penalised those who paid their levies as well as those who were in arrears. Many farmers keep their affairs in order, pay their taxes and levies but they got hammered as well. Many of them registered.

I understand that the Department of Finance got independent advice on this from a well known agriculturalist and that he was of the view that the appropriate level of rebate should be 2.6 per cent or 2.7 per cent rather than 2 per cent. I am disappointed that the Minister, despite the commitments given, has not restored the rate to what it was prior to the 1987 budget. It should be at least 2.4 per cent and I should like the Minister to tell us why he did not set it at 2.4 per cent. I think advice on this was available to the Minister, as there was to all of us, and I understood there was a certain level of agreement between the adviser and the Minister's officials, that the appropriate rate should be 2.6 per cent.

I approve of this move because it is timely. This is an effort to fulfill the commitment given by the Minister last year, and I believe it is right that that commitment should be fulfilled. I wish I was in a position to amend this because if I were, I would put down an amendment to set this rate at 2.6 per cent. In any event the rate should be at least 2.4 per cent, and I will be putting down an amendment to that effect to the Finance Bill and we can debate it that day. I approve of the restoration of the rebate. I have a quarrel about the level and I should like to hear the Minister's explanation on this. However, it is a move in the right direction and one which we can endorse.

Mr. McDowell

I should like to ask the Taoiseach two questions. As Deputy Noonan correctly said, when this process of resorting to a reduction of the VAT rebate was originally proposed to this House, it was a temporary measure, designed to produce a temporary effect, was regretted in ways and would be restored if the situation improved. What was meant by that statement to the House? Was it really meant that the rebate would be restored to its full value, and does the Minister now propose this at the first stage of its restoration, or does he see this as the entirety of what the Government intend to do in relation to the restoration of the VAT rebate?

The other point I should like to raise is the amount of tax paid. The Minister in his speech said that a large part of the increase in yield over the 1988 budget estimate of £42 million was the result of the clearance of arrears under the tax amnesty. I should like the Taoiseach to indicate to the House what proportion we are talking about. Forty two million pounds has gone up to about £80 million, an increase of £38 million. How much of that represents amnesty payments and how much of it is unforeseen buoyancy? In that context I think it would be possible to judge whether the restitution of the VAT rebate is appropriate, under-estimated or overestimated. To simply say that a large part of the increase in yield over the 1988 budget consists of a clearance of arrears leaves this House somewhat in the dark. Surely we are entitled to know what proportion of that £38 million amounted to arrears and what proportion of it was accounted for by buoyancy and taxation of agriculture.

Proinsias De Rossa

This is one of those items The Workers' Party do not support. The Taoiseach indicated that the reason the levy is being increased to 2 per cent is because a deal was done last year to reduce it to 1.4 per cent to encourage farmers to pay their health contributions, etc. Because the take was so good in the last year they are now increasing it to 2 per cent — previously it was 2.4 per cent. The point raised by Deputy McDowell is important. To what extent did the reduction in the refundable VAT have an effect on the take of health contributions and PRSI, and what effect did the amnesty have? It would be interesting to have that point teased out.

A more fundamental point is, how can one set of traders or businessmen opt not to register and yet reclaim VAT while other traders must register if they have a turnover in excess of £12,000 per annum and if they do not register they have no right to reclaim VAT at any level. If their turnover is less than £12,000 per annum, they can opt to register.

The case which farmers generally have made that they want to be treated in the same way as other sectors of the community for income tax purposes should hold in relation to VAT. I know there are serious divisions within the farming community as to whether it should be income tax based on accounts, land tax or whatever. Nevertheless the strong argument made in the past has been that they should pay income tax on the basis of their income and be assesed in the same way as everybody else. I do not see why farmers cannot be treated in the same way for VAT as other traders are treated.

I can see no possible justification for increasing the notional tax rebate which farmers can claim by a further £12 million. According to statistics I have, the VAT refund claimed by farmers in 1979 was £6.8 million; in 1980 it was £21 million; in 1981, it was £22 million; in 1982, it was £40.2 million; in 1983 it was £55.4 million; in 1984 it was £59.7 million; in 1985 it was £63.8 million and in 1986 it was £79.4 million, almost £80 million. If one compares those statistics with the actual income tax paid by the farming community generally in the past year, which I understand was in the region of £40 million to £42 million, one can see that as a community, whatever about individual farmers, the amount of income tax paid was refunded twice over by way of VAT refunds. Here we are proposing to add an additional £12 million to this figure. This does not make sense.

