Seanad Éireann díospóireacht -
Thursday, 14 Nov 1996

Vol. 149 No. 7

Adjournment Matters. - VAT on Bakery Products.

Mr. Hayes

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.

Minister of State at the Department of Transport, Energy and Communications (Mr. Stagg)

I thank Senator Hayes for raising this matter on the Adjournment. VAT on bakery products is governed by EU VAT law with which Irish law must comply. Under the EU Sixth VAT Directive, member states may retain the zero rates they had in place on 1 January 1991 for the duration of the transitional regime, but they may not introduce any new zero rates.

In Ireland, food generally is zero rated. However, since 1973, a distinction has existed in our VAT law between most food, including bread, which has the zero rate of VAT, and a limited number of food items, such as flour, confectionery — for example, cakes, buns, pastries and fancy breads — biscuits, frozen desserts, ice cream, soft drinks, sweets, chocolate, peanuts, crisps and similar snacks, which have been positively rated on the basis that they are discretionary items of expenditure.

Until 1993, the standard rate of VAT at 21 per cent applied to these items, but in that year's budget, flour, confectionery and non-chocolate biscuits were moved to the reduced rate of 12.5 per cent. This step was taken in the context of the Single Market to pre-empt the risk of a distortion of competition vis-a-vis Northern Ireland arising where there are open borders. This is because flour, confectionery and non-chocolate biscuits are zero rated in the UK while all the other food items which are at the standard rate here are also at the UK standard rate of 17.5 per cent. The concession was widely welcomed at the time by the flour confectioners and biscuit manufacturers. Indeed, in 1994, the Flour Confectioners and Bakers Association admitted in its pre-budget submission that the rate reduction took some pressure off the industry.

EU VAT law would permit a reduced rate as low as 5 per cent to apply to flour confectionery. At present, Ireland has one reduced rate of 12.5 per cent. However, any reduction in the reduced rate of flour confectionery would be potentially very costly for the Exchequer as any new reduced rate would immediately become a target for other interest groups who, under EU rules, would have the possibility of benefiting from it, for example, restaurant services, hotel accommodation, house building, newspapers, etc. Given overall domestic and EU considerations, the reality is that the introduction of a new reduced rate of 5 per cent could only be considered in the context of a major restructuring of the VAT system.

It is true that the bakery sector has witnessed a steady decline since the early 1980s. Over 4,000 jobs and 80 establishments have been lost. However, it is not accepted that VAT was wholly or even largely responsible. Closures and job losses reflect a process of ongoing rationalisation within the industry which the abolition of the bread subsidy in the middle 1980s might well have accelerated. A sectoral development committee report on the industry in 1990 predicted that this trend would continue as the industry was too fragmented to be efficient and was production rather than market driven. In the event, employment declined by a further 14 per cent in the period March 1990 to March 1994. Although the report recommended the introduction of a reduced VAT rate on confectionery as essential for the viability of the small craft baker, which was given in the 1993 budget, it identified the bread sector, where zero VAT applies, rather than the confectionery side, as the main problem area where most job losses had occurred and where further rationalisation was required.

As regards the Border areas, it is inevitable that some cross-Border trading will occur. However, we are not aware that the present VAT arrangement is creating a major difficulty there. While bakery products are zero rated in the UK, such flour confectionery produce is liable to the 12.5 per cent rated when sold here. Any price advantage which UK and other foreign produced flour confectionery products have over Irish produce is likely to be due to non-tax factors, such as the greater economies of scale and market diversification undertaken by bakers in other member states with large populations. Changing patterns of consumer demand and other market considerations are also relevant. Furthermore, it should be noted that any reduction in the VAT rate here would have to apply equally to imported and domestically produced products. Accordingly, any price advantage which imported goods have at present would not be removed.

It is too simplistic to blame the VAT regime for the decline of the bakery industry. The biggest decline has been witnessed in the bread making sector where the zero rate applies. The introduction of new VAT rates is prohibited by EU VAT law. Wider budgetary considerations preclude a further reduction in the level of the VAT rate applying to flour confectionery at this time.