I welcome representatives from the Department of Finance and the Revenue Commissioners who will make a presentation to the committee on the EU legislative proposal in regard to the common system of VAT as regards tax evasion linked to import and other cross-border transactions. I understand Mr. Pat Murphy will make the presentation on behalf of the Department of Finance.
Proposed VAT Regulation: Discussion.
Mr. Pat Murphy
The proposal we are discussing today was brought forward by the European Commission on 1 December 2008. It represents the second in a series of measures being developed by the Commission in response to the ECOFIN Council's agreement of November 2006 on the need to establish an anti-fraud strategy at Community level to combat tax fraud, especially tax fraud in the area of indirect taxation and particularly VAT. The committee examined the first proposal in this series on 15 July 2008. That proposal dealt with the frequency of submitting returns by traders used for the exchange of information between member states in respect of cross-border transactions. A directive in that regard was adopted by Council on 16 December 2008.
In this presentation, I will briefly put the Commission's new proposal into context, outline its main elements and elaborate on our concerns and the position being adopted by Ireland at EU Council working party level.
Around 2006, a number of member states had expressed concerns regarding the growing problem of VAT fraud, especially what is termed carousel fraud or missing trader fraud. Particular concerns were expressed by Germany, Austria and the UK, who were reporting significant losses in VAT revenue. Carousel fraud targets intra-Community transactions, that is goods traded across the Community and typically consignments of high value, low volume goods such as computer chips or mobile phones and more recently contact lenses. The zero rate of VAT applied to the initial intra-Community supply of these goods provides an attractive vehicle for fraudsters who charge VAT on the goods to their customers, but fail to pay over the VAT to the tax authorities or else reclaim VAT that they have not paid.
The Commission proposal we are discussing today contains two measures to be included in the VAT directive designed to counter VAT fraud arising in the context of cross-border transactions within the Community. Both concern the operation of administrative co-operation arrangements in controlling intra-Community trade, with particular reference to the VAT information exchange system, VIES. The first measure aims to clarify the conditions under which imported goods destined for another member state may qualify for an exemption from VAT. The second measure provides for the recovery of VAT by making suppliers and purchasers jointly and severally liable for VAT fraud where the suppliers' non-compliance with routine reporting obligations for cross-border transactions has facilitated such fraud.
I will deal briefly with each of these measures in turn. In relation to the conditions for a VAT exemption for imported goods destined for another member state, under current arrangements such goods qualify for a VAT exemption on importation on the basis of conditions laid down by individual member states. The Commission claims that divergences in the application of these conditions have been exploited by traders in order to avoid payment of VAT. The proposal provides for supplementary conditions to be included in the VAT Directive under which information is to be provided by the importer to prove, at the time of importation, that the goods are to be dispatched or transported to another member state. The information to be provided by the importer is to include his VAT identification number or that of his fiscal representative in the member state of importation, the VAT identification of the customer to whom the goods are supplied in another member state and documentation indicating that the goods are to be transferred to another member state.
The Commission proposes that for business-to-business, cross-border transactions within the Community the supplier of goods should be made jointly and severally liable, in conjunction with the purchaser, for any subsequent loss of VAT incurred in the member state of acquisition as a result of the supplier failing to meet reporting obligations to his tax authority in respect of sales to other member states. Joint and several liability is not a totally new concept and is already an option provided for under the VAT directive in respect of domestic transactions, as opposed to cross-border transactions. Ireland currently avails of this option in respect of a small number of activities, for example, in dealing with foreign mobile traders operating at exhibitions and markets in Ireland. In this regard, the organiser of an exhibition or event is held jointly and severally liable for tax losses as a result of the non-compliance of a mobile trader.
Under the Commission's proposal, the joint and several liability measure is being applied for the first time to cross-border transactions. In this arena, suppliers are currently obliged to submit sales lists, VIES statements, in respect of their intra-community supplies on a quarterly basis. The VAT on such supplies accrues to the member state of acquisition on the arrival of the goods and it is the responsibility of the business customer acquiring the goods to pay the VAT. Where a VIES statement made by a supplier is found to contain inaccurate information or is not provided within the timescale required under the VAT directive, the Commission's proposal provides an opportunity for the supplier to avoid liability for the VAT by proving that the shortcomings in his reporting obligations were merely clerical in nature.
