Indirect tax - VAT 

The well flagged increase in the standard rate of VAT by 2% has been formally announced. The Government’s approach in increasing indirect tax rather than income tax cannot be faulted. 

While there is little doubt that consumers will be hard hit by this increase, at least psychologically they can be comforted in that they are no worse off from a take home pay perspective. This may also add to slightly higher consumer confidence as there is the perception that, at least, you have choice as to what you buy. 

On the down side however, this VAT increase will hit much more than luxury goods and services to which the standard rate of VAT is perceived to apply. 

In fact, approximately 49% of all goods and services supplied in the market are liable to the standard rate of VAT.  Many basic essentials such as clothing, soap and washing powder are liable to VAT at the standard rate, as are modern essentials such as telephones, texting and internet access.  This will ensure that an increase in the standard rate of VAT will not go unnoticed. 

When you consider that the Government is counting on an increase in the VAT take of €620m in a full year you begin to see the scope of its impact on people’s spend.  

A further measure of its impact is that this alone will, in fact, increase the Consumer Price Index by 0.72% if it is passed on in full to the consumer.  With many businesses still not in a position to absorb wage increases this will place households under increasing pressure and may further depress consumer demand. 

Effect on business 

On a positive note, VAT is generally not a cost which sticks with most businesses.  While there can be issues around transition to the new rate which can produce costs for businesses they can generally be managed in a way that the increased rate can be passed on to its customer without it producing a cost to the business itself.  

Ironically, however, there are notable exceptions in this case such as banks and financial institutions.  

While there will be little public sympathy for these institutions bearing extra costs there is nevertheless a downside for the borrowers from these institutions.  

These new costs, most likely under pressure from a regulator focussed on ensuring fiscal strength in the banks, will have to be recouped by the banks from the bank’s customers with the indirect result that consumers will bear these costs. 

The other types of business which can be adversely affected are those supplying to consumers or customers which cannot recover VAT and who cannot recoup the VAT increase by upping their prices due to market conditions. 

For these businesses the increase will put further pressure on already tight margins.

How are exports affected? 

The one bright star in the economy, at present, is the level of exports from the country.  In a depressed local market many Irish businesses have looked abroad for customers and successfully so.  If the Euro debt crisis could be decisively resolved, and with it the persistent uncertainty in the Irish banking system, there could be a huge bounce in confidence and optimism in the Irish economy for the new year. 

The good news is that apart from service businesses exporting to private consumers and service businesses that cannot recover all of their input tax, such as those supplying financial services, there will be minimal impact on exports arising from the VAT rate change.  For the two specific categories of business just mentioned the rate change will go straight onto the price of services or reduce the businesses margin by €20 per €1,000 in sales or costs respectively. 

How do we compare after the change?

There are also some positives to be taken from the fact that, despite the increase in VAT rate, Ireland is not far off the average standard VAT rate of 20.6% across the EU.  While its rate, after the change, will be the fourth highest in the EU it shares that rate with Poland, Finland and Greece. Sweden, Denmark and Hungary have the highest rate of VAT at 25% followed by Romania with 24%.   

What’s missing? 

A somewhat surprising feature of the Budget was that in taking measures to stimulate the construction sector the Government has not done so in a similar way to their approach with the tourism sector.   Anecdotal evidence would suggest that the temporary reduction in the VAT rate to 9% for tourism, combined with keen competition in an over-supplied market, has actually paid off with a significant surge in inbound tourism.  EU Law allows Ireland to take similar action in relation to construction services. 

A similar, or even greater reduction in the rate of VAT on construction services in a similarly afflicted market, might act to stimulate activity in the home improvement market and provide some much needed jobs in a labour intensive sector which is still very much on its knees.  

Obviously there are political risks associated with any move which might be seen to alleviate the problems of those to whom the recent collapse in the economy has been primarily attributed.  

However there are many unemployed construction workers, who had nothing whatsoever to do with the economic collapse, who are depending on the Government to create the conditions necessary to get them back to work so that they can again contribute to the economy.