Another strange anomaly, if one can call it that, is the fact that this is to come into effect on 1 March. If one compares that with the fact that the social welfare increases which have been trumpeted here today do not come into effect until July and the proposed scheme for deserted husbands and widowers will not come into effect until October, there seems to be a difference of approach to different sectors of the community. That is not to say that there are not deserted husbands and widowers among farmers. I am simply saying that it is the difference as between the way those who are dependent on social welfare and those who may benefit from the tax breaks in this budget are treated. There is a serious anomaly here in the way different business people are treated, for example, farmers and other traders. There seems to be a lot of money being refunded to farmers with no real justification presented here tonight. I would like to hear what the justification is.

There are no figures, for instance, for the amount of VAT which is being paid by unregistered farmers, even on an estimated level. There is no information as to whether it is farmers or co-operatives or other traders who are actually collecting this 2 per cent refund. There are quite a lot of unknown factors in relation to this.

The Taoiseach argued earlier in relation to the increase in excise on petrol that it would bring in £9.5 million and that it would be unjustifiable not to take advantage of the drop in the cost of petrol to bring this sum of money in. I can see no good grounds for handing over £12 million in these circumstances. I argue that farmers should be obliged to register for VAT in the same way as other traders and, if they choose not to, they should take their losses in the same way as other traders who do not register.

Mr. M. Higgins

I want to make one or two points on this issue which I do not regard as being very satisfactory in a number of ways. For a start, the phrase "farming community" has been used here by a number of speakers. I can think of no more misleading term to use. The fact is that one can break farmers down roughly into at least three major groupings, those who are below the profile threshold, if one likes, those in the higher levels moving close enough to intensive commercial farming, and in the middle there is probably a great range of farmers who are at once the most productive in relation to unit investment and in relation to yield per acre and so forth. There is spatial location of these categories as well. Let us look at the category of agricultural production in the 12 western counties where matters have changed from the time of Dr. John Scully's work which showed that something like 70 per cent of farms in the 12 western counties were under 50 acres, that 50 per cent were under 30 acres and were held in fragmented holdings and that there were problems in terms of physical structure, drainage, market access and the absence of volumes of scale and so forth. I had hoped, nearly 20 years ago, that through the work that had been unleashed in the Agricultural Institute and An Foras Talúntais and elsewhere we were moving towards some degree of specificity in relation to farm incomes. What has happaened unfortunately is that every effort we have made in relation to getting the kind of information that has been referred to by a number of Deputies, I think quite responsibly, every effort we have made to establish income levels for different categories of farm households, has been negated. Thus we have people speaking about the gross transfers to and from the farming community as if that had real meaning. It has very little real meaning.

I found myself, listening to the case for and against, asking where are the principles of equality of taxation taking root. Are we comparing an equality principle between those registered for VAT within the agricultural sector and those unregistered? Are we making comparisons on income levels? We are obviously not doing the latter which is grossly unsatisfactory and sloppy, and this work, the basis for giving more precise figures, was done and is there. If we are just asked to prove the point, if we look at the Minister's tables he is able to specify exactly what the effect of some of his taxation proposals are on single persons, on married people with two children and so forth. We have people caught oppressively for direct taxation and for indirect taxation. When one looks at that type of detailed information and then looks at the comments of the Minister about the flows to and from the agricultural sector, we find they lack specificity. Thus the questions are legitimately raised, for example, as to what sections of the farming community we are talking about; how many farm households; within what range of acreage structures. We need to know this not only for principles of tax equity but in terms of whether the VAT refund is a net contribution to productivity or a contribution into some kind of general pool which will be soaked up by way of benefits which might be in no ration to actual expenditure in relation to supporting an agricultural sector which is like a house of ghosts in that we refuse to specify in terms of who is in it, at what level of productivity and otherwise.

For all these reasons I am very uneasy at the suggestions that are being made. I also think this lack of specificity is evident — and I very much direct my remarks to the Minister for Finance — in terms of the thinking within the Department of Finance.