Regarding Ireland's concerns, in discussions at EU level, Ireland has consistently called for a balance to be struck in terms of the effectiveness of a specific measure against fraud and the potential administrative burden on business. In this regard, Ireland does not have particular difficulties in respect of the first measure involving new reporting obligations on traders in respect of imported goods in transit to another member state. While the effectiveness of the measure remains to be seen, the level of goods transiting through Ireland and bound for other member states is relatively small and the measures should not place excessive additional burdens on business. However, concerns arise regarding the second measure for the joint and several liability of a supplier involved in a cross-border transaction. Given that the vast majority of traders are fully compliant in respect of their reporting obligations, and, more especially, given that fraudulent traders normally ensure that a proper paper trail is available for their transactions, the effectiveness of the measure against fraud and its potential as a VAT recovery mechanism are questionable. We consider that the proposal lacks clarity in terms of how it would operate in practice and also in terms of the extent to which a supplier might be held liable for a subsequent loss of VAT revenue in the member state of destination of the goods involved. Basically, the proposal fails to set out clear legal or procedural steps that must be followed before the supplier is made liable in any given case. For example, there are no rules as to what follow-up action should be taken against the fraudsters in the member state where the loss is incurred before the supplier is made jointly liable. This seems to be disproportionate. In addition, there are difficulties in establishing the actual liability of the supplier when this fraud occurs. Essentially, the proposal does not provide legal certainty or a workable method to enable member states to establish the liability for which the supplier is jointly liable.
To date, there have been two meetings on the dossier at Council working party level. During the discussions Ireland has focused mainly on the joint and several liability aspect of the Commission's proposal. In this regard, we have expressed the view that the proposal lacks balance in terms of the potential additional administrative burden on businesses and tax authorities and the likely benefits to be achieved in terms of its effectiveness in tackling VAT fraud. In addition, Ireland has pointed to a lack of detail in terms of the responsibility of member states and the procedural regime to be followed under the proposal. In short, we are not convinced of the effectiveness or practicality of the joint and several liability aspect of the Commission's proposal. Other member states share this view.
I thank Mr. Murphy for his comprehensive presentation. I am conscious that Deputy Connick must leave; did he wish to ask a question?
No, although I am sorry I must leave.
We understand fully. I call Mr. Brennan from the Office of the Revenue Commissioners.
Mr. Pat Murphy
It was a joint statement covering the Department of Finance and the Revenue Commissioners.
I call Deputy Costello.
I thank the delegates for coming before us. This is a complex issue and my first question is: are the Department of Finance and the Revenue Commissioners singing from the same hymn sheet? Since a joint statement was issued, I presume the answer is yes.
The final point of the presentation was that other member states shared the view that this was not a balanced approach; it was considered it would be ineffective and overly bureaucratic. Are the countries most affected by the directive, including Germany, Austria and the United Kingdom, the ones promoting it? Did the directive originate in these countries? What is the extent of the problem? What is the extent of VAT fraud in Ireland? Is it a problem that affects certain countries exclusively or does Ireland have a serious problem also? If there is a problem in Ireland, is there a geographical spread? In other words, does the problem occur at the Border with Northern Ireland, in trade with the United Kingdom or mainland Europe?
The presentation indicates that the volume of goods transiting through Ireland bound for other member states is relatively small. Therefore, the measure should not place excessive additional burdens on businesses. The level may be relatively small compared to that in other countries but surely it is not relatively small in the context of the volume of Irish trade. I understand 40% of our trade is with other member states, excluding the United Kingdom, and that a further 20% of trade is with the United Kingdom. Therefore, the majority of our trade is with other EU countries. Surely that makes it a relatively large issue for Ireland.
Is it being suggested that if the mechanism provided for is not a runner, an issue of subsidiarity may arise? Is it considered this might be best addressed at individual member state level? We have specific geographical issues, compared to other countries that do not have bodies of water between them and their trading partners. Has consideration been given to that aspect?
