The bakery industry, particularly the craft and confectionery sector, has been decimated over the past number of years. Some 60 per cent of all bakeries have closed and over 4,000 jobs have been lost due to tax increases from 2 per cent turnover tax to 25 per cent VAT. The VAT rate is now 12.5 per cent, while Britain and the North of Ireland are zero rated. These tax anomalies are responsible for the massive growth in the black economy, with hundreds of small operators working from household kitchens, garages and sheds, trading outside the system and paying no VAT, PAYE, PRSI or any other tax.
It has been responsible for the boom in illegal trading in the Border areas, with van agents from the Republic buying products from the North of Ireland where manufacturing costs are lower and are not subject to VAT. They sell directly to consumers for cash or invoice cakes as breads to shops in the Republic. In addition, consumers from the South are enticed to shop in the North where they can purchase bakery products more cheaply than in the South because of the VAT differential. For example, Strabane in the North of Ireland has five manufacturing bakeries while Lifford, which is less than one kilometre from the North, has one bakery. That is largely as a result of the VAT differential.
Since the Central Statistics Office does not segregate flour confectionery from other bakery products, biscuits and rusks, it is necessary to survey the estimated turnover. Estimated turnover in this sector is IR£45 million, over 75 per cent of which comprises imports.
There would be five main benefits to the State from reducing the exorbitant VAT rate on such products. First, the reduction in VAT from 12.5 per cent to 5 per cent, rising to 10 per cent in respect of any other ingredient content such as dough, would allow bakeries to win back turnover lost to imports. Second, it would encourage black economy operators to switch to legitimate trading as the risk of prosecutions, fines and penalties would make illegal trading less attractive because of diminishing returns. Third, it would encourage what remains of the craft and confectionery sector to develop new lines in diverse, continental styles of bread and quality confectionery, thereby creating hundreds of new jobs in this highly labour intensive industry. Fourth, it costs the IDA £13,106 to create one overseas job and £10,178 to create an indigenous job, while every turnover amount of £7,000 per week won back from imports or illegal cross-Border trading would create eight new jobs based on an average wage of £220 per week. Fifth, there would be a reduction in the rate of business failures. The small business task force pointed out that with greater support and encouragement, indigenous industries, such as the craft bakery sector, would flourish and provide a vibrant bedding ground for new jobs throughout the economy.
While it is legitimate to argue for a reduction in VAT or any other form of tax, it is important to suggest how it may be funded. A number of agencies have made recommendations in this regard. It would require an average of 375 employers to fund the Exchequer costs of £0.9 million for every 100 employees out of work. In addition, the payments of taxation, PRSI and other such measures would add to the economy and reduce the social welfare dependency of some.
The Government should consider the VAT rating on these products because of their detrimental effect on employment. Unless we change them and bring them more into line with what is happening in the EU, especially in Britain and Northern Ireland, we will continue to lose jobs in this vitally important sector.