VAT reduction needed amidst ‘30% black economy activity’ – FCI

“A VAT reduction on agricultural/forestry contractor services would significantly reduce the level of black economy activity in the sector.”

That’s the message from the Association of Farm & Forestry Contractors in Ireland (FCI); it’s currently making its Pre-Budget 2019 Submission.

The level of black economy activity in the agricultural/forestry contractor sector is running at close to 30% of all turnover, according to the association.

The FCI has requested that the Minister for Finance and Public Expenditure reduce the VAT rate on all activities provided by agricultural/forestry contractors from the current 13.5% to 9% – for a minimum of two years.

The FCI contends that the services provided by contractors are as important, if not more important, to the agriculture and food industry as the hospitality sector is to the tourism industry.

It says that the reduction in the VAT rate to the hospitality sector (in 2011) provided a “much-needed kick-start, which the agricultural/forestry contractor sector now clearly needs”.

Image source: Shane Casey

According to the FCI, a VAT reduction for contractor services will allow the agricultural sector to get the benefit of improved cash-flow on farms.

Lowering the VAT on farms, most of which are not VAT registered, will “support the additional financial opportunities for re-investment in additional, higher-genetic-worth dairy and beef animals”.

Image source: Shane Casey

FCI national chairman Richard White explained: “This reduction in VAT will also allow farmers to work out from the huge forage difficulties presented by the spring of 2018, which have been compounded by the summer drought conditions of 2018.

We believe that this will result in an extension of the fodder crisis on farms into 2019.

“Reducing the VAT rate from 13.5% to 9% will mean a cost saving of close to €20 million for Irish farming at this critical time,” he added. “It will improve cash-flow on farms and allow agricultural contractors to maintain VAT-exclusive charges – to take some account of the 36% increase in agricultural diesel costs.”

Fleshing out the figures

The FCI reasons that, on the basis of Department of Agriculture figures, there are 130,000 farmers in Ireland. The association claims that the average annual spend on contractor services is €5,000 per farm – equating to a total turnover of €650 million.

The FCI is then assuming 30% non-VAT returns – due to ‘black economy’ activities in the sector. This, in turn, equates to €195 million of turnover for which no VAT is returned.

If VAT was returned on this work at the FCI-proposed (reduced) 9% rate, it says that such a measure would deliver an additional €22 million in revenue to the state.

Comparison

The FCI contends that if all of the VAT from the sector was returned at its proposed (reduced) rate of 9%, it would yield an overall VAT return of €58 million. The current situation, where “in the region of €455 million has a VAT return [30% non-compliance]” yields a VAT return of €68 million.

Image source: Shane Casey

This, says the FCI, all means that the proposal to reduce the VAT rate on all agricultural/forestry contractor services from 13.5% to 9% would result in a “very small overall reduction in VAT –  circa €3 million”.