John Perry (Sligo-North Leitrim, Fine Gael) | Oireachtas source

I thank the Deputy for raising this important issue, to which I am replying on behalf of the Minister for Finance, Deputy Michael Noonan. I welcome the opportunity to outline the position on the question of the VAT treatment of nicotine replacement patches posed by the Deputy.

I wish to explain that, when considering the VAT system and the VAT treatment of any product or service, the VAT rating of goods and services is governed by the requirements of the EU VAT directive with which Irish VAT law must comply. In this regard, it may be useful to remind the House of the structure of Ireland's VAT regime. As the Deputy will be aware, Ireland operates a number of VAT rates. The standard VAT rate of 23% applies to the majority of goods and services, including cars, petrol, diesel, alcohol, tobacco, electrical equipment, CDs and DVDs. There is also a reduced rate of 13.5% which applies mainly to fuel used for heat or light, construction, housing, labour intensive services and general repairs and maintenance. A second reduced rate of 9%, introduced as part of the jobs initiative, applies mainly to tourism-related services, including hotel and holiday accommodation, restaurant services and some entertainment services. The zero rate of VAT generally applies to most food, children's clothes and shoes and oral medicines.

As the Deputy correctly pointed out, nicotine replacement patches are subject to VAT at the standard rate of 23%. Unlike other nicotine products such as inhalers, tablets and chewing gum which are categorised as oral medicines and which thereby qualify for the zero-rate of VAT, nicotine replacement patches are not considered to be oral medicines and are, therefore, correctly subject to the standard rate of VAT of 23%. However, I understand from the Revenue Commissioners that member states have the option, under Annex lll of the EU VAT directive, of applying a reduced rate of VAT to pharmaceutical products of a kind normally used for health care, for the prevention of illnesses and medical treatment purposes. In this regard, since nicotine replacement patches could be considered to meet such criteria, Ireland would have the option of applying a reduced rate to such products. However, constraints imposed by the VAT directive on the number of reduced VAT rates which a member state may operate at any one time would not allow for the possibility of a special reduced VAT rate of 5% to match, as suggested by the Deputy, that which applies in the United Kingdom. Article 98 of the directive provides that member states may apply either one or two reduced rates to the goods and services listed in Annex lll. The introduction of a third reduced VAT rate would, therefore, not be possible under EU VAT rules. Accordingly, any reduction in the VAT rate on nicotine replacement patches would have to be considered in the context of the existing 9% and 13.5% reduced rates.

A proposal to reduce the VAT rate applying to any good or service raises a number of issues. The Deputy will not be surprised if I emphasise the need to maintain VAT revenues and also the need to ensure losses to the Exchequer in these difficult economic times are avoided. Notwithstanding the potential health benefits which may accrue from the use of nicotine replacement patches, losses in one area must be balanced by savings or increased taxes in others. The issue of the degree to which the consumer might benefit from a reduction in VAT on nicotine replacement patches also arises. In this regard, there is, unfortunately, no guarantee that moving standard-rated products to a reduced rate of VAT would necessarily be reflected in full in the retail prices charged to consumers. Any dilution of the potential benefit to the consumer would obviously be a major concern and effectively negate the promotion of the use of nicotine patch technology.

In the context of the imbalance of price between Ireland and the United Kingdom to which the Deputy refers, cross-Border shopping studies indicate that fluctuations in the exchange rate between sterling and the euro represent the most significant influence on price. In this respect, the current exchange rate between sterling and the euro should provide less incentive for people to shop outside the State. The report of the implications of cross-Border shopping which was undertaken on behalf of the Minister for Finance by the Revenue Commissioners and the Central Statistics Office notes that the main causes of price differentials between goods in Northern Ireland and the Republic are operating costs, profit margin or mark-up, taxes and the exchange rate between sterling and the euro. While variations in VAT rates widened some price differentials, their impact remained small compared to the significance of the change in the exchange rate.

I again thank the Deputy for raising this matter. I hope I have clarified the position on the VAT treatment of nicotine replacement patches and the situation regarding the possibilities available under the EU VAT directive.

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