Wednesday, 6 December 2006
Financial Resolution No. 4: Value-Added Tax
(1) THAT the level of the turnover from taxable supplies below which persons shall not, unless they otherwise elect, be taxable persons be increased to €35,000 from €27,500 in respect of a person's supply of services, and to €70,000 from €55,000 in respect of a person's supply of goods and that, accordingly——
(a) section 8 of the Value-Added Tax Act 1972 (No. 22 of 1972) be amended by substituting "€35,000" for "€27,500" (inserted by the Finance Act 2006 (No. 6 of 2006)) and "€70,000" for "€55,000" (as so inserted) in subsections (3), (3A) and (9) wherever they occur, and
(b) the Sixth Schedule to the Value-Added Tax Act 1972 be amended by substituting "€35,000" for "€27,500" (inserted by the Finance Act 2006) in paragraphs (viib) and (viic).
(2) THAT this Resolution shall have effect as on and from 1 March 2007.
(3) 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).
Resolution No. 4 provides for an increase in the VAT registration thresholds for small businesses from €27,000 to €35,000 for services and from €55,000 to €70,000 for goods. The resolution provides that the new thresholds will take effect from 1 March next year. This change will cost €35 million in 2007 and €53 million in a full year. As a result, it is anticipated that 8,000 businesses could be removed from the VAT net in the year. This measure will also remove the administrative burden for small businesses and for Revenue. The existence of registration thresholds allows certain small businesses to remain outside the VAT net and helps small, new businesses to develop. The measure will also reduce the administrative burden for Revenue. The changes represent an increase of over 27% in the VAT registration thresholds.
Resolution No. 5 provides for an increase from 4.8% to 5.2% in the flat rate farmers' refund. This was last changed in 2005 when it was increased from 4.4% to 4.8%. The new rate of 5.2% will take effect from 1 January 2007. The flat rate scheme is a simplified and practical method of applying VAT recoupability to farming. It compensates unregistered farmers on an overall basis for the VAT charged on their purchases of goods and services. This is achieved without applying the normal VAT rules on registration, record keeping, invoices and returns. As required by EU law, the Revenue Commissioners have calculated the flat rate on the basis of macroeconomic data for the last three years. The revised flat rate for 2007 takes into account a number of changes in the method of calculating the refund following consultation with the farming bodies. These consultations are ongoing. The increase in the flat rate will cost €13.5 million in 2007 and €16 million in a full year. The livestock rate, which has traditionally been at the same rate as the flat rate, is being maintained at 4.8%. The livestock rate is charged by VAT registered farmers and other businesses on the supply of livestock and live greyhounds and the hire of horses. Under EU law we are permitted to maintain the livestock rate below 5%. I commend both resolutions to the House.
I do not oppose these resolutions. Resolution No. 4 is an important measure and the package of resolutions for small business brought forward by the Minister for Finance is welcome. Over the last few years the indigenous sector has been hit with many additional regulatory burdens. Better regulation documents have floated around the Department of the Taoiseach over recent years. Regulatory burden is supposed to be assessed on the basis of necessity and proportionality. Until now I have seen no evidence of this.
The principle the Minister has brought forward in this resolution is a first step towards removing an unnecessary paperwork burden that has accumulated over a number of years for fledgling businesses that are trying to get off the ground. Although a modest number of companies will be exempt, I do not denigrate the resolution. The Minister has broken the ice on establishing this principle. Because a turnover of €70,000 for goods and €55,000 for services is not a large amount, I am sure the number of companies exempt will be small.
The form filling and bureaucracy a start-up business must go through requires urgent attention by the State. Small business people are the kingpins of the national economy as regards going through the frustrating experience of getting started. The various monthly and bimonthly returns in VAT and tax are cumbersome for fledgling companies that lack the expertise or the wherewithal to employ the necessary accounting expertise to get started. The future of our national economy will be more dependent on small, Irish businesses, entrepreneurs in our own jurisdiction, rather than foreign direct investment. I have sought these changes in the past and I acknowledge that the Minister has taken the first step.