Unlike 90 per cent of the people in this House at present I am not a conservative. I was trained in the principles of taxation and one was always encouraged to have a degree of certainty. I do not see where this is present in this case. Such phraseology, for example, as "eroded a rebate", "a stick and a carrot" or "something may have happened that may perhaps have led to a greater contribution from the farming community" is all very fine but it is a very unusual language emanating from a Minister for Finance and is at quite a distance from many of the old principles of certainty in taxation, the business of knowing the administration costs and posing an item, looking for its return and being able to specify it and so forth. In fact the only people about whom the exactitude of language is directed are what one might call the victims who are involved in direct work and are taxed directly at source. Everyone is suffering as a result of this. There may be very many people who are entitled to a VAT refund but who are unregistered; there may be others who are not. We do not know the human composition of the people involved and we do not know its productive composition. All of this is stemming from a mixture of witchcraft and notions that the land should never have tax directed against it, that there are categories of people who are not used to paying tax and one has to get them used to paying it gradually. Then there is the other kind of course, and I like this kind of ruralist reductionism because there is a certain charm to it although I have not much time for it. One thing that is absolutely certain is that there is a great number of people within this category, again, the farming community who are paying a fortune to accountants to avoid paying levels of taxation that they clearly owe to the State. This is raising questions that are going to divide this country. If people want equal citizenship it means taking an equal responsibility for taxation and the people who have expressed disquiet about what is proposed as a handback of maybe £12 million would like to know to whom and for what and with what consequences it is being handed back. This riddle-me-ree of sticks and carrots is all very fine if one is talking to children of the age of 9 but it is not very useful rhetoric from the Department of Finance.

The Taoiseach

First, I will deal with the point raised by Deputy McDowell because it is the simplest one. The figures given by Deputy McDowell were for income tax and have nothing whatever to do with this resolution. Unfortunately, he has left the House and therefore that little correction on my part is wasted.

Deputy Noonan is quite right in that having a flat rate for farmers and not having them registered for VAT is very sensible indeed. It is a system which is in operation in ten of the EC countries. The position is that most farm outputs are mainly zero-rated and farmers would be in a refund position on VAT. If all these farmers were registered there would be the whole administrative burden of their registration and of dealing with them in the context of the VAT system and at the same time the Exchequer would be getting nothing. That would not be a very sensible way of proceeding. The idea of a flat rate of VAT refund for farmers is eminently sensible and very much to the benefit of the Exchequer.

I will retrace the history of VAT refund. When VAT was introduced it was decided it would be much more sensible not to have farmers registered and to have a flat rate refund for them. That rate was fixed at 2.4 per cent. As I have said, that was an eminently sensible and fair arrangement. As time went on, farmers were not paying their health contributions and levies. Deputy Albert Reynolds's predecessor, Deputy Ray MacSharry, decided, not as has been suggested here as a threat or some form of compulsion but to protect the Exchequer, that as long as farmers were not paying their health contributions and levies he would reduce the refund of VAT to farmers as a sector of the economy. First, he reduced it to 1.7 per cent but there was no improvement in the position. In order to look after the interests of the Exchequer he then reduced it to 1.4 per cent.

All the while we acknowledged that that was a blunt instrument approach. It was really a negation of the principles of VAT. VAT is a very fine taxation system and is very much based on the concept of refunds. You pay out a certain amount of VAT, get in a certain amount and either pay over the difference to the Revenue or the Revenue refund you the difference. That is the essence of the system. In not giving farmers their flat rate refund of 2.4 per cent, the Minister for Finance and the Government were acting in defiance, as it were, of the proper administration principles of the system. It was a reasonable thing to do as long as farmers persisted in not paying their health contributions and levies which they were obliged to pay. Basically, it could not be defended on the basis of the principles of administration of VAT as a taxation system. It was always understood — Deputy MacSharry said this several times — that this was done only to make up to the Exchequer the loss the Exchequer was suffering by virtue of the farmers not paying these amounts that were due and if and when farmers did meet their obligations the position would be restored.

In 1988 farmers paid about £18 million in health contributions. This has been calculated very roughly. The figures cannot be exactly measured but by and large they are accurate enough. Of the £18 million paid in health contributions and levies in 1988 by farmers, about £11 million related to arrears for previous years. Farmers have made a very substantial amount of payments of their current health contributions and levies and of arrears but there is still a fair amount due.

