Committee Reports::Report No. 09 - Proposal for a Twelfth VAT Directive::31 October, 1984::Report



1. The Joint Committee has examined the Commission proposal for a twelfth VAT Directive — expenditure not eligible for deduction of value-added tax. The original Commission proposal — COM (82) 870 final — is dated 25 January, 1983. Following a resolution of the European Parliament, adopted on 17 November, 1983 the Commission revised its proposal. The amendments proposed by the Commission appear in document COM (84) 84 final dated 16 February, 1984. The proposals have been examined for the Joint Committee by its Sub-Committee on Economic, Commercial and Financial Affairs under the Chairmanship of Deputy Donal Ormonde. The Joint Committee is indebted to Deputy Ormonde and his Sub-Committee for their work. The Joint Committee was facilitated in its consideration of the proposals by memoranda from the Confederation of Irish Industry, the Office of the Revenue Commissioners and the Department of Finance.


2. VAT is a non-cumulative tax on final consumption. It is collected, by VAT registered persons, at each stage in the process of production and distribution. The net amount collected at each stage is generally the amount arising in respect of value-added to the product at that stage. This result is usually brought about in two steps. The VAT registered producer charges to customers, output VAT, at the appropriate rate, to be paid over to the Revenue Commissioners. Before paying over this VAT, however, the producer may generally deduct VAT paid by him on business inputs used by him. In general, therefore, the VAT registered producer does not bear VAT on business inputs and the VAT on his output is borne by his customer. If the customer, in turn, uses the goods in question for the purposes of his business the process is repeated, and so on, until the VAT on the final product is borne by the final consumer.


3. The draft twelfth VAT Directive is concerned with those goods and services which, although used, to a greater or lesser extent, in some connection with a business, have many of the characteristics of final (or private) consumption. Article 17(6) of the Sixth VAT Directive (77/388 of 17 May, 1977) requires that, in respect of such goods/services, “VAT shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment”. Pending the introduction throughout the EEC of a harmonised system for dealing with such goods and services “Member States may retain all the exclusions provided for under their national laws”.

The same article in the Sixth VAT Directive requires the Council to agree on a harmonised approach to these exclusions. This Directive envisaged that this agreement would be reached before the end of 1981, but this has not occurred.

4. The provisions of the original proposal are summarised as follows:

Article 1

Article 1 concerned the exclusion of the right to deduct the tax on expenditure relating to passenger cars, pleasure boats, private aircraft or motor cycles. The EC Commission held that this exclusion was justified by the fact that acquisition of these types of vehicles necessitates expenditure which, even if it was incurred in connection with an undertaking, was not necessarily linked directly and exclusively to the activities of the undertaking.

However, this exclusion was accompanied by a number of riders designed to maintain the right to deduct input tax where vehicles constituted stock-in-trade, or were the subject of the economic activity of certain taxable persons (e.g. driving schools, car hire firms).

Article 2

The exclusion provided for in Article 2 concerns transport costs incurred on business travel. The justification for this provision was given in similar terms to that in respect of Article 1.

Paragraph 2 of Article 2 stipulated that the exclusion of travel expenses does not extend to transportation costs borne by an undertaking which relate to the movement of staff between different places of work — to work sites, for example — or to the collection of staff from their homes.

Article 3

The purpose of this provision was to exclude from the right of deduction a category of expenditure which was primarily consumption expenditure, even if it was incurred in connection with the operation of an undertaking.

This exclusion did not concern those economic sectors whose activities consist in providing the goods or services which are the object of the exclusion (hotels, restaurants, and suppliers and manufacturers of food). Nor did the exclusion cover works canteens, even where these could operate only with the help of subsidies, provided these subsidies were included in the taxable amount in accordance with Article 11(A)(1)(a) of the Sixth Directive.

Exclusion from the right to deduct did not apply to expenditure incurred by an undertaking in providing accommodation free of charge for security staff.

Articles 4 and 5

These exclusions, which concerned expenditure on entertainment, amusements and luxuries, stemmed from the same arguments as those outlined above.

The effect on Ireland of this Directive, as originally proposed, would have been that value-added tax would have been non-deductible in respect of some items on which it is at present deductible, and vice versa. The major change would have been that tax on expenditure by taxable persons on the repair and maintenance of passenger vehicles would not have been deductible. A gain to the Exchequer would have thereby accrued. The Joint Committee is advised that some minor changes would have been necessary in our existing legislation but the changes on overall VAT yield would not have been great.


5. The latest proposals [COM (84) 84 final], which are in line with those proposed in a resolution of the European Parliament, adopted on 17 November, 1983, would, if implemented, require the following changes from the first proposal:

Article 1a—within a period of four years, 50 per cent deduction of value-added tax in respect of expenditure on the purchase, manufacture, importation, leasing or hire, use, modification, repair or maintenance of passenger cars and motor cycles (position to be reached in stages) would be allowed. The same rules to apply to supplies for, or, services performed in relation to such vehicles.