The other package of measures in the small business sector is equally important and valid. One of the measures was initiated during the 1994-97 rainbow Government when we exempted from tax liability the profits of small businesses under €50,000. This builds on that up to €150,000 related to corporation tax liability and the timing in which it was made. My one criticism of the Government over the last number of years is that it has tried to make ends meet in its Exchequer figures by bringing capital acquisitions tax, capital gains tax and particularly corporation tax liability forward into the current year of operations that will generate the tax liability. It is the only sector that must pay money to the Revenue based on money it has not yet earned. Paying corporation tax before the end of the current tax year for notional income that will accrue by the end of December is unfair and should be examined in future budgets. However, I support the resolution and the expansion of the VAT thresholds. The Minister for Finance has done a good day's work in exempting businesses with small turnovers from VAT and getting them started. We should examine other regulatory burdens on small businesses that could be removed, particularly for the first year or two, or below a particular turnover, to get them started and give them a breathing space from the bureaucracy they must go through.
Section 58 of the Finance Act 1983 contained a provision whereby unregistered farmers could claim back the VAT component of the cost on capital expenditure projects. This applied mainly to farmyard development. I assume that stands and will not be affected by any of the provisions we are discussing here. The other issue is the growing of willow and other crops. We are at an early stage in the development of this concept in Ireland, although considerable research has been carried out on it in the North. There will be a lead-in period for the establishment of these crops with heavy capital expenditure by individual farmers who want to get into it. Will the Finance Bill early in the new year give consideration to these circumstances to add to the worthwhile and welcome incentives that have been announced today?
I do not oppose either of these resolutions. In the area of services we are spawning a number of new companies and we need to increase this. The threshold of €35,000 turnover is very modest. Many small businesses are overwhelmed by bureaucratic requirements. Is this the main thrust behind this change, as distinct from the imposition of VAT? The amount of €52.5 million per year is not insignificant. The complaints I hear relate to the regulatory burden.
I see Deputy Johnny Brady is offering and I was going to liven up the night by opposing resolution No. 5 but I agree with it.
The removal of 8,000 small companies from the register for VAT seems high. Are the figures entirely negligible in some cases and substantial in other cases? I presume some would have minimal liability and others would have a higher figure.
I heard one of Deputy Rabbitte's party's Dublin Deputies suggesting that the Minister for Transport compulsorily purchase land for road improvements and motorways. I do not know how Fine Gael feels about that. The parties can sit down together and iron it out. Deputy Rabbitte has an interest in agriculture and may persuade Fine Gael not to implement the policy.
Farming organisations are impressed with what the Ministers for Finance and Agriculture and Food have done for the sector. Agriculture is going through difficult times. Major changes are taking place and it is important that we have caring Ministers and a caring Government.
I welcome the VAT relief from 4.8% to 5.2%, a matter about which I have contacted these two Ministers. Stock relief for farmers is continuing. Certain tax exemptions apply for income from certain leases of farm land from January 2001. The budget also includes a new exemption of €20,000 per year. The cost is estimated at €500,000 for 2007 and €1 million for a year. The extension of stamp duty relief for farm consolidation is welcome, particularly where farmers' lands are divided because of motorways. Changes to stamp duty relief for young farmers——
Dublin South-Central is one of the most socially disadvantaged constituencies in the country and has a very low attendance at third level compared to the farming counties. When I hear the love-in between Deputy Johnny Brady and Deputy Rabbitte, and the Minister's comment that the increase is based on macroeconomic data and that it follows consultation with the farming bodies, I wonder why the flat rate is being increased from 4.8% to 5.2%. Fair dues to them and I hope they enjoy it.
