Eoghan Murphy (Dublin Bay South, Fine Gael) | Oireachtas source

I am pleased to have the opportunity to speak on the question of the VAT cash basis system, on behalf of the Minister for Finance. I thank the Senator for raising the issue.

VAT is an EU tax and Irish VAT law is governed by the EU VAT directive. In respect of accounting systems, the VAT directive provides that VAT must generally be accounted for on an invoice basis, that is, VAT is payable on the total sales invoiced in a relevant period regardless of whether the trader has been paid for the supply in that period. EU VAT law also allows member states to introduce simplification measures for small and medium-sized businesses such as the cash receipts basis of accounting, where the trader is not required to pay VAT until payment for the supply is received. Availing of this option assists businesses in the critical area of cashflow.

In order to avail of the cash basis, a business must either supply goods or services to mostly unregistered persons or have an annual turnover of less than €2 million. This threshold was increased on 1 May 2013 from €1 million to €1.25 million and again on 1 May 2014 from €1.25 million to €2 million. It is worth noting that currently a total of 161 ,000, or 66% of all businesses, benefit from accounting for VAT on a cash basis. The retail, accommodation and restaurant sectors are among those businesses that qualify automatically for the cash basis, as the majority of their supplies are to non-registered persons. The type of businesses that benefit from the cash basis threshold on the basis of the €2 million turnover threshold are manufacturing, technology, professional and administrative services. Due to variations in their treatment for VAT purposes, the cash basis system would not apply to the construction, motor and financial services sectors. The cost to the Exchequer of operating a cash basis system is significant as these businesses can claim back the VAT they are charged on their purchases and overheads, irrespective of when they pay for them. They also have no obligation to pay over the VAT they charge on their sales until such time as they receive payment from their customers.

I shall speak directly to the Senator's proposal. Increasing the threshold to €3 million would cost the Exchequer €45 million and would benefit only 636 businesses. This breaks down as a cost of €70,000 for each of the 636 businesses that would benefit from this increase. The Minister, Deputy Noonan, did not increase the cash basis threshold in 2015 or 2016 because of the cost of extending the limit beyond €2 million and because a very small number of businesses would actually benefit from such a change. Article 66 on the EU VAT directive provides that the cash basis system can only be used for “certain transactions or certain categories of taxable persons”. It cannot be used to replace the normal VAT arrangements.

A range of simplification measures is available to businesses in Ireland, including a facility to make VAT returns on a bi-annual or annual basis, as well as VAT registration thresholds that are among the highest in Europe. The success of these measures is reflected in the recent PwC-World Bank Group report that highlights Ireland's taxation strengths. For the eighth year running, Ireland continues to be the most effective country in the EU in which to pay business taxes and is the fifth most effective worldwide. In the circumstances, there are no plans to review the cash basis accounting threshold.

Senator Paul Coghlan:I can see how it is advantageous for Revenue because the initiative means Revenue can borrow from or lean on businesses. It is unfair that one must pay in advance of being paid oneself. One is totally out of pocket in advance. A business might not be paid for months and might never be paid for some invoices that have been issued. The system lacks equity and cries out for redress.