Sales Taxes & VAT

Turnover Tax

In 1962 receipts from excise taxes on a narrow range of goods in particular tobacco, beers,  spirits and hydrocarbon oils constituted 40% of government revenue.

The Finance Act 1963 introduced a turnover tax. It applied to all retail sales of goods and provision of services in the course of business. It also applied to supplies by clubs, gaming betting and entertainment. Goods imported into the State were subject to the charge. It was collected by the Collector General.

The turnover tax was calculated monthly as a percentage of total retail sales on most goods and services. The main exemptions were goods for resale, capital goods, exports, transport and certain professional fees.

The turnover tax did not apply to sales to businesses and registered traders. For example a large brewery  resupplying 5,000 publicans would incur  little or no turnover tax. In the this case, the tax was collected by from the retail publicans.

Wholesale Tax

The Finance Act 1966 introduced a wholesale tax at the rate of 5% on the sale of goods other than food medicine clothing and fuel. It did not apply to commodities which were exempt from the turnover tax. Drink tobacco and hydrocarbon fuels which were already subject to heady heavy excise duties and were exempt.

The rate wholesale tax was due to increase to 10% from 1 January 1969. However. the rate increased to 15% in 1969 on certain categories of goods such as motorcars, radios and television sets. The wholesale tax was levied on a small range of goods and excluded food drink tobacco clothing medicine fuel box and hydrocarbon oils.

By the end of the 1960s 62% of current tax revenue came from indirect taxes principally customs and excise and to a much lesser extent,  the above sales taxes. This was in marked contrast to other European countries were the dependence on indirect sales was much less, UK 39% Denmark 41% USA 34%. Of the total revenue from Customs and Excise 80% came from five taxes, tobacco, beers, spirits, hydrocarbon oils and motor cars and parts.

VAT

In June 1968 the government issued a White Paper on Value Added Tax. This described value-added tax and explained why the EU Council of the European Economic Community had decided in favour of it. A second value-added tax White Paper followed. The government announced it would introduce value added tax and published proposals for  value-added tax in March 1971.

Joining the EU in 1972 meant the elimination of customs duties by 1978 on imports from other EEC countries. This led to a very substantial shortfall in customs.

Value-added tax was introduced in 1972 in advance of Ireland’s entry into the European Economic Community. It  provided a broader base of indirect taxation.

Crosschecking was inherently built into the system. Unlike the sales and wholesale taxes above, it  applies  to each level of production down to the retailer selling to the consumer.

Each  business recovered VAT on its inputs and charged VAT on its outputs. This involved most businesses in registering for and making value-added tax returns.

Value-added tax was required by EEC directives. The rates first  applied were , 5.26% 16.37% and 30.26% according to the goods and services concerned. These rates were intended to maintain consistency with the prior turnover and wholesale taxes.

Scope

VAT applied to the sale of goods and services as well as the importation of goods. Exports were zero rated. Persons were obliged to register subject to exemptions below a certain turnover. The tax was entrusted to the Revenue Commissioners.

Initially there were broadly speaking higher rates on luxury items and a reduced rate zero rate or exemption for necessaries. When Ireland joined the EEC,  was permitted to maintain zero rating for a transitional period to July 1977

The following were zero rated

• Food and oral medicine
• children’s clothing
• footwear
• books
• passenger transport

The following were exempt

• telecommunication services
• passenger transport
• admission to sporting events
• certain professional services

Rates Progression

Value-added tax as originally introduced had 3 rates by 5.26% 16.37% and 30.26% equivalent to the turnover taxes. There was a 3% rate on buildings and building work. Consumer durables are liable at 16.37%. 5.26% applied to building materials and fuel. Builders and property developers adjusted their supplies to yield an effective 3% rate overall.

Over the next ten years, the lower rate increased from 5.26% to 23% and the higher rate increased from 16.37% to 35%. On 1 May 1980 the 20% rate was increased to 25%. O on 1 September 1981 10% rate was increased to 15%. The registration limits were increased to £15,000 and £30,000 (good only) respectively.