VAT Changes 

Change in the Standard rate of VAT

The standard VAT rate will increase from 21% to 23% with effect from 1 January 2012. VAT rate on district heating The VAT rate on district heating will be reduced from 21% to 13.5% in the Finance Bill. This will bring district heating into line with the supply of heating fuels which is currently taxed at 13.5% and will help to encourage the uptake of district heating.

Farmers to get VAT refunds on purchase of wind turbines 

Although farmers are generally not required to register for VAT they are entitled to recover VAT on certain items of capital expenditure, the minister has indicated that the VAT Refund Order will be extended to provide that unregistered farmers can reclaim VAT paid on wind turbines purchased after 1 January 2012. This is to be welcomed as another positive step in making Ireland a leader in sustainable energy production. 

VAT rate on open farms reduced to 9% 

In extending the tourist agenda the  9% rate of VAT will apply to admission to open farms. This rate was designed to boost the tourism sector and it seems only right that open farms should benefit in the same way as other similar entertainment attractions 

Excise duties 

Mineral Oil Tax 

There has been a significant increase in the rate of mineral tax that applies to petrol and motor diesel. The rate has risen from €15 per tonne of carbon dioxide emitted to €20 per tonne. In practical terms this will result in an increase of 1.4 cents per litre of petrol and 1.6 cents per litre of Diesel which will apply from 7 December 2011  – these increases are VAT inclusive but do not take into account the increase in the VAT rate that will apply from 1 January 2012. 

Tobacco Products Tax 

With effect from 7 December 2011 duty on cigarettes will increase by 25 cents a packet (including VAT) with a pro rata increase across other tobacco products. The price will likely rise further when the VAT rate is increased in January 2012. 

Vehicle Registration Tax 

Driven by falling receipts from VRT and motor tax the Government has pledged to review the bands and rates currently used to calculate VRT. Since 2007 VRT receipts have fallen from €1.4 billion to €365 million. Whilst the primary reason for this has been the fall in quantity and price of new car sales and the switch to cheaper cars, the restructuring of the way in which VRT was calculated has exacerbated the underlying economic factors.  The method of calculating VRT was previously restructured to be calculated on the basis of carbon emissions, however the improvement in emissions of vehicles combined with the switch to more fuel efficient vehicles has compounded the fall in VRT revenues. 

The Government has undertaken to enter into a public consultation period with a view to adjusting bands with effect from 1 January 2013. Submissions to the consultation should be submitted by 1 March 2012.

Motor Tax 

There has been a similar, albeit not as stark, fall in revenue from motor tax, with the switch to lower taxed fuel efficient cars being cited as a major cause of this fall.  Cars registered after 1 July 2008 pay motor tax based on cc emissions, with cars registered before 1 July 2008 paying motor tax based on the cc capacity. From 1 January 2012 motor tax rates across all categories both for pre and post 1 July registered cars will increase significantly. 

View the increased rates (PDF).  

Betting Duty 

Currently, betting duty only applies to bets placed in betting shops and does not apply to bets placed by Irish punters on the phone or online.  In January 2011, the Finance Bill proposed that bookmakers would pay betting duty at 1% on bets made by way of the internet, telephone or other electronic means (remote bets), and that there would be a new excise duty of 15% to the commissions, relating to remote bets, made by betting intermediaries, including betting exchanges, from parties in Ireland. Additionally, it was proposed that bookmakers who take remote bets would be licensed and subject to an excise duty of €5,000 on the grant of the license. 

The fee for renewal of the license to be based on the bookmaker’s turnover. A similar regime should apply to betting intermediaries that provide facilities which allow people to make remote bets. 

There were also consequent changes to the VAT legislation to provide that the services of the remote bookmakers and intermediaries referred to above would be exempt from VAT. 

The Minister has now stated that the Betting (Amendment) Bill is being drafted with the final draft due in 2012. The intention is that the new regime will commence from the second quarter of 2012 and should bring in an additional tax yield of €10m in 2012 and €20m within a full year.