The present Minister for Finance and the Government decided that the time had come that, as farmers had made major payments of both the current amounts due and the arrears, the promise made by Deputy MacSharry as Minister for Finance should be adhered to. It was decided in this budget to move towards restoring the position but to move para passu as it were in so far as the farmers still owed a certain amount of their health contributions and levies and therefore the restoration should only be in part. I think that is fair and reasonable and will be accepted by the farming community. As they have gone a fair distance to meet their obligations to the Exchequer, the Minister for Finance is going a fair distance to meet their claims for a full refund of 2.4 per cent. The Minister decided, with Government agreement, to restore the refund to 2 per cent this year.

In answer to Deputy Noonan, that is not the end of the matter. It is an ongoing process. At present the Government and the Minister feel that 2 per cent is just about right having regard to the amount the farmers have paid. The situation will be kept under review and any further necessary changes will be made. That is the best information I can give the House about this matter. The Minister for Finance was right originally in making this change even though it was in contradiction of the basic principles of VAT. The Minister for Finance and the Government are right in moving back towards the 2.4 per cent but not going all the way because there are still arrears from the farming community in respect of health contributions and levies.

Mr. Dukes

We had some discussion on this matter last year and the previous year. It is extraordinary to hear the Taoiseach giving us this very confused presentation of what is going on. The Taoiseach is now admitting that the flat rate VAT refund system, for farmers is not being properly worked. He has said he accepts that the rate he is now proposing is inadequate. He has accepted that it should be even more than he is proposing now. He talked about moving pari passu and increasing the refund rate to 2 per cent because he thinks that is the appropriate figure, bearing in mind that other taxes have not been fully collected. The Taoiseach agrees that if it were not for any other consideration this rate would be higher than it is now. I am told the rate should now be about 2.6 per cent. I would like to ask if the Taoiseach would propose this kind of system in any other sector. I do not think he would.

Let me deal briefly with the matter. Deputy Dukes is making a serious miscalculation with regard to this whole matter. In so far as other sectors of the business community are concerned, if there were arrears of VAT they would be arrears in individual cases but the general body of business people concerned in whatever section it was would be paying in full. In the case of the farmers, however, it was a composite decision by the farmers as a whole not to pay.

Mrs. Doyle

Not any longer.

Mr. Dukes

The Taoiseach is completely misinformed.

The Taoiseach

Deputy Dukes was making an argument that this system adopted by Deputy MacSharry as Minister for Finance was inappropriate in the case of farmers because it would not, or did not, apply in the case of other sectors. I am making the point that something like this never arose in the case of other sectors. If there were arrears in other sectors it was a case of an individual trader or business person not paying, whereas in the case of the farming community up to 1988 it was a decision by farmers as a body, as a community, as a sector, not to pay. The health boards and the Revenue Commissioners tried to collect them and it proved impossible.

The situation changed in 1988 and farmers, again as a body of business people, self-employed persons, decided to pay up and they paid up substantially, as I said, £18 million. As a result, the Government feel that the original mechanism employed to try to protect the interests of the Exchequer can now be modified to the extent proposed here. It is ridiculous and absurd to be making an analogy between the situation as far as farmers are concerned and other sectors of the business community.

Mr. Dukes

That is utterly specious.

An Ceann Comhairle

I want to call Deputy Cooney who was offering earlier.

Mr. Dukes

I want to make this point briefly. The Taoiseach is trying to make the point that there was some corporate decision to adopt a certain line of action. That is not the case. There are many cases on record of people who were in the tax net whose accounts were all submitted, where whatever agency was charged with the collection of these charges could determine what the income and the liability was and the charges were paid. What the Taoiseach is saying is totally unfounded and it does not take away for a moment the inappropriateness of using an instrument like this to make up for the inadequacy of collection in another area of taxation.

An Ceann Comhairle

I have given the Deputy some latitude. I call Deputy Cooney.

Mr. Cooney

It is quite clear from what we have heard and what we know about this mechanism that it was a classic case of rough justice. Rough justice is never justice and I do not think that the State should ever indulge in rough justice. I concede that there is a dilemma which arises with the administrative and legal difficulties of collection all the outstanding levies and other payments that were due. If the collection was to be made through the normal system, the legal and administrative burdens would be simply huge. I can see the pragmatic justification for rough justice, although I must qualify that statement by saying that mere considerations of pragmatism should not justify rough justice when it is the State dealing with its citizens. The State should always endeavour to be even-handed. However, I concede that that was the — principle is the wrong word — policy that was adopted and applied. The Taoiseach does indicate to us that it was successful, if success is to be measured in terms of the return achieved.