Initially, most food and oral medicines, clothing, footwear and fuel were zero rated.

In the mid-1980s the zero rate applied to food, oral medicine, children’s footwear children’s clothing, medical appliances and electricity. The 5% rate applied to building work garage repairs concrete and few other than electricity. The 8% rate applied to clothing and clothing materials other than children’s clothes.

The 18% rate applied to hotel business and short-term hire of vehicles and certain other things. The main items covered by the 23% rate to 23% rate applies to most services and supply of goods. It 35% rate applied to specified bowls with luxury goods.

Broadening of Scope

The sixth VAT directive made the VAT directive made requirements in respect of many aspects of value-added tax. Most zero rating was to be prospectively abolished. It envisaged the gradual narrowing of zero rating by restricting it to foodstuffs clothing and footwear during the first  stage and then later to very basic foodstuffs in a second stage. The retention of the zero rate was permitted only in respect of limited categories.

On 1 May 1982 the 15% rate was increased to 18% and the 25% rate was increased to 30% with alterations in the classifications of goods.  On 1 September 1982 the 18% rate was applied for the first time to legal and auctioneering services

On 1 March 1983 the 18 and 30% rate increased to 23 and 35%. The lower rate of 3% on building an agricultural services was increased to 5%. On 1 March 1983 zero rated fuels except electricity were charged at 5%.

VAT was introduced at the point of importation in 1984 in most cases. An additional 5% rate and 18% rate were introduced.

The result was that VAT increased from yielding 21% of total revenue and 5% of GNP in 1973/ 74 to 25% of total revenue and 9% of GNP in 1984. Education health financial services insurance and betting were exempted.

Traders with turnover of £25,000 per year were obliged to register in 1984. The threshold was £12,000 for the traders including those providing supplying services.

Mid-1980s

By the early 1980s the lower rate of VAT was 23% and the standard rate 35%. This led to significant diversion u of trade  in border areas because the United Kingdom value-added tax rate was 15%. The higher Irish rate was due to a significant extent to the fact that there were a significant number of exemptions.

The Commission on Taxation in its 1984 report on indirect taxation considered that the VAT system’s  high rates and narrow base incentivised and created significant distortions significant distortions in the allocation of goods.

Compliance and returns were a significant cost on taxpayers being entirely paper-based. Substantial repayments of tax arose for some. The checking of VAT returns against income returns were made,  but it was not possible at a systematic level.

By the early 1980s the system most fell most heavily on smaller retailers. The VAT return had 38 entries. Differentiation in categories of goods between the higher and standard rates was occasionally  anomalous and led to inequities, leading sometimes to confusion.

Exemption for food clothing and footwear was very significant in narrowing the VAT base. It comprised 28% of personal consumption in the mid-1970s.

Revenue indicated that if the exemptions were removed the standardised rate could be significantly lower, closer to 14%. VAT was charged on clothing except children’s clothing after 1984.

The sixth VAT directive limited Ireland’s ability to depart from uniform basis thereby provided. The standard rate of VAT of  21% applied on most goods.

A range of goods and services previously encountered including electricity agricultural services telecommunication services legal services clothing and footwear of previously liberated or exempted were brought into the VAT net. Food children’s clothing and footwear passenger transport continue to be zero rated or exempted.

Some medicines were charged at zero  while others were charged at 21%. Soaps and shampoos and detergents insecticides were charged at 35%.

Zero & Lower Rates

The supply of electricity was zero rated. However excise duties were levied on hydrocarbon oils and are special levies in lieu of rates on electricity stations and networks.Books were zero rated.

A special reduced rate of 5% applies to certain agricultural products. Farmers were generally excluded from VAT but could register voluntarily. The scheme was designed to compensate flat-rate farmers for the VAT they incur on farming costs without having to register. Flat-rate farmers are entitled to receive an amount known as the flat-rate addition on their supplies of agricultural activities..

Building and associated services  subject to a 5% rate in the 1970s and 80s. VAT applied on property in accordance with the pre-2008 rules from 1972. It was  not generally payable on rent unless an election was made.