Regarding the increase in VAT registration thresholds, I welcome the Government initiative and accept what Deputies Hogan and Rabbitte said about the regulatory burden on small business. It is quite easy for mandarins and officials, with major support in their offices, to design these forms and seek their completion on a regular basis. It is very difficult for the one man operation, assisted by a partner or spouse and working all hours to make a few bob, to do paperwork. The burden, particularly on small business people, should be reduced in whatever way possible.
There is also the question that if the exemption limit is raised too much, there may be competition with people in the VAT-registered scheme. With the current availability of SSIA money, there will be a number of new kitchens or windows being installed, or footpaths will be surfaced. There are companies that are registered, paying VAT and fully compliant, as well as companies that would be fully compliant except for the VAT issue. They definitely have a competitive advantage, which must be taken into account.
I ask to what extent that has been taken into account. Why has the exemption been set at this level? Is it because the amount involved is so minimal and it costs more to collect and administer than the amount received? Is it to help the small business person reduce the regulatory burden, as Deputy Rabbitte and others stated?
I wish to speak on Resolution No. 5, relating to agricultural VAT relief. I welcome this measure but point out that when agriculture and general inflation is taken into account, farmers will be short changed by this calculation. The resolution should provide for the payment to farmers not registered for VAT because of their input costs over the previous three years. However, they can only recoup VAT through the sale of produce to a VAT-registered business.
As we know, the introduction of the single farm payment has meant that commodity prices in general have gone down and will continue to do so. The volume of production going through farms is also going down, so farmers are losing out because they are not selling the same amount of product and therefore cannot get the refund back in VAT that has already been paid on inputs.
We were also promised a review of this structure a number of years ago but nothing has happened. It is unacceptable that the issue has not been reviewed, as a significant anomaly exists within the current system of recovering VAT paid by farmers on input costs. The mechanism which exists of getting it back through the sale of produce will not allow farmers to do so because of the single farm payment.
Agricultural inflation is running significantly higher than ordinary inflation, and this has not been taken into account in the rise of output costs. Yet the farmer's returns from produce has decreased because of the significant control of grocers and major retailers over food produce. Milk is a significant example of what has gone on over the last number of years. Farmers are genuinely being short changed.
This increase should have come about last year, when there was no change made to the recovery of VAT for farmers. As a direct result, farmers have lost out on an additional €16 million that they should have been entitled to recoup. Will the Tánaiste and Minister for Justice outline when this review will be completed, as it has been ongoing for the past two or three years? It is about time we got a decision.
I welcome the initiative in the budget looking to help the small business industry, and in particular the business expansion seed capital scheme. The work and recommendations of the Small Business Forum will stand to this country over the next five, ten or 15 years. If we look past 2013, we will have to look to small Irish-owned businesses that today number 250,000, employing over 800,000 people, as we were told by the Minister.
This budget has considered the area very seriously. As Deputy Hogan and many Deputies on this side of the House have done, I welcome the initiatives taken on board by the Minister, particularly the suggestions heard by the Oireachtas Committee on Enterprise and Small Business. Many of the initiatives are very worthwhile and I look forward to their implementation.
With regard to the farmers' flat rate and Deputy Johnny Brady's comments, VAT incurred on the construction of farm buildings and land drainage is still reclaimable. The amounts of VAT reclaimed under the provisions mentioned by the Deputy were of the order of €32 million in 2005 and the same amount to the end of October 2006. There is no change.
I listened to the Deputy talking about his land being bisected — the one dividend will be the many sites on which to put up election posters on either side of the road.
Listening to Deputy Ardagh speaking about Dublin South-Central reminds me that agriculture was wiped out in my constituency under a Fine Gael and Labour Government. The nuns on Merrion Road gave up their last few cattle and that was the end of agriculture in Dublin South-East. I warned the Government at the time it would happen, but it was wiped out just like that.
