Wednesday, 1 December 2004
Dáil Eireann Debate
The only resolution before the House is a VAT resolution on farmers flat-rate on livestock. The resolution provides for an increase from 4.4% to 4.8% in the level of the flat rate farmers’ refund together with a similar change in the VAT rate on the supply of livestock, live greyhounds and the hire of horses. The flat rate farmers’ refund and the livestock rate were last changed in budget 2004 when they were both increased from 4.3% to 4.4%.
The Revenue Commissioners have calculated that on the basis of macroeconomic data for the past three years that a flat rate of 4.8% is now needed to achieve full compensation. This represents a significant increase in the flat rate, one of the largest increases for a number of years. The increase to 4.8% will take effect from 1 January 2005 and will cost €12.93 million in 2005 and €15.52 million in a full year.
The flat rate scheme is a simplified and practical method of applying value added tax to farming. It compensates unregistered farmers on an overall basis for the VAT charged to them on their purchases of goods and services. This is achieved without applying normal VAT rules on registration, record keeping and returns. Traditionally, the VAT rate on livestock has been maintained at the same level as the flat rate addition. This is administratively more convenient for farmers and their customers.
The zero rate of VAT generally applies to farmers’ outputs, such as food, whereas many of their inputs are subject to VAT at the standard rate. Thus, under the normal VAT system, most farmers, if registered, would be continually reclaiming VAT incurred on their inputs.
The flat rate scheme which is provided for under the EU Sixth VAT Directive is a practical method of applying value added tax to farming. The scheme is designed to compensate unregistered farmers on an overall basis for the VAT charged to them on their purchases of goods and services — their farming inputs. This is achieved without applying the normal VAT procedures of registration, record-keeping and returns. The tax compliance burden for farmers participating in the scheme is minimal and, in addition, the State is relieved of a significant administrative burden.
The scheme sets out a percentage amount known as the flat rate refund or addition. Unregistered farmers add this percentage to their prices when selling to VAT registered businesses such as co-operatives and meat factories. The VAT registered business treats the flat rate amount as a normal business input in its periodic VAT return. The flat rate for 2004 is 4.4% and this is being increased to 4.8% for 2005.
An example would be where an unregistered farmer sells goods worth €100 to a meat factory on 1 January 2005. The flat rate addition of 4.8% means that he can increase his price to €104.80. The factory then claims back the €4.80 flat rate addition as a VAT credit in its normal return and there is no impact on the price of goods to the final customer due to the flat rate addition. VAT paid by unregistered farmers for 2004 is €185.36 million while the figure for agricultural sales is €3,879.88 million. The rates underpinning the calculation are rounded to 4.8%.
Mr. Naughten: I am glad the Taoiseach impressed on us his knowledge of the agricultural industry. His contribution was interesting. While time is limited in terms of our being tied to the motion before us, I am disappointed with the budget as it relates to the agricultural sector. It contains nothing in terms of farm consolidation even though the Minister spoke about it for a number of minutes. The relief on the control of farmyard pollution will not impact especially given the enormous pressure brought about by the nitrates directive, something of which my colleague, Deputy Crawford, is aware.
Mr. Naughten: I welcome anything that benefits the farming community. The Fine Gael Party realises how difficult and uncertain things are for farmers and in that regard will not oppose Financial Resolution No. 1 as outlined. As the Taoiseach said, the rate of calculation is set down under EU VAT law. The calculation is based on the rate of VAT paid by farmers on input costs over the previous three years. My understanding is that the rate is based not on the value of VAT paid over the previous three years but on the rate of VAT over the previous three years. When agricultural and general inflation are taken into account, farmers will be short-changed in this. This resolution should provide for payment to farmers not registered for VAT because of their input costs over the past three years. However, they can only recoup this input cost through the sale of produce to a VAT registered business.
Considering this and that farm practices will change dramatically over the next 12 months due to the introduction of the single farm payment which will be separated from production for the first time, many farmers will not get the benefit of this relief although they have already paid the input VAT. In other words, they will be short-changed. They will not have the same throughput of produce to enable them to recoup the VAT already paid. While the flat rate is not intended as an aid or assistance to the agricultural sector, it is fair compensation for VAT incurred by farmers. A farmer who produces more will get a higher rebate.
Has the Department of Agriculture and Food examined how this benefit could be maintained for farmers, downscaling in production because of the decoupled payment? Can it be maintained for the many more farmers forced to produce less due to entry into REPS or through the severe criteria laid down by the nitrates directive? This is particularly apt since the EU has rejected current Irish proposals for implementing the directive.
