Diarmuid Wilson (Fianna Fail)
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I welcome the Minister of State at the Department of Finance, Deputy Eoghan Murphy, to the House.

Paul Coghlan (Fine Gael)
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I thank the Minister of State for coming to the House to discuss this important issue of a cash basis threshold. I have been told about this matter by business people who pay on a receipt basis because now that their business approaches a €2 million turnover, they must use a cash basis threshold. I refer to small businesses that are trying to grow and recover from the devastating effects of the recession. As we all know, it is Government policy to support small business and undertake measures to further increase job creation, which this issue affects.

It is simple to understand the cash basis. If one has a small growing business and one's invoices approach the €2 million mark, one may not be paid for months. Some invoices might end up as bad debts and not be paid at all. Having to pay VAT on an invoice issue basis will seriously affect the cashflow of small businesses thus affecting job creation, particularly for small businesses located outside of the capital and throughout rural Ireland.

Paying VAT in advance totally militates against growth and job creation simply because it damages cashflow and has a huge negative impact. Is it possible to increase the threshold from €2 million to €3 million? Such a small increase would encourage new employment across the country and VAT would still be paid to Revenue. The only sectors to be affected by the increase would be the small business community and, ultimately, job creation. I have been informed that the measure affects a significant number of businesses and two specific businesses have approached me about the matter. A modest change could satisfy everyone and act in the interest of further job creation. I look forward to hearing from the Minister of State.

Eoghan Murphy (Dublin Bay South, Fine Gael)
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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.

Diarmuid Wilson (Fianna Fail)
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Does the Minister of State wish to comment?

Eoghan Murphy (Dublin Bay South, Fine Gael)
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I understand the Senator's point. I appreciate that he tabled his proposals in the best interests of businesses. The Government is conscious of the needs of business, particularly at present. However, increasing the threshold would cost the Exchequer €45 million but would benefit only 636 businesses. A cost of €70,000 for each of those businesses cannot be justified given the competing demands on Government at present. I shall reiterate how the Government supports businesses. 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.