Seán Barrett (Dún Laoghaire, Fine Gael)
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Question 11: To ask the Minister for Finance his views on the impact of the VAT clawback on the motor trade in times of recession. [12521/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am conscious of the decline in the motor industry in Ireland and internationally due to the contraction in economic activity. I and my officials have had meetings with representatives of the motor industry on the matter.

In the case of second-hand cars a special VAT scheme is in place in Ireland. This special scheme was introduced in 1994, following strong representations from the motor industry, as a derogation under the VAT Directive. The scheme contrasts with the Margin Scheme, which operates in most other Member States.

The special scheme allows motor dealers, at the time of purchase, to claim credit for residual input VAT which is considered to be included in the cost of acquiring a second-hand car from a customer. When the car is subsequently resold, the VAT is chargeable on the full sale price of the car or on the original purchase price paid by the dealer, whichever is the higher. This is necessary because the dealer has already been granted a credit in relation to the residual input VAT incurred. The special scheme allows dealers the maximum benefit by allowing an immediate deduction of residual VAT at the point of purchase. The VAT credit already allowed on second-hand cars must, despite the industry's view, be seen for what it is, i.e. money advanced to dealers by the Exchequer which they are only repaying when they resell the second-hand cars.

Under the Margin Scheme, garages and dealers would account for VAT on their profit margin only, i.e. on the difference between the cost of acquiring and selling the second-hand cars involved. Under the Margin Scheme, there would be no entitlement to a deduction on the acquisition of the car and consequently the question of a VAT clawback would not arise.

Although with the changing economic circumstances dealers have found themselves selling traded-in second-hand cars at a loss, which is increasingly giving rise to clawbacks of VAT situations for dealers, it is not possible to write-off the VAT credit already allowed to the dealers on second-hand cars. In this context the Revenue Commissioners have however granted concessionary treatment which allows dealers to postpone payment in respect of the clawbacks over the past number of months until 19 May 2009.

The motor industry has made calls for the introduction of a Margin Scheme for second-hand cars in conjunction with the writing-off of the outstanding VAT credits already provided to dealers in respect of second-hand cars. I am not opposed to the introduction of such a Margin Scheme, but not on the basis that the outstanding VAT credit already provided to dealers in relation to their existing stock of second-hand cars would be written-off in full.