Michael Harty (Clare, Independent)
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4. To ask the Minister for Finance if he will consider in Budget 2017 addressing the issue of applying a zero rate of VAT on medical vehicles and equipment purchased by organisations with charitable status, such as the Red Cross, for use by community and voluntary groups. [27877/16]

Michael Harty (Clare, Independent)
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I thank the Minister for taking this question. The charity sector provides essential services to Irish society and is widely respected and supported by public donations and Government grant aid. The imposition of VAT on equipment and services purchased places a considerable burden upon charities and their resources, and diminishes their ability to function to their maximum capacity. Would the Government to consider relieving the burden by reducing their VAT liability to as close to zero as possible by introducing a VAT compensation scheme?

Michael Noonan (Limerick City, Fine Gael)
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VAT is a tax on consumption and is applied to supplies being made by a person and not to supplies received by him or her. In this context, it is not possible under EU VAT law, with which Irish VAT law must comply, to introduce VAT exemptions based on services received or on the basis of the recipient of a service, nor is it possible to allow for zero rating of such supplies.

Non-profit groups engaged in non-commercial activity are exempt from VAT under the EU VAT directive. This means that they do not register for VAT and cannot recover VAT incurred on goods and services that they purchase. This non-entitlement to VAT deductibility is a general feature of VAT exemptions. There is no provision in European or Irish VAT law to allow a zero rating or exemption for supplies of this nature. However, there is a specific VAT refund order that provides for VAT incurred on the purchase or importation of new medical instruments and appliances, excluding means of transport, which is purchased through voluntary donations, and may be refunded to hospitals or donors, as appropriate, subject to conditions. In addition, there are a number of other VAT refund orders that provide for refunds of VAT in certain circumstances, such as where the VAT is incurred on aids or appliances for persons with a specified degree of disablement.

A working group was established last year, comprising representatives from my Department, the Revenue Commissioners and the Irish charities taxation reform group, to examine options available to reduce the VAT burden on charities. The report from the group is available on the budget 2016 website. On the basis of that report, I decided at the time not to introduce a VAT refund scheme for charities as the charities sector already benefits from a range of ministerial refund orders and special tax treatment across a number of tax heads. Requests for new ministerial refund orders have been consistently refused since the 1980s primarily to maintain the integrity of the VAT system.

Additional information not given on the floor of the House.

However, A Programme for a Partnership Government recognises the difficulties faced by community groups and charities in relation to VAT rates on certain products such as defibrillators and commits to raising the issue at EU level. The European Commission's action plan on VAT was adopted on 7 April 2016 and contains a proposal to look at VAT rate policy across the EU in 2017. The action plan's proposal on rates may offer member states more flexibility in the future in determining VAT rates applicable to goods and services. This forum will provide an opportunity to discuss VAT rates applicable to goods and services. However, the Deputy will be aware that any proposed changes to the current EU VAT directive would require unanimous agreement from all member states.

Michael Harty (Clare, Independent)
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I thank the Minister. I understand the EU VAT directive precludes charities from claiming a direct refund but, as the Minister is aware, the Irish charities tax reform group has been part of a working group which has examined how to reduce the tax burden on the charity sector. This group has identified that a VAT compensation scheme operated outside of the VAT system would be workable.

The Danish system of VAT conversation would be the model most suited to Ireland. Denmark sets aside a fixed pool of funding from which charities can reclaim VAT. The claim is in proportion to the funds raised by public donation, and if a charity has raised 50% of its funds by donation it can apply to reclaim 50% of its VAT. Charities' claims are pooled and the individual charities receive a pro rataproportion of their claim. The size of the refund would depend on the size of the pool which the Government would set aside. The pool set aside by the Government is fixed so there is certainty in the cost to the Exchequer. Charities gain by reclaiming a proportion of VAT paid and society gains by having increased services.

Michael Noonan (Limerick City, Fine Gael)
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I thank the Deputy for that information. The European Commission's action plan on VAT was adopted on 7 April 2016. It contains a proposal to consider VAT rate policy across the EU in 2017. The action plans proposals on rates may offer member states more flexibility in the future in determining VAT rates applicable to goods and services. We will avail of it if it comes through. I am sure it will consider comparisons like those the Deputy referenced and the VAT situation in Denmark.

VAT refunds are quite significant. In 2014, there was a refund of €642,000 on donated medical equipment, in excess of €2.9 million for disability equipment, €18,000 for water rescue craft and equipment, in excess of €100,000 for exports by philanthropic organisations and the disabled drivers' fund received a refund in excess of €5 million. The refund system is working and delivers quite a lot of money to the areas to which the Deputy referred.

2 o’clock

However, the best course to pursue now is to await the result of the EU review because we are very constrained by EU law on what we can do in VAT. If the EU provides us with the flexibility to move in the direction suggested by the Deputy, then we will not be reluctant to move.

Michael Harty (Clare, Independent)
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Do I take it from the Minister's reply that the compensation scheme will not be considered in regard to the budget for 2017? Charities, such as the Irish Red Cross, are providing essential services that the Government is not providing and they fund-raise, sell lines and collect money from schools and GAA clubs. In my county, County Clare, the Red Cross bought an ambulance for public service for €86,000. It raised €76,000 of that fund itself and ended up paying €16,000 in VAT. It does not seem right that it is acting as a tax collector for the Government. There should be some compensation in recognition of its public fund-raising and yet a high proportion of that fund-raising is being returned to the Government. Perhaps the Minister will seriously consider a VAT compensation scheme, which may not return all the VAT but which would return a proportion of it and it would allow charities to provide their services to the maximum extent.

Michael Noonan (Limerick City, Fine Gael)
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As I have said, there was a review and report in advance of the budget for 2016 and the charities participated in the review. It is my understanding that they were agreeable to not making the change that was contemplated at the time because they had significant refunds and nobody wanted to change. The European Union has put in place an action plan on VAT and it is to report before too long. It contains a proposal to look at VAT rates across the EU for 2017. Since we are so constrained by EU directives, I do not contemplate making major changes this year in VAT for 2017 but I look forward to the EU report to see if it gives the flexibility to allow me to do the things of which the Deputy is talking.