On the possibility of participation in this directive, do we have a veto, at this point? Mr. Murphy might clarify that. Is the real issue fraud, or is it the different rates of VAT? There is a discrepancy, or lack of equity, in the levels of trade between this jurisdiction and Northern Ireland. There is a high VAT rating on goods traded within this country, as distinct from goods traded across the Border. As Northern Ireland is in such close proximity to many parts of this jurisdiction, it is inevitable that serious problems will result from the fact that the rate of VAT is 21.5% in the Republic and 16% in the United Kingdom. Does this not immediately invite VAT fraud? Surely there are mechanisms for that. This directive, as it has been presented here, does not addresses that.
I would like clarification on how this type of fraud operates. Do I understand correctly that this fraud is being perpetrated by traders who charge VAT on intra-Community trade that should be zero-rated? If so, it is almost impossible to estimate the extent to which it operates. As it would be very difficult to establish joint liability between member states, that is virtually a non-runner, practically speaking.
Mr. Pat Murphy
I will try to answer some of the Deputy's questions. The officials from the Revenue Commissioners will probably answer some of the other questions. The Deputy asked who has been putting pressure on the EU to do something about VAT fraud. Such pressure has mainly come from Germany, Austria and the UK. Small goods of high value are of greatest interest. The Department does not believe Ireland has a significant problem with VAT fraud of the carousel type.
Does Mr. Murphy have any figures?
Mr. Pat Murphy
We do not have any figures for that. Those involved do not consider the Irish market to be sufficiently large, as they are usually interested in large volumes. If such a person shifted a large volume in Ireland, it would be seen because it would be too obvious. The Deputy also suggested that our export trade is quite high. That is correct. Under the first proposal, importers would have to provide more information. When imports from outside the EU come into Ireland before going on to another member state, that is not seen as not cross-border or intra-Community trade within the EU. The imports in question come from outside the Community.
Mr. Philip Brennan
I will put the first proposal in context. As Mr. Murphy said, it relates to products imported into Ireland from third countries before being transmitted on to other member states. This form of trade is commonly referred to by its customs procedure code, which is 4200. Such consignments are actively monitored and examined in Ireland. I will put them into context. In 2008, there were just 21 such transactions in Ireland, spread across nine importers. Revenue has conducted several investigations into this procedure in the past, including one company with a high level of transactions, but no irregularities were determined.
Estonia is attempting to ascertain what is happening in respect of this procedure at Community level. It has not yet found any evidence of imports into Estonia where there was onward transmission into Ireland. The first proposal is therefore relatively a minor one. Ireland has no objection to a tightening of procedures. The second proposal, however, causes difficulty.
As far as Ireland is concerned, carousel fraud was at its peak in 2002. A dedicated carousel fraud team operates in Revenue. In 2002 some 65 traders were being monitored, mainly in the computer components and mobile telephone sectors. It was confirmed at the time that the Irish traders were conduit traders, receiving the goods and exporting them to the United Kingdom which was the big market for carousel fraud where the trader was missing. The traders made sure they complied with Irish VAT law so there was no real exposure for the Irish Exchequer. The United Kingdom was exposed because the trader who acquired the goods sold them on to customers and failed to account for VAT or went missing. In VAT parlance they are known as missing traders in carousel fraud. The problem lay in big countries where there were big markets for these goods. We are actively monitoring carousel fraud on all occasions.
The VAT rate differentials between here and the United Kingdom are not relevant in the context of fraud. What matters is the ability to make an intra-community acquisition. One trader can acquire it at zero rate so there is no VAT when the trader gets the import from the United Kingdom, or in the United Kingdom, from Ireland. The problem is what happens at retail level, when the trader sells on the goods he is required to account for VAT. That is where VAT fraud comes into the picture. It can have many guises. It can be carousel fraud or under-declaration. The differential could be an issue in that there might be a higher attraction to acquire goods——
Would that not incentivise smuggling?
Mr. Philip Brennan
It could incentivise it if one accepts the argument that it is cheaper to source goods in the North but to get VAT at zero rate the trader would have to quote his or her VAT number and is then obliged to account for the VAT here and charge VAT accordingly. It could be possible for a trader to go up and not quote his VAT and acquire goods at the UK VAT rate of 15% as opposed to 21% and try to keep that stuff off the books but Revenue is active. Measuring the VAT fraud is problematic. It is difficult to measure fraud generally because there is no one internationally accepted or proven method but the Commission is active and is undertaking an exercise in the measurement of VAT fraud and VAT gaps.
