Joe McHugh (Donegal North East, Fine Gael)
Link to this: Individually | In context

Question 388: To ask the Minister for Finance if he will revise the 21.5% VAT rate on a basket of goods likely to be Christmas gifts (details supplied) in view of the fact that the Northern Ireland VAT rate on these goods is 15%, and that Ireland lost €700 million to Northern Ireland in cross-Border shopping in 2008. [39031/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
Link to this: Individually | In context

The VAT treatment of goods and services is determined by EU VAT law, with which Irish VAT law must comply. In general, the EU VAT Directive provides that VAT rates are determined by the nature of the particular good or service being supplied. The changes made to the EU VAT Directive in May of this year related to Annex III of the VAT Directive, which lists those goods and services to which Member States may apply a reduced rate of VAT. This list was expanded to include locally supplied labour intensive services, which had already been subject to the reduced rate in Ireland because such services were reduce rated here on 1 January 1991. To this end, the option is not available to apply a reduced rate to goods such as CDs, cosmetics, furnishings, jewellery, toys and furniture.

With regard to the VAT differential between Ireland and the UK, given the current Exchequer deficit position, the policy decision of increasing the standard VAT rate in Budget 2009 continues to be necessary in order to support the public finances. 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.

Although the UK cut its standard rate of VAT from 17.5% to 15% on a temporary basis from 1 December 2008 to the end of 2009, at the same time they increased excise duty on alcohol, cigarettes, petrol and diesel in order to offset the 2.5% reduction in VAT on these items. Consequently there was no reduction in the price of these products in Northern Ireland as a result of the reduction in the UK VAT.

The VAT rate is not the only factor in the price differential between North and South of the border. The weakening of sterling has had a far more significant impact on relative prices than any VAT changes. Furthermore, as a small open economy, many of our goods and services are imported, especially in the case of those at the standard rate. Cutting the VAT rates could benefit the economies from which we import more than our own. In other words, while, it might help the consumer, it would not be the most effective way of helping our own economy.

There are other means of stimulating the economy, outside of the VAT system. The government is funding capital investment of €7.3bn or 5% of GNP in 2009, a significant sum in times of constrained resources. This funding will be targeted at economically valuable infrastructure which will enhance our long term productive capacity and support employment.

With regard to incentivising environmentally friendly goods, there is no provision in European VAT law that would allow the application of a reduced VAT rate, or an exemption from VAT, on supplies of goods or services based on their environmental impact per se.

The supply of certain environmental products, such as insulation materials, wind turbine equipment, wood pellet boilers and solar panels, are chargeable at the standard VAT rate which in Ireland is 21.5%. However, the reduced VAT rate of 13.5% may be applied to such products where they are provided under a single supply and install contract where the VAT exclusive cost of the goods does not exceed two-thirds of the total VAT exclusive charge to the customer.

The Programme for Government contains a commitment to examine the current VAT classifications with a view to reducing the rate of VAT applied to certain environmental goods and services from the standard VAT rate to the reduced VAT rate of 13.5%. While the scope for reduced rates is limited, the Finance Act 2008 provided for the VAT rate applicable on the supply of miscanthus rhizomes, seeds, bulbs, roots and similar goods used for the agricultural production of bio-fuels being reduced from the standard VAT rate to the reduced rate of 13.5%. This and other measures under the Programme for Government clearly demonstrate the Government's commitment to addressing the environmental challenges which we face.

I would draw to your attention that the EU Commission recently undertook a study of the possibility of using reduced VAT rates as a tool to support the climate change agenda. Ireland expressed support for such a study. However, at a Council of Finance Ministers meeting earlier this year the Ministers noted that reduced VAT rates as a tool for achieving environmental policy objectives are relevant only to a certain extent.