Martin Conway (Fine Gael)
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I welcome the Minister to the House and I thank him for taking this matter. I was surprised when I was contacted by representatives of surfing groups recently to point out that the 23% VAT rate applied to surfing lessons. Despite my limited knowledge of surfing, I was surprised to learn that. They made the case that given surfing lessons are primarily taken by local children and tourists, the 9% VAT rate would be more appropriate and I am inclined to agree with them. The Government has made significant progress with the tourism jobs initiative that was introduced last July and it had an instant effect in breathing confidence into the tourism sector. Like the Cathaoirleach, I represent a coastal county and surfing has evolved, particularly over the past decade. We now have a situation in many of our towns, from Donegal to Cork and Waterford, whereby visitors come to surf not only during summer months but also in the depths of winter. Surfing is an activity that provides significant additional value to the economy and it continues to offer considerable potential for growth. The number of young people who express interest in learning how to surf is increasing. Unfortunately, however, the cost of the activity is becoming prohibitive. If the Government introduced a provision in the Finance Bill to reduce the VAT rate on surf lessons from 23% to 9%, another small step could be taken towards offering an overall tourism product.

As our unique climate means we cannot be weather dependent, we must develop a product that attracts families to the coast in all weather conditions. There has been significant investment in indoor facilities. In my constituency alone, over €100 million has been invested in indoor facilities over the past several years. We have also seen what I describe as healthy investment in nature walks. My own area of the Burren has secured investments in the order of €100,000 to upgrade walks to attract hikers.

My proposal would send a clear message that the Government is prepared to invest in surfing. The facilities provided to surfers are modest. Most beaches do not even have shower facilities and anybody who is familiar with surfing will be aware of the importance of washing wetsuits after they are used. I do not propose that the VAT reduction should extend to surf equipment, whether surf boards or wetsuits. One surf operator in my area who previously employed three full-time and five or six part-time instructors has had to reduce his staffing to three or four part-time instructors alongside his own role as a full-time instructor. In light of the potential direct benefits in terms of employment, I hope the Minister will have good news from the Department of Finance.

Pat Rabbitte (Dublin South West, Labour)
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I am pleased to have this opportunity to respond to the important matter raised by Senator Conway on behalf of my colleague, the Minister for Finance.

VAT is charged on the supply of goods and services. The rate applying is subject to the requirements of EU VAT law, with which Irish VAT law must comply. The EU VAT directive governs VAT law and the rates applicable to various goods and services. The directive provides that member states must apply a standard rate of VAT to the majority of goods and services and this rate must be between 15% and 25%. Ireland's standard rate is currently 23%. Member states may also apply up to two reduced rates of VAT of between 5% and 15% on set goods and services listed in annex III of the VAT directive. Ireland, along with the majority of member states, operates two reduced VAT rates of 9% and 13.5%. The VAT directive also allows member states to apply a zero rate, reduced rate or a rate of less than 5% to goods and services where such a rate applied to those goods or services on 1 January 1991.

The supply of surfing lessons is subject to VAT at the standard rate of 23%. As annex III of the directive does not include surfing lessons it is not possible to apply a reduced VAT rate to surfing lessons. Furthermore, as surfing lessons did not qualify for reduced, super reduced or zero rate of VAT on 1 January 1991 it is not possible to apply any of those VAT rates to surfing lessons. Consequently, surfing lessons must be charged at the standard VAT rate of 23%.

For Ireland to apply the 9% reduced VAT rate to the supply of surfing lessons we would require an amendment in the VAT directive to include the supply of surfing lessons in annex III. Changes to the VAT directive are made periodically by the European Council of Finance Ministers following detailed analysis and negotiation at the Council working party on tax questions. A number of goods and services were added to annex III in 2009, primarily related to labour-intensive services, following six years of negotiations on the matter.

While many tourism related services were made subject to the lower reduced VAT rate of 9% from 1 July 2011, this rate only applies to those tourist related goods and services that are listed under annex III of the VAT directive. Some tourism related activities not listed under annex III continue to be subject to VAT at 13.5% and 23%, while others are exempt from VAT. The 9% VAT rate introduced on 1 July 2011 applies to restaurant and catering services and hotel and holiday accommodation, including guesthouses, caravan parks and camping sites.

Other activities related to tourism that are subject to the 9% rate include various entertainment services such as admissions to cinemas, theatres, certain musical performances, museums, art gallery exhibitions and fairgrounds or amusement parks. The use of sporting facilities, including green fees charged for golf and subscriptions charged by non-member owned golf clubs, also apply at the new lower VAT rate. Admissions to historical houses and gardens, including open or pet farms, also apply at the 9% rate. Finally, hairdressing services, which is a growing activity connected to hotel services, also applies at the 9% rate, as does printed matter such as brochures, maps, programmes, leaflets, catalogues and newspapers. Books are already subject to VAT at the zero rate.

Tourism related activities that are charged at the 13.5% rate include tour guide services and the short-term hiring of cars, boats, caravans, mobile homes, tents or trailer tents. Passenger transport, including the transport of tourists, is exempt from VAT. All other goods and services related to the tourist industry, including surfing lessons, apply at the standard VAT rate of 23%. In addition, while restaurant and catering services apply at the 9% rate, alcohol or soft drinks sold as part of a meal, or otherwise, are liable to VAT at the 23% rate.

However, an exemption from VAT may still apply to surfing lessons in certain circumstances. Surfing lesson providers, like any other service businesses, may opt not to register for VAT if their turnover is under the VAT registration threshold of €37,500 per annum. Where this is the case VAT will not apply to the lessons.

Martin Conway (Fine Gael)
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I thank the Minister for a comprehensive and informative reply. In regard to his comment that rates "must be between 15% and 25%" can a case be made for creating a VAT rate of 15% for certain activities? There are health benefits to getting people out on the water to exercise. Perhaps he might investigate with the Minister for Finance whether there is scope for creating a rate of 15%. During the next round of negotiations, which will probably be even more difficult than the previous round, the Government may consider exempting surf lessons from VAT.

Pat Rabbitte (Dublin South West, Labour)
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I will be glad to raise the Senator's questions with the Minister for Finance. The usual argument applies. A good case can be made to extend the 9% VAT rate. That is not possible in these circumstances for the reasons I explained - that is, it is not included in annex III of the VAT directive. The specific point made by Senator Conway about the 15% to 23% range is something about which I would be glad to talk to the Minister for Finance, Deputy Noonan. There are any number of good arguments that can be made to reduce the VAT rate, and I imagine the Minister of Finance will be looking at it from the point of view of the impact on the Exchequer.

Mark Daly (Fianna Fail)
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The Minister should not forget the hurleys. If he is taking in surfing lessons, he might just bring in hurleys and sliotars too.

Martin Conway (Fine Gael)
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They are not good at hurling in Kerry.

Mark Daly (Fianna Fail)
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We won the first All-Ireland final, I remind the Senator.

Denis O'Donovan (Fianna Fail)
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Senator Daly wants to expand the discussion, but the Minister is entitled to take his leave.