Under the new regime, agricultural commentators expect agricultural produce prices will fall. This will be due to the lack of price support, caused by the decoupling of the payment, which will have a dramatic impact on the price paid to farmers for livestock. Cattle and other produce prices will fall. Consequently, when farmers sell on the produce, they will not get the same VAT rebate as they would have in the past. Prices will also fall because of the current round of WTO negotiations which will allow additional produce from third countries. The increasing power of the major supermarkets will force farmers to take a lower price for their produce, thereby losing out. A review of the groceries order would have a further impact on prices.
If agricultural produce prices fall, the actual value of the rebate coming back to the farmer will be lower. In real terms, they will not get the value of money paid in VAT back through the rebate system. This is compounded by agricultural inflation running at approximately 6%, twice the rate of inflation. Input costs have risen by 6% but return on produce sold has not. Consequently, farmers are losing €6 in every €100 on the value of this rebate, without considering the changes that will take place with produce prices. Many farmers will have purchased equipment for more intensive farm production during the three year VAT reference period. Equipment still has to be maintained and in many cases the repayments have to be made. If they downscale, they will be big losers in the rebate system.
This is a watershed in agriculture and the Minister for Finance and his Department should have recognised and acknowledged it in the budget. I ask the Taoiseach to review the rate of rebate considering these significant changes in the agricultural sector. It is evident from the figures the Taoiseach has quoted that the Department of Finance has not realised these major changes taking place. The Department estimates the rebate will cost €15.5 million a full year. However, based on the changes now taking place with the decoupled payment, it will not cost that to the Exchequer. I urge the Taoiseach to review this matter and increase the level of rebate for farmers. Will the Taoiseach comment on the consideration the Department on Agriculture and Food has given this and whether a further rebate could be included in the decoupled payment to address the shortfall I have outlined?
Last year, I was disappointed the then Minister for Finance, Mr. McCreevy, only increased the rebate by 0.1% from 4.3% to
4.4%. It is a practical way of compensating farmers. For once, dealing with the Revenue Commissioners will be customer friendly as it is not complex. Its simplicity adheres it to the farming sector. It is paid to compensate for inputs for which farmers pay the appropriate VAT, but because they are not VAT registered they would not normally receive a refund. However, I am concerned at the change in the ways of paying the rebate. Many livestock marts where it was often paid are closing. We better start taking pictures of these for posterity. In County Westmeath, the heart of farming country, Mullingar and Moate marts have closed. Soon we will have none of those traditional outlets. It is sad that those traditional outlets where farmers picked up this payment will no longer be available.
I advocated, as Deputy Johnny Brady knows, decoupling proposals which was decried by farming organisations at the time. One might say that is not unusual for a Labour Party member. I championed that proposal in the mid-1990s when it was not popular. I did so because I wanted to ensure small farmers, the backbone of farming, would get their due and just entitlements. It was easy when one was on the side of the large farmers’ cohort to win the battles. However, I thought of the small farmer, down the boreen, who was denied payments. Many whom I knew never applied for subsidies. That is why I was eager to ensure that those people were entitled to payments. I support the Government’s efforts in that regard.
I accept what Deputy Naughten has said on decoupling. However, it will mean a significant change in farming patterns and methods of production. I hope we will reach the stage where farming will be less intensive and we will win the battle for traditional output. This will allow us to penetrate those lucrative EU markets. Where we only had a one in five penetration, we must now increase that to ensure we win a bigger market share of a higher value added market. This in turn will allow us to compensate in that way. That means changing our traditional production patterns and that beef production must be focused on to ensure agriculture survives. I always argued that the traditional beef breeds should be rewarded.
It would be remiss of me not to acknowledge that this is a larger increase than any other year. Farming inflation runs ahead of normal inflation. This appears normal when one considers that prices for oil and diesel have had a significant impact in the past 12 months. The value of this increase will not be as significant as it would appear on paper. I acknowledge it will be €15.5 million in a full year. Deputy Naughten asked if it can be included under the single farm payment system where the lesser value would be compensated. This is worth examining. However, I wonder if it can be accommodated under the existing scheme. I have grave doubts that the EU Agriculture Commissioner will allow such an arrangement.
