No need for Consumers to suffer new VAT hit

The Government should act now to ensure that the imposition of VAT on public service charges does not cost consumers a cent.

Last week’s Finance Bill confirmed that council and public body fees for services such as waste collection, parking and road tolls will soon be subject to VAT of 13.5% or 21%.

This follows a recent European Court of Justice (ECJ) ruling, which found that the VAT exemption for Irish local authorities gave them an unfair advantage over private sector operators, who provide these services to the public on a commercial basis. The ECJ ruled that this VAT exemption must be removed in order to eliminate this unfair advanage. To this extent, the Government’s hands are tied.

That said, there is a very simple measure that the Government can take in order to protect consumers and households from any additional VAT cost arising from this move.

It should instruct all councils and public bodies to absorb the VAT charge within their existing revenue from these services. It should then calculate the net VAT cost for each council or public body, and refund this cost to them, from the proceeds of the new VAT charge. If these calculations are done correctly, it will not cost the Exchequer a cent.

On the other hand if the Government attempts to use this change as an excuse to extract more tax revenue from consumers, I believe it is doomed to fail.

Take the example of local council operating a refuse collection service. Normally a collection truck will visit each estate once weekly. If charges rise by 13.5%, at least some consumers will switch to private operators instead of paying the higher fee. To maintain their service, the collection truck will still have to visit each estate each week, but now collecting refuse (and revenue) from a dwindling base of customers. Its average cost per collection will increase and its revenue will decrease. Not a good result for the council.

Similarly, look at the M50 toll road, which is managed by the NRA on behalf of the State. If toll rates go up, less cars will use the road. As volumes decrease, so does revenue. Yet the NRA still must maintain the road to the same standard.

In a recession, the key to maximising toll revenue is not to jack up prices (a surefire way to lose revenue) but to increase the volumes of cars on the road. This is why the private-sector operators of the M4 Enfield toll plaza decided recently not to implement a price increase for 2010, even though they are legally entitled to increase tolls annually.

If the Government plays stupid on this one, demand answers from your T.D.