Martin Mansergh (Tipperary South, Fianna Fail)

I am pleased to have this opportunity to contribute to today's debate and to respond to Senator McFadden's Adjournment matter concerning the introduction of a VAT margin scheme for Irish car dealers similar to that which operates in most other member states. I am acutely aware of the serious difficulties and the acute downturn facing the motor industry and will meet representatives of SIMI early next week in my constituency. The Garda Traffic Corps is fairly good at enforcement, certainly to judge by the number of times I have been stopped to have my various discs checked. I accept the danger and acknowledge that all sorts of people find themselves in difficult situations today. That said, it requires some effort of imagination to think of my local friendly car dealer queueing up for social welfare.

At the outset, it is important to clarify that the margin scheme to which the Senator refers in her motion concerns the VAT treatment of second-hand goods, in this case, second-hand cars. In this regard, we are talking about how VAT is applied to second-hand cars bought by garages and dealers or acquired through a trade-in arrangement and the subsequent resale of such cars by the garages or dealers involved to private individuals.

The margin scheme, which was introduced under the VAT directive in 1994, is applied by 25 member states. Only Ireland and Denmark do not operate such a scheme. Under the margin scheme, a dealer accounts for VAT on his or her profit margin, that is, on the difference between the cost of acquiring a second-hand car and the selling price of the vehicle. However, following strong representations from the motor industry at that time, Ireland did not implement the margin scheme but instead negotiated a derogation in the form of the current special scheme, which also is provided for under the VAT directive.

In informing today's discussion, it is important to outline the existing special scheme as applied in Ireland and the margin scheme which is applied by all other member states except Denmark. I will take the special scheme first. The distinguishing feature of the special scheme operating in Ireland is that it allows garages and dealers, at the time of acquiring a second-hand car, to reclaim immediately or deduct the VAT considered to be embodied in the price of the car. The car typically would be purchased by the garage or accepted as part of a trade-in arrangement. For example, if a second-hand car costs €12,500, the garage can reclaim or get a VAT credit up-front for €2,212. The State therefore is part-financing the second-hand car until such time as the garage resells it. When the car is sold on, the garage then must account to Revenue for the VAT on the full price of the car. However, if the car is sold at a loss, then an adjustment or clawback must be made. This amounts to the difference between the VAT credit originally claimed by the garage when it bought the car and the amount of VAT actually charged by the garage in the eventual selling of the car.

At a minimum, the garage or dealer must account for VAT to the tune of the up-front VAT credit received when the car was purchased or accepted as a trade-in. In the example I have just given, if the car which was bought in by the garage at €12,500 was resold for €10,000, the VAT collected by the garage on the sale would amount to €1,770. This falls short of the original VAT credit of €2,212 received by the garage when it acquired the car in the first place. The difference, which amounts to €442 in this example, represents the claw-back which must then be paid by the garage to Revenue. In response to difficulties being experienced by some garages and dealers, particularly their increasing exposure to claw-back payments, the Revenue Commissioners have granted concessionary treatment which has allowed dealers to postpone payment of the claw-back arising in recent months until 19 May 2009.

As I have already explained, under the margin scheme, the dealer accounts for VAT on his profit margin. In other words, VAT is accounted for on the difference in the trade-in price and the resale price of a second-hand car passing through a dealership. If there is no profit margin, which means the car is sold at a loss, no VAT liability arises. For example, if a dealer agrees to allow an amount of €10,000 on a second-hand car as a trade-in and subsequently resells that car at a VAT inclusive price of €12,000, the VAT due to the Exchequer is based on the margin achieved by the dealer. In this particular case, the dealer would be liable for €354 in VAT. A key difference between the margin scheme and the special scheme is that under the former, a dealer is not entitled to reclaim or receive credit for any VAT when acquiring a second-hand car, but he or she is entitled to do so under the current special scheme.

The current special scheme has provided considerable benefit down the years to the motor industry since, through the VAT reclaim mechanism, the Exchequer is part-financing the second-hand car until such time as it is resold by the garage or dealer. However, in the current difficult economic climate, the motor industry considers the margin scheme to hold specific advantages over the special scheme. We do not have a difficulty with the principle of moving to the margin scheme for the VAT treatment of second-hand cars. Such a move would bring Ireland into line with most other member states and is a development which we would be prepared to consider favourably. However, difficulties arise in regard to how a move to the margin scheme would be made. As I understand it, the motor industry is seeking as part of a transitional arrangement that the outstanding VAT credits that garages and dealers have already received in respect of their existing stock of second-hand cars be written off in full. This outstanding VAT credit could be between €70 million and €90 million.

A loss of this magnitude to the Exchequer could not be contemplated. In addition, the writing off of outstanding VAT credits already provided to the motor industry in full as proposed, even as a transitional arrangement, would be contrary to the underlying principles that apply to VAT, which is a European Union-harmonised tax. We must also remember that the current special scheme is a derogation from the normal rules granted to Ireland under the VAT directive and once a derogation is given up, it cannot be restored.

We will reflect on the issues raised and the balance to be struck on possible transition costs. The Government is certainly open to moving to the new basis in a cost-neutral way. Further discussions with the motor industry will be required to achieve that.