Kathleen Lynch (Cork North Central, Labour)
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Question 108: To ask the Minister for Finance his views on temporarily reducing the lower rate of VAT for labour intensive services; and if he will make a statement on the matter. [18950/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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In Ireland, labour intensive services are in general subject to the reduced rate of VAT of 13.5% including hairdressing, small repair services, window cleaning, and repair/renovation of private dwellings and restaurant services. The reduced VAT rate for labour intensive services is available on the basis that Ireland applied a reduced rate to those services on 1 January 1991.

Prior to the recent adoption by the Council of Finance Ministers (ECOFIN) of a proposal on labour intensive services on 5 May 2009, the majority of other Member States were dependent on an experimental scheme for reduced rates for labour intensive services introduced in 1999 under the EU VAT Directive. In this regard, the ECOFIN Council agreed that reduced rates for certain labour intensive services, including restaurant services, would now be a permanent option for Member States under the VAT Directive.

In the context of this change, it would be possible to further reduce the VAT rate applicable to labour intensive services either through a general reduction in the 13.5% reduced VAT rate or through the introduction of a second lower reduced VAT rate that would apply specifically to such services. However, introducing a second lower reduced rate would further complicate the existing VAT structure in Ireland and lead to demands for the lower reduced rate to be applied to all goods and services currently subject to the 13.5% reduced rate. This would result in a significant cost to the Exchequer; a one percent reduction in the reduced VAT rate would cost €300m in a full year. Given the current Exchequer deficit position, reducing VAT rates would not help support the public finances. In that context we are borrowing to fund day to day public services which is unsustainable as future generations will be required to pay higher taxes unless we correct our public finances.