FAMILIES and householders face the prospect of being hit with VAT on top of their water charges when bills are issued in early 2015.
The Irish Independent has learned that Irish Water will be obliged to impose the tax when it begins issuing bills in just 15 months' time.
And schools, hospitals and sports clubs will be hit with an increased charge from early next year when Irish Water takes responsibility for issuing bills from city and county councils.
This is because local authorities are exempt from charging the tax for providing water under EU rules secured in the 1970s.
However, because Irish Water is a private company, it will be obliged to impose a 13.5pc VAT rate which currently applies to other utility bills.
The Government now plans to undertake a lobbying campaign in the European Commission to allow it obtain an exemption from the rules.
Environment Minister Phil Hogan said he did not favour VAT being imposed on householders, voluntary groups, schools and sports clubs.
However, the Government faces an uphill struggle to avoid imposing the tax as most countries across the EU charge it for the supply of water.
VAT, or Value Added Tax, is a tax on consumer spending which is applied to the purchase of goods and services.
If a householder receives a bill of €350, another €47.25 will be added in VAT.
While many commercial customers can reclaim VAT, schools, hospitals and sports clubs cannot.
The Department of Finance is aware of the issue and was in discussions with Irish Water, it said last night.
A spokesman said: "At present, work is under way on the overall structure of Irish Water, its financial model and the treatment of its function for taxation. The outcome of this work will determine its VAT treatment."
The Irish Primary Principals' Network (IPPN) said imposing VAT would impose an enormous financial strain on schools.
Almost half its members paid charges of up to €2,000 per year, while 12pc said they paid between €2,000 and €2,500 a year.
"Schools get charged for VAT anyway, and we have asked to be VAT exempt in our pre-budget submission to the Department of Finance," IPPN president Brendan McCabe said.
"This won't cause any shock to schools because they pay VAT on everything – heating oil, gas, electricity. When you think of it, it's ridiculous because we're funded by the Exchequer which then imposes VAT only to take it back.
"Primary schools are finding it very difficult to balance their books and this is another source of pressure. There's no meat left on the bone. Any additional charge is going to put even more pressure there."
Currently, commercial water customers are billed around €200m a year for their water and the EU/IMF bailout requires domestic customers to pay another €500m a year.
That means that an additional €95m could be collected in VAT if applied at a rate of 13.5pc.
One source said that negotiating changes at EU level could be more difficult until Ireland officially exits the bailout at the end of the year.
There could also be issues surrounding state aid rules.
"We're out of the troika at that point (early 2014) so they can't dictate to us," the source said. "The domestic rate will be whatever the charge it is and the government is confident they'll get the exemption for domestic."
Legislation, to be published later this year, will set out when Irish Water will take responsibility for billing – but it was expected to take control early in 2014.
The problem was first identified last year in a high-level report prepared for the Department of the Environment on reforming water services by consultants PriceWaterhouseCoopers.
It said the provision of water by local authorities was an "exempt" activity as a result of an EU derogation, but that it was only available in situations where water was provided by local authorities.
"Irish Water, as a taxable entity, would be required to charge VAT for water services," it said.
"The rate of VAT applicable would be determined by the Department of Finance."
Some 90pc of the country's 1.35 million households will start paying water charges from 2014.
By Paul Melia