Ireland does not have a difficulty with the principle of the measure on joint and several liability and we are not proposing to veto it. However, we want clarity about the operation and applicability of the measure. We already have joint and several liability in the VAT code, for example, for mobile traders operating from exhibitions here where the owner of the premises could be made jointly and severally liable for the VAT liabilities of the mobile traders but that is easily circumvented if the premises owner notifies Revenue of the names and addresses of the mobile traders who will appear at the exhibition or in the market. There is absolute clarity from the point of view of the supplier.
It is not clear how the measure will operate and there is the added complication of cross-border co-operation to enforce liabilities. When the supplier provides goods for the other member state, responsibility for VAT and liability transfers to the state of acquisition. Under this proposal, it is being suggested that if the supplier does not comply with basic reporting obligations, he or she could be made liable. It is not clear from the directive to what extent the supplier would be made liable. Will he or she be made liable for every transaction with the person acquiring the goods? It is not clear from the proposal what exactly are the circumstances in respect of a failure to comply with reporting requirements. For example, if there are minor clerical errors, will the supplier be liable if the person who acquires the product does not account for this? The proportionality of the proposal is at issue and, more important, its applicability and how it will operate in practice. We have no objection in principle.
In the event of fraud being discovered, under the proposal, there will be a division of responsibility between the two tax authorities concerned. There is a question about how this will operate in practice. For example, there will be an onus on the member state of acquisition to pursue the person who acquires the goods and does not account for VAT but if the liability, either in whole or in part, is transferred to the supplier, the member state where the supplier is based will be responsible for pursuing the VAT. The issue needs to be teased out in more detail.
The Deputy asked many questions and I am not sure whether I have covered them all. I hope I have.
I thank Mr. Brennan, as that was very helpful. What progress has been made on the directive? I acknowledge it is being debated by member states and a considerable number are seeking clarification.
Mr. Philip Brennan
They are. I attended a VAT fraud seminar in Amsterdam. A number of member states have genuine concerns about the joint and several liability proposal. The issues are proportionality and how the directive will operate in practice. The measure will take its course through the Council.
Mr. Ray Kavanagh
As we stated in the note, we are very much in the preliminary stages of the discussions. There have been two working party meetings and my understanding is the Czech Presidency will hold other meetings. It is a question of the applicability of the proposal and how it might operate. They are the issues under the joint and several liability aspect about which member states have common concerns. In the nature of proposals placed on the table, they take time to be clarified. Given the issues that have arisen, there may not be early agreement and it could take a few more months to complete the discussions. It depends on the priorities of the individual Presidencies.
What is the total VAT take in the State?
Mr. Pat Murphy
It was €13.4 billion last year.
Is that the State's biggest earner? What is the percentage?
Mr. Pat Murphy
It is slightly bigger than income tax at approximately 30%.
Is this the first time the cross-border liability has been raised? I know it has been mooted in the United Kingdom on the domestic end. Is there any precedent for the joint and several VAT liability with a member state?
Mr. Pat Murphy
There is no precedent for it across borders on domestic goods.
Was there not a situation in which there was no movement of goods but where VAT was claimed on paper invoices? Have the officials experienced that?
Mr. Philip Brennan
Is the Chairman referring to basic VAT fraud?
Yes.
Mr. Philip Brennan
Revenue has invested large resources in risk evaluation, traders are monitored, there is ongoing audit and compliance and we have a dedicated investigation and prosecution unit. There were 15 convictions for serious tax offences last year, including a couple of jail sentences. We are active in the area.
I am aware that Revenue has concerns about this directive but what changes will it seek to this proposal that would enhance and perhaps safeguard the VAT anomalies that exist? There is concern about the sterling exchange rate and value for money in retail. Many people are importing direct and bypassing wholesalers in Ireland. How big an increase has Revenue seen in direct imports from the UK mainland and Northern Ireland? In respect of traceability, how sure is Revenue that the VAT numbers used are authentic? What mechanism does it have to ensure that if someone goes to the North and uses a VAT number to get the derogation, that it is an authentic number?
Mr. Philip Brennan
To apply the zero rate the supplier is obliged to take several steps, including verification of the VAT number supplied by its customer. They have access to an EU database to check the accuracy of the number.
Is Revenue satisfied that the checking does take place? Is there a mechanism by which somebody must produce his or her VAT number and the supplier should be sure that Revenue has cleared the VAT number before it can supply the goods?
