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

I am taking the debate on behalf of the Minister for Finance, Deputy Michael Noonan, who conveys his apologies to the Senator for not being here to reply. I am pleased to have the opportunity to contribute to today's debate and to respond to Senator Landy's motion concerning the equity of Ireland's VAT rates.

The VAT rating of goods and services is subject to the requirements of European Union VAT law, with which Irish VAT law must comply. The EU VAT directive provides that each EU member state must apply a standard VAT rate to the majority of goods and services. The standard VAT rate must be set at a rate not lower than 15% and there is political agreement that it does not exceed 25%, although it is possible to set the rate higher. Hungary has introduced a standard rate of 27% in recent years. In addition, member states may apply up to two reduced VAT rates of between 5% and 15% for a range of goods or services which are set out in annex III of the VAT directive. Member states also have the option of maintaining, at a reduced rate of not less than 12%, any items not listed in annex III, provided they applied a reduced rate to those items on 1 January 1991. This is known as the parked rate. Member states may also continue to apply the zero rate, or a rate lower than 5%, known as a super-reduced rate, to goods and services provided they applied at a zero rate or a super-reduced rate to those items on 1 January 1991. However, it is not possible to introduce a zero rate or a super-reduced rate on any new items. That point must be made.

In the context of the rules at EU level regarding VAT, the structure and scope of Ireland's VAT rates are as follows. The standard VAT rate in Ireland is 23% and applies to such goods as cars, petrol, diesel, alcohol, tobacco, electrical equipment, CDs and DVDs. Ireland applies two reduced VAT rates of 9% and 13.5%. The 13.5% rate applies mainly to residential housing, labour-intensive services and general repairs and maintenance. In addition, the 13.5% parked rate applies to fuel used for heat or light and commercial construction. The 9% reduced rate applies mainly to tourism services including hotel and holiday accommodation, restaurant services and various entertainment services. The rate was introduced as part of the jobs initiative and applies from 1 July 2011 until end December 2013. Those services at the 13.5% rate that had been parked were prohibited under the EU VAT directive from availing of the 9% rate. The zero rate applies to most food, children's clothes and shoes and oral medicines. Ireland also applies a super-reduced VAT rate of 4.8% but this is limited to livestock sold by VAT registered persons. In addition, services provided by non-profit organisations, transport operators, medical professionals, undertakers and certain financial services are exempt from VAT, as are schools and hospitals, etc. Exempt suppliers do not generally charge VAT on the services they provide and cannot reclaim VAT incurred on the goods and services they purchase.

As of 1 July 2013, a total of 23 of the 28 EU member states have a standard VAT rate of 20% or higher. The average standard rate in the EU is 21.5%. Six member states have a higher standard VAT rate than Ireland, namely, Hungary at 27%, Denmark, Sweden and Croatia at 25% and Finland and Romania at 24%. This means Ireland has the joint seventh highest standard VAT rate, along with Portugal, Greece and Poland, at 23%. A further 13 member states have a rate of between 20% to 22%.

The trend among EU member states has been to increase VAT rates as a means of covering the budgetary shortfall generated by the economic downturn. A total of 23 of the 27 member states, not including the recently acceded Croatia, have increased their VAT rates since 2008, with 18 member states making an increase in their standard rate alone. Of the member states that have not increased their VAT rates during this period, two already have in place the maximum standard rate of 25%.

VAT increases continue to be considered. In October 2013, Italy is due to increase its standard VAT rate to 22%. In January 2014, France will increase its standard VAT rate to 20% and its reduced rate from 7% to 10% and Cyprus will increase its standard rate to 19%. In addition, Luxembourg, which has the lowest standard VAT rate in the EU, also plans to increase its standard rate in 2015. At 13.5%, Ireland has the fourth highest reduced VAT rate in Europe after Hungary, at 18%, the Czech Republic, at 15%, and Finland, at 14%. However, we apply reduced rates to an extensive range of goods and services relative to other member states. In addition, Ireland, along with the United Kingdom, is unique among member states in applying a zero rate of VAT to a sizeable proportion of economic activity. In contrast, for example, Denmark applies a rate of 25% to all taxable activity, as it does not have any other VAT rates in operation.

There is equity in the application of Ireland's VAT rates. While the system of VAT rating in Ireland is often historic, the application of Ireland's VAT rates is none the less very equitable. In applying the zero VAT rate to basic foods, medicines and children's clothes and the 13.5% reduced rate to domestic fuels, the burden of VAT is reduced on basic commodities and utility services, which results in a lower tax burden on the less well off. The application of the 13.5% reduced rate to construction and labour intensive services and general repairs as well as the maintenance and the application of the 9% reduced rate to tourism services encourages employment through the reduced VAT burden on service related businesses. The VAT system encourages good health by applying the 23% standard VAT rate to alcohol, tobacco and sugary foods. The environmental benefits of applying the standard rate to cars, petrol and diesel are also evident. I point to the equity of Ireland's VAT rates. It is also made apparent in the context of the scope of VAT rates in other EU member states. Ireland applies reduced and zero rates of VAT to a much higher proportion of goods and services than any other member state. Ireland is one of a small number of member states which apply the zero rate to basic foods and medicine. Ireland is also among a small number of member states which apply a reduced rate of VAT on domestic fuels.

I wish to draw the attention of the House to the fact that Ireland's VAT rates, their scope and their structure, are revised on an annual basis in the context of the annual budget. Such reviews takes into consideration the equity of VAT rates, along with the EU legislative constraints and the Exchequer and economic impact of any potential changes. Accordingly, the scope of the VAT rates will be reviewed in advance of the upcoming budget in this context. That is a comprehensive reply in a complex area.