Peadar Tóibín (Meath West, Sinn Fein)
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Question 65: To ask the Minister for Finance if a cost benefit analysis to the economy of a VAT harmonisation across the island of Ireland has been completed; and if so, the details of same. [21884/11]

Michael Noonan (Limerick City, Fine Gael)
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I wish to point out that there is currently a greater parity between the VAT rates in Ireland and the UK than previously. The UK standard VAT rate at 20% is only 1 percentage point lower than the Irish standard VAT rate of 21%. At 5% the UK reduced VAT rate is lower than our reduced rates of 9% and 13.5%. However, Ireland applies reduced rates of VAT to a much wider range of goods and services than the UK. VAT is charged on the supply of goods and services, and the rate applying is subject to the requirements of EU VAT law with which Irish VAT law must comply. The EU VAT Directive provides that Member States operate a standard VAT rate of between 15% and 25% on the majority of goods and services. Member States can also operate up to two reduced rates of between 5% and 15% on a select number of goods and services as listed in Annex III to that Directive. In addition, Member States may retain historic VAT provisions that they had in place on 1 January 1991 with regard to applying a zero rate, or a rate of less than 5% (known as super-reduced rate), and also of applying a rate of between 12% and 15%, known as parked rates, on goods and services not listed in Annex III.

Both Ireland and the UK avail of a range of such derogations from the standard VAT rate. However, because of the historic nature of the parked and zero rates derogation, what goods or services they apply to are unique to each Member State and could not be imitated by other jurisdictions. For example, the UK historically applies a zero VAT rate to the supply of caravans, which could only apply at the standard rate in Ireland. Similarly, there are many historic VAT derogations that Ireland applies that are not available to the UK or other Member States. In this respect, full bilateral VAT harmonisation between Ireland and the UK would only be possible where both jurisdictions remove these derogrations and apply a unified standard VAT rate to those goods and services that they currently apply at the zero-rate or at a reduced rate.

In addition, as stated earlier, Ireland applies reduced rates to a much wider ranger of goods and services than the UK, many of which relate to Annex III services which are open to all Member States to charge at a reduced rate. In this case it would be possible for the UK to apply a reduced rate to all the Annex III reduced rated goods and service in Ireland.

As is clear, not only is the overall VAT system complex but the system of VAT rates that apply to the supply of goods and services is equally complex. In this context the harmonisation of VAT between Ireland and the UK would require very substantial reform of VAT rates in both jurisdictions. Given the economic nature of making changes to the VAT rate on any single good or service, it is clear that in the short term VAT harmonisation between Ireland and the UK is unfeasible. In addition, as it is not possible for Member States to charge VAT on a regional basis, any changes to VAT rates for the sake of cross-border harmonisation would have to apply on a UK wide basis.

Nevertheless, greater VAT harmonisation on an EU basis is one of the longer term goals of the EU. On 1 December 2010, the EU Commission published a Green Paper on the Future of VAT marking the launch of a public consultation on the future of the VAT system and essentially the delivery of a simpler and more efficient system tailored to support/promote activity in the single market. Among other issues, the Green Paper deals with the continued relevance of reduced VAT rates and existing derogations for Member States. The Paper also deals with the degree of harmonisation needed for the single market, the reduction of red-tape for business, enhanced fraud-proofing of the system, and modernising the administration of the VAT system by tax authorities.