Pearse Doherty (Donegal, Sinn Fein)
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523. To ask the Minister for Finance the derogation and flexibility he sought in his correspondence and communications with the European Commission with respect to VAT as it applies to domestic energy and fuel use; the categories of fuel and energy for which he sought a derogation and flexibility with respect to VAT; the details of the communication with the Commission which facilitated a reduction in VAT on electricity and gas; the flexibility that was provided and the minimum rate of VAT which that flexibility allowed; the reasons for which the VAT as it applies to home heating oil could not be reduced in line with reductions applicable to gas and electricity in the flexibility facilitated by the Commission; and if he will make a statement on the matter. [20670/22]

Paschal Donohoe (Dublin Central, Fine Gael)
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As I previously stated, I wrote to Commissioner Gentiloni in early March regarding the need for Member States to have greater flexibility when responding to the energy crisis, particularly in relation to the VAT and Excise Directives. This was in addition, to the ongoing and frequent contact between officials in my Department and their colleagues in Brussels and the European Commission across a wide range of issues, including taxation policy and how to respond to the energy crisis. 

As the Deputy will be aware, following lengthy negotiations, amendments to the VAT Directive were provisionally agreed in December 2021 with final sign off on the amended text at ECOFIN in April 2022. This new agreement came into effect on 5 April 2022.

Under this new agreement, Annex III of the VAT Directive was expanded to include gas and electricity. This means that Ireland can apply a reduced rate of 9% to these products in line with other goods and services to which a reduced rate applies. The Government has made a decision to avail of this flexibility from 1 May, the start of the next VAT period.

In relation to VAT on home heating oil, this new agreement on VAT rates also preserved Ireland’s historical derogations in relation to fuel and oil despite them not being included in Annex III. It is on this basis that Ireland applies its 13.5% reduced rate of VAT to the supply of fuel and oil for domestic and commercial use while other Member States must apply their standard rate of VAT to this product. The current 13.5% VAT rate applied to energy products is a ‘parked rate’, and cannot be reduced below 12%. 

If the Government were to reduce VAT on home heating oil to 12%, the saving would be very small, but there would be a considerable additional cost to the Exchequer (€216m to the end of October). This is because, all other areas currently subject to the 13.5% rate to this level would also have to be reduced to 12% as  we are only allowed have two reduced VAT rates under EU law.  These account for about 25% of economic activity and, as well as fuel used for heat and light, also includes construction, housing, labour intensive services and general repairs and maintenance. 

I and my officials have sought and will continue to seek the maximum degree of flexibility for Member States with respect to VAT as it applies to domestic energy and fuel use. That engagement will continue as I work with my European counterparts and the EU Commission to respond to the current energy crisis.