Article 2.1—similar deduction to that in Article 1a to be allowed in respect of business travel.

Article 3a:—full deduction may be sought in respect of any of the goods or services covered by Articles 1, 2 and 3 where “proof (is furnished) that such expenditure has been made exclusively for business purposes”.

6. Both Commission proposals, have been discussed at working party level. There was a substantial level of disagreement on the proposals at these meetings and further meetings at working party level will be required in relation to the revised proposals. These difficulties arise from considerable differences between the national systems operating in Member States at present.


7. Ireland does not allow deduction of VAT paid in respect of:




(d)food and drink,

(e)entertainment and other personal expenditure.*

The Joint Committee is advised that the original proposals by the Commission would, if implemented, have had relatively little impact, in the overall budgetary context, on Ireland. The aspects of the proposal relating to the repair or maintenance of passenger cars would have had some effect on the motor trade (particularly when the relevant VAT rate was 23 per cent: it is now 5 per cent) as VAT on such services is currently deductible. The current proposals would, however, have significant budgetary implications. In particular, the Revenue Commissioners estimate that the annual cost in 1984 terms of allowing 50 per cent deductibility for cars/cycles as envisaged in Article 1a would be as follows:


passenger cars etc.












repairs, fuels, lubricants





Net Loss


These figures, which are based on up-dated material from the CSO, are very substantially different than those estimated to arise if the original proposals had been adopted without alteration. The Joint Committee is also advised that it is not known what the precise effect of the new Article 3a would be, but its implementation could involve additional substantial losses of revenue. The budgetary effects of the remaining changes now proposed by the Commission and the original proposals still standing would probably be minimal.

8. In its submission to the Joint Committee in relation to the original proposal the Confederation of Irish Industry noted that, in Ireland, at present only the VAT on the acquisition of cars and the purchase of petrol for them is non-deductible. The Confederation feared that if VAT relating to the repairs, maintenance, supplies etc. were to be made non-deductible, the result would be a new and significant burden on industry which would inevitably be reflected in selling prices. The Confederation considered that the worsening of the cost competitiveness of Irish industry inherent in the Commission’s proposal should be resisted and that, in the context of the processing of the draft Directive, an entirely new look should be taken at the appropriateness of the application of non-deductibility to any expenditure on vehicles acquired and used for the purpose of taxable activities.

The Confederation felt that it should be recognised that the purchase and running of passenger vehicles is a substantial cost factor for industrial concerns and that, irrespective of the incidence of VAT, the expenditure involved is undertaken only to the extent that it is essential to the effective operation of a company’s activities. The Confederation further felt that it is clear that this point already finds wide acceptance within the Community since, as shown in the Commission’s documentation, “four or five” Member States currently permit deductions in respect of the purchase of motor vehicles. (Three, Germany, Netherlands and Luxembourg permit full deductions: Italy and Belgium permit partial deductions).

In conclusion, the Confederation was of the view that in Ireland particularly, with its underdeveloped public transport systems and the absence of adequate urban public transport in the major centres of population, the use of motor vehicles for business purposes is the only practicable method.


9. The Joint Committee welcomes the Commission commitment to harmonise the conditions under which VAT may be deducted, in order that industry in Ireland should not suffer disadvantages due to different VAT regimes, which could also affect the level of “own resources” contributions from Member States. The Joint Committee is also very conscious of the considerable implications for the Irish Exchequer if the proposal is adopted in its present form.

Nevertheless the Joint Committee is sympathetic towards the views expressed by the Confederation of Irish Industry especially in relation to the proportionately greater need for the use of motor vehicles in Ireland due to the low population density and the difficulties and diseconomies of a public transport system not enjoying the economies of scale and of transboundary connections as obtains on the European mainland.

The Joint Committee is also mindful of the beneficial effects to the Irish motor industry if the greater level of deductibility, which would be allowed under the revised proposals, in respect of the acquisition and use of motor vehicles were to be implemented and feels the nett loss to the Exchequer as set out in paragraph 7 would be made up to some extent by an increase in the collection of duty which would be generated by the extra sales of such vehicles.

The Joint Committee recognises, however, that the multiplier effect to the economy as a whole would be limited as the extra monies thereby made available would be expended on imported vehicles and that the loss of revenue would probably need to be financed initially by borrowing or by tax increases in other areas.

In addition however to the revenue implications inherent in the amended Commission proposals, the Joint Committee is concerned that any increased complexity in the VAT system could lead to greater opportunities for tax evasion or increased administrative costs. The Joint Committee understands that discussions on the present draft have not yet reached an advanced state, but that, due to budgetary considerations, it is most unlikely that it could be accepted in its present form.


Chairman of the Joint Committee.

31 October, 1984.

* (Section 12(3) of the Value-Added Tax Act, 1972 as amended).