Mr. Philip Brennan
If there was a formal clearance business would break down, given the level of activity. The supplier is obliged to verify the VAT number and that can be done electronically. There is also an obligation on the supplier to make sure that the goods have left the jurisdiction.
I understand the Chairman's concern. The VAT differential now may give an added incentive to perpetrate VAT fraud. Revenue is conscious of that. We plan an in-house VAT fraud seminar in April where we will bring the best people together to establish best practices and what further administrative arrangements, perhaps IT-based, and legislative arrangements we can introduce to combat this. It is high on our list.
Of the €13 billion that Revenue collects, what percentage is non-domestic and coming from an import-export situation?
Mr. Philip Brennan
I do not have that information with me but can find out for the Chairman.
If an importer brings goods from China into Germany and sends them via VAT derogation to Ireland, how is that invoice dealt with?
Mr. Philip Brennan
I referred to customs control procedure 4200. Such transactions are known as "orange routing" and every single one is examined.
Exempt?
Mr. Philip Brennan
They are exempt but they are examined to make sure the documentation is in order and that the onward supply is valid and takes place. In 2008, there were only 21 such transactions where the supply came into Ireland for onward transmission to another member state. We could not be clear on how many supplies went to other member states for onwards transmission but I mentioned the Estonian study which is examining this across the Community. To date, no evidence has been found of, for example, consignments between Italy and Estonia being supplied onward to Ireland. We are satisfied customs procedure code 4200 and the controls in place are adequate but we do not have an objection to procedures being tightened at Community level. It would have minimal impact on business.
Our big concern is the proportionality of the joint and several liability. We are very much in favour of measures to combat fraud. We are not too sure that the proposal, as it currently stands, is the best way to achieve that.
The volume of goods being imported directly by UK distributors, thereby bypassing Irish distributors, has increased in recent months. Is that so?
Mr. Philip Brennan
I have no firm evidence of that. I take the Chairman's word for it.
Mr. Murphy stated the zero rate of VAT applied to the initial intra-Community supply of goods, providing an attractive vehicle for fraudsters who charge VAT on the goods involved to their customers but fail to pay over the VAT to their tax authorities or else reclaim VAT they have not paid.
Mr. Philip Brennan
That is the attraction. If a retailer, for example, bought it on the domestic market, the domestic supplier here is obliged to charge VAT. If he acquires it direct from the UK, as the Chairman has pointed out, the supply can be zero rated but he is then obliged to account for the VAT on the sales. This is where it goes missing and that is the problem all jurisdictions face.
What alternatives will Ireland and other member states propose to deal with the problem the Commission is trying to address in this measure?
Mr. Philip Brennan
Greater co-operation between jurisdictions and closer monitoring of intra-Community acquisitions. I was struck by comments at a business level at the fraud seminar I attended. Some businesses favour the taxation of the intra-Community acquisitions and the application of VAT to them.
Will Mr. Brennan explain that?
Mr. Philip Brennan
Instead of getting the supply from the other member state at zero rate, a rate of tax would be applied at source. That conflicts with Single Market principles but some people have pointed out if one takes the EU as a single entity, it is the only domestic market that does not tax its domestic supplies. That is one way of looking at it, perhaps, at a philosophical level. I am not sure the business interests that put forward this proposal have fully thought it through. There would be complications because of the different VAT rates across the Community but the attraction and the incentive is the ability to obtain goods VAT free initially and then not charge VAT in respect of onward supply.
I refer to Northern Ireland and the difficulty with imports and exports. It is attractive for people trading along the Border to buy their goods in Northern Ireland using a VAT number.
Mr. Philip Brennan
There is no problem with a trader using a VAT number if it is legitimate and he accounts for VAT. He is quite entitled to source his supplies from the North.
Given the credit crisis, he does not have to fund the VAT up-front.
Mr. Philip Brennan
If it is a domestic supply, he will pay VAT initially. If it is a supply from the UK, he gets it zero rated and is obliged to account for VAT when it is sold on.
Has Ireland domestic joint and several liability provisions with regard to VAT?