The Taoiseach has quoted a figure of £18 million as having been gathered into the Exchequer since this rough justice mechanism was applied but he has been singularly silent as to the amount of the arrears now outstanding and it is that unknown sum that is now offered as the justification for continuing rough justice, albeit in a less rough form. I think we are entitled to know how much is outstanding now so that we can make a pragmatic estimate, a pragmatic judgement as to whether the rough justice still being pursued is being properly applied although, as I say, I have reservations about the principle. These reservations become even more pointed because what is being done now is that the entire body of the farmers of Ireland are now being punished for the alleged default of what must now clearly be a minority and the considerations, the administrative and legal difficulties that might have prevented an orthodox collection of the arrears in the case of a huge number of farmers surely do not apply when we are now dealing only with a minority of farmers. What the Government are now doing is punishing all the farmers for the continued default of a minority. There is no way that can be defended. The Government should look seriously at the position in which they have put themselves whereby they are being unjust to the majority of a sector of the community because a minority of that sector are still in default. There is no justification for that. If a minority are still in default, they should be pursued through the normal mechanisms rather than this blackmailing punishing of the entire sector.

The Dáil divided: Tá, 78; Níl, 17.

Tá

Abbott, Henry.
Ahern, Bertie.
Ahern, Dermot.
Ahern, Michael.
Andrews, David.
Aylward, Liam.
Barrett, Michael.
Brady, Gerard.
Brady, Vincent.
Brennan, Matthew.
Brennan, Séamus.
Browne, John.
Burke, Ray.
Byrne, Hugh.
Calleary, Seán.
Collins, Gerard.
Conaghan, Hugh.
Connolly, Ger.
Coughlan, Mary T.
Cowen, Brian. Daly, Brendan.
Davern, Noel.
Dempsey, Noel.
Dennehy, John.
de Valera, Síle.
Doherty, Seán.
Ellis, John.
Fahey, Frank.
Fahey, Jackie.
Fitzgerald, Liam.
Fitzpatrick, Dermot.
Flood, Chris.
Flynn, Pádraig.
Foley, Denis.
Gallagher, Denis.
Gallagher, Pat the Cope.
Geoghegan-Quinn, Máire.
Wallace, Dan.
Walsh, Joe.
Walsh, Seán.
Haughey, Charles J.
Hilliard, Colm Michael.
Hyland, Liam.
Jacob, Joe.
Kirk, Séamus.
Kitt, Michael P.
Kitt, Tom.
Lawlor, Liam.
Lenihan, Brian.
Leonard, Jimmy.
Leyden, Terry.
Lynch, Michael.
Lyons, Denis.
McCarthy, Seán.
McCreevy, Charlie.
Mooney, Mary.
Morley, P.J.
Moynihan, Donal.
Nolan, M.J.
Noonan, Michael J. (Limerick West).
O'Dea, William Gerard.
O'Donoghue, John.
O'Hanlon, Rory.
O'Keeffe, Batt.
O'Keeffe, Ned.
O'Kennedy, Michael.
O'Leary, John.
O'Rourke, Mary.
Power, Paddy.
Reynolds, Albert.
Roche, Dick.
Smith, Michael.
Stafford, John.
Swift, Brian.
Treacy, Noel.
Tunney, Jim.
Wilson, John P.
Wright, G.V.

Níl

Bell, Michael.
De Rossa, Proinsias.
Desmond, Barry.
Gregory, Tony.
Higgins, Michael D.
Howlin, Brendan.
Kavanagh, Liam.
Kemmy, Jim.
McCartan, Pat.
Mac Giolla, Tomás.
O'Sullivan, Toddy.
Pattison, Séamus.
Quinn, Ruairí.
Sherlock, Joe.
Spring, Dick.
Stagg, Emmet.
Taylor, Mervyn.

Tellers: Tá, Deputies V. Brady and D. Ahern; Níl, Deputies Howlin and McCartan.

Question declared carried.

Dáil Éireann díospóireacht - Wednesday, 25 Jan 1989

Financial Resolution No. 1: Excise — Beer. - Financial Resolution No. 7: Value-Added Tax.

Tá

Níl

Dáil Éireann díospóireacht -
Wednesday, 25 Jan 1989