I looked at the material on farmers in receipt of the flat-rate and the information regarding construction. I see the Minister for Agriculture and Food is in the House. There will be serious pressure on farmers to comply with environmental and pollution directives, especially the nitrates directive. While doing so will require significant expenditure, funds are no longer available in farming to meet costs of this nature. Is there any possibility that the grants system will be changed to support farmers who must comply with the directives to provide us with the environmental standards required to penetrate the European markets I described earlier? We should help our farmers to obtain a 50% market share and to take them over. It can be done but only if we implement an integrated package of environmental enhancement. Can the income restraints and eligibility criteria of the capital grants system be changed to accommodate this process?
There are some farmers in the midlands who train horses to supplement their incomes. Does the rule still apply whereby 10% of farm income is taken out of the equation and deemed to be allocated to the training operation? Perhaps one of the officials could clarify the matter.
I welcome broadly that more substantial increases than last year’s have been made. They had to be. I wondered how the former Deputy McCreevy could behave in so Scrooge-like a manner in this area over recent years given that he came from a heartland of farming activity, which was something I thought was dear to his heart.
Mr. Sargent: I welcome the opportunity to speak on the resolution. While it suggests a need for a wider debate, I realise we are limited here and will have a chance to speak on the budget more fully tomorrow.
In the context of agriculture generally, the resolution is narrowly focused. Given the fine body of officials who are present to give the Minister advice on any aspect of it, I assume it was well-thought out and comprehensively prepared. The resolution will be cold comfort to anybody who is trying to make a living in agriculture and the food industry. Farm gate prices have been decreasing and the current scenario is quite stark when compared with that of 1954. The resolution will be of cold comfort to farmers who remember receiving 50% of the final price of a product and are nowadays lucky to get 12%. Perhaps this explains why it is so difficult to make a living in farming and why so many are leaving the sector.
There is a great deal more to be done to rise to the challenges with which we are presented in agriculture. I hope the Minister will be open to many of the ideas farmers are communicating to me but which do not appear to be getting through in Government. With the requirement to export 80% of produce, farmers are being asked to compete with very low wage and, sometimes, low standard producers in other countries. Whether it is viewed as an opportunity or as a requirement to be met under duress, change is inevitable. Change will arise mainly in the context of energy costs, which are currently internalised in agriculture to a great extent, a strategy it will be very difficult to maintain.
Is it possible to expand the resolution to take into account the potential and need to develop local food economies which have been allowed to decline? We spoke about this subject during Question Time recently. Deputy Penrose also referred to the closure of marts, which appears to be a trend. The trend will continue only as long as the energy regime remains in place and exports continue to be a viable way of disposing of agricultural produce. When energy prices increase, the local market will become much more necessary and viable. One hears this point being made time and time again by Darina Allen and other food specialists who find it is more difficult to operate here when they compare their businesses with those in other countries.
The nitrates directive will be among the more immediate challenges for operators in the non-organic sector. I point the Minister towards a recent copy of the New Scientist which set out recent American research which has resulted in much more accurate methods to measure the nitrate requirement of land than we have traditionally used. I urge the employment of these methods to assist farmers to put exactly what is needed on their fields rather than engage in a process of estimation which can make it difficult to comply with the nitrates directive.
The resolution constitutes an opportunity to make these points in a wider context. It does not contain much which indicates the context in which it arose. Even the Taoiseach’s introduction dealt only with the bare facts surrounding it. While the resolution points to the need for a wider debate which we cannot have today, it is useful to consider New Zealand. New Zealand has often been compared to Ireland in the context of agricultural policy. It ceased to use subsidies and went down the decoupling route much sooner than we did. While to some extent there has been pain, those who have survived have done so on the basis of their own merits. It was interesting to read in the paper recently what Darina Allen said about Heinz in Dundalk being treated in exactly the same way as a local cheese maker in west Cork. That requires attention.
Mr. Sargent: I am keeping the resolution firmly in my sights. It is important to provide any possible assistance. There are obvious ways to do so bearing in mind the turnover involved. For example, speciality food firms turned over €450 million in a €10.7 billion Irish food market. Over the past eight years, there has been an eight-fold growth in the sector.
Mr. Sargent: While Ireland has 320 firms in this sector, New Zealand has 2,000. The Minister for Agriculture and Food must examine why that is and explore why we are discussing a resolution which ignores the potential in agriculture.
Mr. J. Brady: I welcome the changes which are being made. I compliment the Minister for Finance on what he has done for agriculture today and also the Minister for Agriculture and Food, Deputy Coughlan, and her Ministers of State for their interest in and dedication to agriculture.