Mr. Philip Brennan
We have two aspects where there is joint and several liability. One relates to mobile traders where, for example, traders from other jurisdictions appear at exhibitions. In that situation, the premise's owner can be made jointly and severally liable. It is proportionate because he can get away from that potential liability by telling Revenue in advance who the mobile traders will be.
The incidence of joint and several liability arises in a VAT grouping of, for example, five or six companies, which has a single remitter, but each and every member of that group is potentially jointly and severally liable for the VAT obligations of the group.
Working on that theory and Mr. Brennan's observations and concerns, implementing this appears to be a non-starter because it is difficult to prove the case in respect of joint liability on the large scale. It might work on the domestic side.
Mr. Philip Brennan
The Commission proposal is quite broad because it states that if the supplier fails to comply with the reporting obligations to any extent, the supplier can be made liable for the VAT obligations of the person who acquired the goods in the other member state. It is a question of whether one regards that as proportionate.
How would Revenue deal with a clerical error?
Mr. Philip Brennan
When does an error become material and to what extent does one put the liability on the person who acquired the goods who is the real fraudster? One can only do that if one can prove that there was collusion between the supplier and the person who received the goods and deliberate under or non-reporting of the transaction. Revenue's experience in respect of fraudsters involved in this is that the paperwork is always right.
Does Mr. Brennan see merits in 80% or 50% of the whole proposal that would safeguard the €13 billion coming in?
Mr. Philip Brennan
In principle, we have no problem with the first proposal. In respect of the second proposal, we have no basic objection to the idea of joint and several liability provided it is circumscribed and that businesses have clear legal certainty and know what they are letting themselves in for. Our view of the proposal is that it is somewhat vague, ambivalent and too open-ended. Legitimate suppliers may be liable for the acts of others.
Have we made solid recommendations to the Commission on this proposal?
Mr. Philip Brennan
We have made our views known to the Commission.
We are hoping to formulate a report on this. Could Mr. Brennan send us documentation after this meeting that would copperfasten the report? We would like to have it discussed in the Chamber too.
Mr. Philip Brennan
If we could develop a more targeted joint and several liability-based approach where collusion is involved we would not have a problem with the concept. This proposal is too open.
Has Revenue tightened up its cross-checking of cross-Border trade?
Mr. Philip Brennan
We have good co-operation with our UK, and particularly our Northern Ireland, counterparts. They also have dedicated teams examining this type of activity. Smuggling does not go one way.
Our counterparts in Belfast have set up a special unit to tackle the problem. The critical factors are early detection and investigation in real time if possible.
Does Revenue ever send out refresher notes to people dealing with VAT numbers regarding their obligations when importing and exporting goods?
Mr. Philip Brennan
There is an information leaflet available on that issue on the Revenue website.
Could Mr. Brennan come back to us with a figure for the estimated fraud throughout the European Union? Does he have a table covering the member states? If we are going to introduce legislation we need to have a reason to do so.
Mr. Philip Brennan
VAT fraud is problematic and has not been examined unilaterally in this jurisdiction. The EU Commission is examining the measurement of tax fraud in general across the 27 member states. It concentrated initially on VAT and got a report from an independent company charged with examining the level of VAT fraud. It has given us preliminary indications of the Irish result on which we have sent back some views.
I emphasise that the estimation of VAT fraud or tax gaps, as they are known, is highly problematic. There is no proven methodology, no internationally accepted methodology of so doing. Some member states have attempted it but the results can vary widely. At least this exercise on the part of the Commission — and my understanding is that it intends publishing the results of all 27 member states — will allow the performance of member states to be benchmarked to some extent. Whatever the results, one needs to exercise a degree of caution about them. It is not an exact science and results can vary widely. The Commission exercise currently being undertaken uses national accounts data which, as far as I know, are three or four years old. One is looking back at a snapshot in time and things change.
I understand Ireland has no problem dealing with the 21 companies transiting goods to other countries. I presume that is easily examined.
Mr. Philip Brennan
Yes. That is easily done.
It is the carousel fraud that presents a problem.
Mr. Philip Brennan
Carousel fraud is the difficult issue.
When can we expect the reports for the individual countries to be available?
Mr. Philip Brennan
Probably a couple of months.
Will Mr. Brennan return to the committee when they are available?
Mr. Philip Brennan
I can come back. There are preliminary indications that Ireland has come out quite well. That is as much as I can say because the results are not yet official.