Member states are given some latitude in how they decide to exempt small businesses from the VAT registration requirements. It cuts both ways, as if a company is unregistered, VAT cannot be recovered on inputs. It is not as if the money is all thrown away from the Revenue's point of view. An unregistered trader who falls below the threshold cannot recover VAT on the inputs and cannot pass it on to the customer. That trader would effectively have to take that hit themselves.
The incidence therefore depends very much on the trade. I remember as a barrister the difference between being registered and unregistered was very significant, as it was effectively 21% of everything except the VAT on the paper and pencil and something else. Very little VAT was reclaimable.
On the other hand, if there was a high-cost input into the business, and a company was selling windows to SSIA holders, for example, there would be much VAT. If that cannot be recovered, it would not have the same distorting effect on competition. That is the significant difference. There is another angle if a company is supplying to VAT-registered customers or end users who cannot reclaim the VAT. The distortion effect is much more marked if a company is supplying to retail customers who cannot reclaim the amount, or consumers in other words. In those circumstances, the difference between having a 21% VAT obligation and not having it could be quite considerable, particularly in the case of somebody with very low VAT inputs.
It differs from business to business and on the nature of the business as to whether there is a distorting effect. From the Revenue's perspective, there are costs involved in dealing with very small businesses. To take an example, requiring an exchange of forms every VAT period with every minute start-up business along with an examination of cheques for minute amounts would impose a significant charge on Revenue's time.
By the same token, Revenue does not lose out. It is not the end of the world for Revenue if somebody who has significant VAT on inputs into his or her business which is not recoverable does not register. I should emphasise registration is always optional. Anybody who wants to register can. Certain people below the VAT threshold register because it makes sense due to the nature of their businesses.
Ireland is among those countries with the highest VAT registration thresholds. Our nearest neighbour, the UK, traditionally maintains its thresholds at a high level and has the highest level in the EU at £61,000. As I stated, such high thresholds bring their difficulties. They can give rise to distortion in competition between those just below the threshold and those just above it. This distortion effect is exaggerated the higher the threshold is set.
It is considered the increases proposed in the budget today are more than adequate to give small start-up companies breathing space and an opportunity to achieve a foothold in the market before their turnovers reach the level which requires them to register and account for VAT. The threshold also caters for small businesses operating on a part-time or hobby basis. For various reasons, including the sporadic nature of their activities or the seasonal nature of their markets, such businesses often experience difficulties in complying with VAT accounting requirements in a consistent way. From Revenue's point of view, it makes sense to give a degree of latitude to those firms.
Some countries in the EU have no VAT registration threshold. It must be charged and that is it. To give the House an example, Ireland has thresholds of €35,000 and €70,000. Italy has no threshold. I mentioned the UK which has a threshold of £61,000, equivalent to €86,000. The gross averaging out of EU member states without being weighted is €17,212 for services and €21,000 for goods. We are certainly way above the average which makes sense.
Regarding what Deputy Cassidy stated, it is important to note this is not merely a Revenue convenience measure. The small business forum demanded this. It pressed its case strongly and was heard. We should acknowledge the case was made and heard at committees of this House. Deputy Cassidy presided at meetings where these issues arose. It is important to note the Government listened to the voice of small business on this issue.
Regarding agriculture, the changes in VAT were strongly canvassed by farming organisations. I pay tribute to the Ministers for Finance and Agriculture and Food for the way in which they listened carefully to those representations and acted on them. The question was asked whether the review which has been ongoing for some time is likely to come to a conclusion. I am informed by my colleague the Minister for Agriculture and Food, Deputy Coughlan, that it will do so in the relatively near future. We will have certainty arising from that review.
General consensus exists in the House that these resolutions should be passed. Generally speaking, they are an ease for small businesses, be they agricultural or non-agricultural. It is part of building an enterprising society in Ireland and reducing the burden of the State on small-scale economic activity. In all circumstances, the Minister for Finance is to be greatly complimented for the pro-business, pro-enterprise and pro-farming nature of the budget he tendered before the House today.