Deputy Penrose spoke about the many issues he raised in the past, particularly his interest in and support for decoupling. I have to admire the Deputy because he has supported that from the outset at a time when many farming organisations had different views, although Members on all sides of the House fully supported it. It has been very successful——
The tax relief on farm pollution control measures to help farmers under the EU nitrates action programme is very welcome. Through negotiations with both the Minister for the Environment, Heritage and Local Government and the Minister for Agriculture and Food, enormous changes have been made under the nitrates directive. The problem had been severe. Deputy Crawford’s county and that of the former Minister, Deputy Michael Smith, have been affected more than other counties but what the Minister and the Government have done today will be of enormous help to those areas.
Mr. J. Brady: There is no doubt about that, and some of them will be divided with our new road in the next few years. That is welcome and it will complement the farmers of County Meath who were very supportive in making their land available for progress in the county, and in Counties Cavan, Donegal and elsewhere.
Mr. J. Brady: We met members of the IFA on the pre-budget submission. They raised many issues with us in that and in further meetings — as chairman of the party committee they met me on other occasions as well — and I was delighted to hear the president of the IFA say on the news this evening that many of their concerns were addressed in today’s budget.
Mr. J. Brady: I am thankful for that. There has been enormous support from farmers in terms of the reduction, both this year and last year, in disease levies. The VAT refund is welcome also and I thank everybody concerned in that regard.
Mr. J. Brady: No, this aspect is part of the resolution, a Cheann Comhairle. It is important to keep young farmers on the land but it is difficult to do that. Our buoyant economy means there is great opportunity to earn money and, unfortunately, it is very difficult to keep young farmers on the land.
I am happy to see the Taoiseach in the House when we are discussing agriculture, and accompanied by such a strong team. It gives me heart that agriculture, which continues to be a major industry, still has a place in the Dáil.
Mr. Crawford: ——I reckon that at least €30 million is due to farmers who have not been paid. This increase should have been made two years ago. That is the simple fact. It is being made retrospectively, which is a serious issue. When one considers the difficulties with which farmers have had to deal in recent years, this position is not fair. I was assured here last year that the figures farmers would get back as a result of the 0.1% increase were based on proper and adequate research into what was happening. Nothing had happened a year before. There is something very wrong when farmers have to wait so long for the repayment of such VAT.
As my colleague pointed out earlier, with the direct payment system to farmers under the single payment system, there will be a lower price structure. I hope I am proven wrong in that but without intervention or the other support systems in beef or dairy production, such amounts will come through the direct payment system on which VAT will not be paid. I cannot understand, therefore, how the Department of Finance can indicate that next year farmers will get a larger amount in VAT refunds than this year.
I welcome any increase but why has it taken so long to get through the system? The mushroom industry is under extraordinary pressure. The pig industry is not much better. At a committee meeting today under the chairmanship of Deputy Johnny Brady, we discussed the position in the sugar beet industry which is also facing a serious drop in price for its product. I say to the Taoiseach, through the Chair, that this measure is a small help to farmers. There is very little other assistance to farmers in the budget.
Deputy Brady mentioned the nitrates directive. My county, and that of the Ceann Comhairle, as well as Counties Cavan and Leitrim — for some reason Donegal was dropped — were being asked to provide 24 weeks——
Mr. Crawford: I am dealing with the same issues with which Deputy Brady dealt. The nitrates directive is extremely serious. Farmers in areas in which increased levels of slurry accommodation must be provided must be compensated. This change in VAT alone will not be sufficient.
Have departmental officials evaluated how Ireland compares with other members states in regard to VAT support which has been provided indirectly to farmers in other European countries? Have the Taoiseach’s officials information on this? It might provide a way to support small farmers. Deputy Johnny Brady referred to all the help provided in the budget. Perhaps it will help farmers whose land will be taken from them to build the M3. I hope that road is built as quickly as possible. My party tabled a resolution to that effect in the House and Fine Gael is speaking clearly on the issue.
Mr. Crawford: However, the farmers who must sell their land in order that the M3 can be built were promised three years ago before the general election that their capital gains tax would be rolled over but that has not been addressed in the budget, even though there is plenty of money available to do so.
The Taoiseach: I will reply to Deputy Crawford first and then work my way backwards through the questions. I thank the Deputy for his support for this measure. The flat rate in the United Kingdom is 4% and has the same basis as ours. The CSO agricultural data were revised earlier this year. This is reflected in the calculation. The rate is calculated on a three year rolling basis. It comes up every year in the budget when the latest macroeconomic data are taken into account.