Has any fraud that has taken place been in the United Kingdom rather than the other way around?
Mr. Philip Brennan
Fraud comes in many guises. Where carousel type fraud has taken place we are satisfied that where Irish entities were involved they were conduits and the fraud took place at supplier and trader level in the UK.
Could Mr. Brennan do a special note on the interface between Northern Ireland and the Republic?
Mr. Philip Brennan
In terms of co-operation?
In terms of trade and the issue of the VAT rate and VAT fraud in regard to it, if that is possible.
Mr. Philip Brennan
I am not too sure whether we would be able to break it down as between the wider UK and Northern Ireland. We will see what we can do. Is the Deputy interested only in Northern Ireland?
If the whole lot can be done together it is all the better but I would also like to get a breakdown in regard to the land border.
Deputy Costello's point is that unfortunately there is no harmonisation in regard to VAT. The Republic's VAT rates are considerably higher than those in the sterling area.
Mr. Philip Brennan
Let me be clear about this. Is Deputy Costello talking about business trader level or ordinary consumer level?
All of it would be interesting. It would be interesting to get a picture of what is happening between the two parts of Ireland in terms of retail of consumer goods and how it is operating now. That is a broader picture.
Deputy Costello's point is a very good one because we are now talking about €13 billion in VAT which is essential to the Government coffers at the moment. When one looks at the level of consumer spending there is a massive loss, not only to this State.
Mr. Philip Brennan
The Minister committed to asking the Revenue Commissioners and the Central Statistics Office to look at the extent of cross-Border shopping in its broadest terms at private consumer level and the impact of that on the Exchequer. A report has been made to the Minister. Maybe Mr. Murphy will comment on it.
In some counties up to 80% of trading business is leaving to cross the Border. That must represent a massive reduction in VAT. It is a loss in every sense, not alone in terms of VAT but in terms of jobs. In terms of getting information on VAT, Deputy Costello's point regarding VAT is very relevant because that movement is having a big impact.
This is for information. There is no suggestion of fraud.
Mr. Philip Brennan
The Revenue Commissioners and the CSO have made a report to the Minister. It is my understanding — Mr. Murphy can comment further — that the Minister intends at some stage to publish it.
The point we are making is that one might think one can get additional money by raising VAT rates but one might get less when one takes into account the massive exodus of trade. I know for a fact that 70% to 80% of business is leaving; therefore, not alone are we losing VAT, we are also losing jobs. It is a chicken and an egg situation. The information Deputy Costello requested would be very relevant to the Minister for Finance in terms of a proposed increase in VAT rates. There could be a reduction in the take.
Mr. Pat Murphy
During the debate on the Finance Bill the Minister asked the Revenue Commissioners and the CSO to see whether they could produce some figures relating to the degree of cross-Border trade and the impact it was having on Exchequer figures here. The Revenue Commissioners have provided a report which is with the Department of Finance.
Will Mr. Murphy comment on that report? Does it indicate that less money is coming in with a higher rate than with a lower rate?
Mr. Pat Murphy
The movement of trade across the Border takes place for a number of reasons. One is the cost of doing business in the South. A second is tax, while a third is the mark-up traders in the South put on goods. The main element that affects cross-Border trade and shopping is the exchange rate which, between January and December 2008, changed by around 30%. In that context, changes in VAT rates are very small. The change in the VAT rate was only three percentage points.
Does Mr. Murphy agree that the higher the margin for the retailer the higher the amount of VAT for the State?
Mr. Pat Murphy
Yes, but it would be unreasonable to assume that changes in cross-Border trade were the result of the fact that the United Kingdom reduced its VAT rate by 2.5% and we increased ours because in respect of many goods, there was no change in the VAT rate or there was no VAT payable on them on either side of the Border and people are still going to the North to shop.
I thank Mr. Murphy, Mr. Brennan, Ms Robson and Mr. Kavanagh for their very comprehensive presentation. We are preparing a report on the proposal which will be sent to the Government and laid before the Houses. We are hoping to have a debate in the Dáil or the Seanad. If there are any points of clarification the delegation believe would be of benefit and add to our report arising from today's meeting, we would very much appreciate receiving them.
The joint committee adjourned at 1.35 p.m. until 11.30 a.m. on Tuesday, 24 March 2009.