John Curran (Dublin Mid West, Fianna Fail)
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Question 205: To ask the Tánaiste and Minister for Finance his views on removing VAT to cars being converted from petrol to biofuels. [19992/07]

Brian Cowen (Laois-Offaly, Fianna Fail)
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The position is that the VAT regime and indeed the rating of all goods and services are subject to the requirements of EU VAT law with which Irish VAT law must comply. While we can retain the zero rating provisions which were in existence on 1 January 1991, we cannot introduce any new ones. Therefore, it is not possible to apply a zero rate to the supply of cars converted from petrol to biofuels.

In addition, while a reduced rate can be applied to certain goods and services, there is no mechanism which would allow for the reduced rating of alternative fuel consumption systems for cars. The VAT Directive does not make any distinction between different types of fuels or methods of production of energy. The supply of all fuel consumption systems, including environmentally friendly ones, is therefore chargeable at the standard VAT rate of 21%. Any change in the standard rate would apply to the sale of all fuel consumption systems and indeed products at the standard VAT rate. A reduction in the standard VAT of 1% would cost the Exchequer in excess of €440 million and have little or no effect on price.

However, under the VAT system, VAT registered businesses can claim a deduction for fuel, other than petrol, e.g. diesel, LPG or bio-fuels. In addition, VAT on the conversion of a vehicle is allowable as a deduction provided the conversion is an expense suffered in the course or furtherance of business and used for a taxable activity.

I would draw the Deputy's attention to the significant measures in other tax areas, provided for in Finance Act 2006, which have served to promote biofuels in Ireland.

The excise relief scheme for biofuels, which received the necessary EU State Aid approval, commenced in November 2006 and:

provides for excise relief on up to 163 million litres of biofuels per annum;

costs over €200m over 5 years;

when fully operational, will result in CO2 savings of over 250,000 tonnes per annum;

will contribute towards meeting a target of 5.75% transport fuel market penetration by biofuels by 2009;

will help reduce our dependency on conventional fossil fuels, and

will stimulate activity in the agricultural sector.

As a complementary measure, I provided in Finance Act 2006 for a 50% VRT relief to promote new flexible fuel vehicles (cars designed to operate on biofuels) for an initial period of two years.

The Deputy may also wish to note that there are additional non-fiscal measures that can be used to promote biofuels and reach the targets referred to. To provide further market certainty and encourage biofuel projects of scale, in March 2007, the Government announced its intention to move to a Biofuels Obligation by 2009, with targets for market penetration for biofuels of 5.75% in 2009 and 10% by 2020. This measure is included in the Programme for Government in conjunction with a commitment to work with our EU partners to require biofuels used in transport to comply with an environmental certification system which incorporates sustainability criteria in terms of biofuel production.