Seán Crowe (Dublin South West, Sinn Fein)
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Question 157: To ask the Minister for Finance if he will initiate a comprehensive review of the items to which VAT is applicable to ascertain the scope for introducing new anti-regressive and pro-energy and efficiency measures. [39119/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
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I do not agree with the view that the VAT system is inherently regressive. In fact, every effort is made, as far as EU law will permit, to reduce the incidence of VAT on low incomes.

The position is that VAT rates are applied in accordance with the rules and rating structures provided for under the Sixth VAT Directive. It is EU law, agreed by all Member States, that defines the scope for applying a rate to a good or service. In this regard, Ireland, apart from the farmers' flat rate VAT addition, operates three rates of VAT.

1. Zero-rate which generally applies to most food, children's clothes and shoes, and oral medicines. While it is possible to retain the zero rating for goods and services that were in place on 1 January 1991, no new zero VAT rates can be introduced.

2. Reduced rate of 13.5 per cent which applies, for example, to hot food, cinemas and certain live animals and plants. Member States may have up to two reduced VAT rates of not less than 5 per cent for a specified number of goods or services which are set out in Annex H of the EU Sixth VAT Directive.

3. Furthermore, Member States have the option of maintaining, at a reduced rate of not less than 12 per cent, any items not listed in Annex H, provided they carried that reduced rate on 1 January 1991. These items are considered to be 'parked' and Ireland's parked rate equates to our reduced rate of 13.5%. Domestic fuels and labour intensive services are examples of parked items.

4. Standard rate of 21 per cent for goods or services which are not zero rated or reduced rated. Examples would include: cars, electrical equipment, motor fuels and CD/DVDs. Under the Sixth VAT Directive Member States may set the standard VAT rate not lower than 15% — there is political agreement that the standard rate of VAT applying in each Member State does not exceed 25%.

Certain services provided by charities and the financial services sector are VAT exempt. Operators in these sectors do not charge VAT on the services they provide and cannot claim VAT on the goods and services they purchase. In general, Government Departments and local authorities are also exempt. This means that most public services are not liable to VAT.

The question of using the VAT system to bring about pro-energy-efficiency measures can only be addressed in line with EU law. Supplies of fuel and energy used for heat or light are subject to the parked VAT rate of 13.5% under Article 28 (2e) of the Sixth VAT Directive.

It is not possible to reduce to any real extent the VAT rate applicable to fuel and energy used for heat or light (e.g. wood pellets). The reduction would only be from 13.5% to 12% with little or no impact on the price of fuel.

In relation to the supply only of the equipment required for energy generation, which would include geothermal and solar energy systems, this is liable to VAT at 21 per cent. However, where the systems are supplied and installed as a single contract, the total charge may be liable to VAT at 13.5 per cent subject to the 'two-thirds rule'. If the VAT-exclusive cost of the goods to the supplier exceeds two-thirds of the total VAT-exclusive charge to the customer in respect of the supply and installation of the goods, then the entire contract is treated as the supply of goods liable to VAT at 21 per cent. However, it is likely that the latter would only apply in a small minority of cases.

It should be noted that where the VAT content of fuel or equipment purchases is a business input, these are treated as a deductible credit for business.

In regard to undertaking a review of the scope for introducing new anti-regressive and pro-energy-efficiency measures, I don't believe that a special review is necessary. Such considerations are continually kept in mind in the context of developing taxation policy, in so far as this is possible under EU law and especially in the annual budgetary process.