Deputy Sargent referred to energy costs which are included for the purpose of calculating the farmer’s flat rate refund. All member states have the option to use the flat rate scheme in applying VAT to farmers. The relevant EU law states countries may apply to farmers a flat rate scheme to offset the value added tax charge on the purchase of goods and services. However, the directive rules out overcompensation on the flat rate which may not be used to obtain for flat rate farmers refunds greater than the VAT on inputs. It cannot be used to provide an indirect subsidy, that is, to compensate farmers for changes arising from CAP and international trade reforms. Under EU rules, we cannot compensate for anything other than value of VAT on inputs, as the Minister pointed out. There can be no additional element other than inflation. I refer to the charts of recent years. This is the highest percentage flat rate for farmers for a long time.
Deputies Sargent and Naughten asked about farm waste. A sum of €38.8 million is provided for farm pollution control measures in the Department of Agriculture and Food’s Estimate which was announced two weeks ago.
The Taoiseach: Income criteria have been abolished under Sustaining Progress. A question was raised about people not using or liking the system. Under the EU directive, farmers can register for VAT if they feel they are being short-changed under the flat rate system, which is not compulsory. However, Deputy Penrose is correct that the flat rate system has many advantages. One can use the other system but the reason people avail of the flat rate is its effectiveness.
Deputy Naughten was not clear about the value of VAT as opposed to the rate of VAT. The flat rate is calculated in accordance with Article 25 of the sixth VAT directive which provides that the rate is calculated on the basis of the macroeconomic data for the previous three years and the value of input costs. Reducing output also involves lower input costs. Therefore, VAT will reduce. Like many things in life, one cannot have it both ways.
The Taoiseach: The flat rate is calculated on the basis of the data for the previous three years. Accordingly, while the level of refund is calculated with the intention of giving a full refund of the VAT borne on agricultural inputs by the farming sector as a whole, the level of refund does not take account of rate changes announced in the budget or expected changes in agricultural outputs which have not taken place or changes as a result of CAP reform. These changes will be reflected in future determinations of the flat rate.
The Taoiseach: I hope more constructive comments are made tomorrow than all the other Thursdays I watch proceedings on my monitor. I am glad I do not come to the House on Thursdays because I would be even more bored than on Wednesdays.
The Taoiseach: In addition to the renewal of farmer’s stock relief, improved capital allowances for expenditure and pollution control are provided. The writing down period under the special tax relief scheme for expenditure on farm pollution control measures will be reduced from seven years to three to assist farmers to comply with the nitrates action programme. Relief will be provided under the scheme at 33.33% per annum over a three year writing down period for expenditure incurred during the four year period commencing on 1 January, with an option to avail of a more flexible writing down arrangement in respect of the lesser of €31,750 or 50% of qualifying expenditure in any one year. Details will be provided in the Finance Bill. However, this is an important measure.
Deputy Johnny Brady referred to the averaging of certain payments outstanding under FEOGA direct payment schemes. Provision will be made in the Finance Bill to enable farmers not using income averaging for income tax purposes to average certain payments outstanding under FEOGA direct payment schemes in three equal instalments for 2005, 2006 and 2007. This measure will apply to payments made in 2005 for entitlements established for 2004 in respect of the FEOGA scheme which will be replaced by the new single farm payment scheme. I welcome Deputy Penrose’s views and support for the new scheme. The Minister for Agriculture and Food says he has been consistent in his position.
Deputies Johnny Brady and Naughten mentioned the issue of stamp duty relief for the exchange of farm land for farm consolidation purposes. The Finance Bill will provide for a new stamp duty relief for the exchange of farm land between two farmers for the purpose of consolidating each farmer’s holding by applying the stamp duty only in respect of an amount equal to the difference in the values of the lands concerned which must be payable in cash. Currently, each farmer is liable to the full stamp duty on property he or she receives in such an exchange and this once-off relief will apply for a two year period. The qualifying conditions will be contained in the Finance Bill. This measure will encourage the consolidation of holdings to reduce fragmentation which impacts negatively on the competitiveness of farmers.
The renewal of farmer’s stock relief will assist new entrants to the farming sector. The special incentive stock relief of 100% for certain young trained farmers has been extended from next January for a further two years to 2007. The existing general 25% stock relief for farmers has also been extended for the period.
Without going into the details of all these, which we cannot do under this debate, when we take the stock relief, the improved capital allowances, the FEOGA direct scheme, the consolidation stamp duty relief and the farmers’ VAT, it is important that we acknowledge the significant additions that have been made in this budget for the important agriculture industry. Deputy Crawford is right on that.
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