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Summary of Irish VAT rates, structure, and scope for change

ITM Newsletter July 2022

On 10th May, the Minister for Finance, announced the extension of the 9% VAT rate for the tourism and hospitality industry for a further six months. This means the 9% VAT rate will remain for these sectors until 28 February 2023.

Also recently announced, in light of the increasing cost of living, was a temporary reduction to supplies of electricity and gas. For the period from 1 May 2022 to 31 October 2022, the second reduced rate of VAT, 9% will apply, instead of the 13.5% VAT rate.

The structure and scope under which EU Member States can apply VAT to goods and services is primarily determined by EU law. Ireland’s VAT rate structure is as follows:

  • Standard rate of 23% applies to the majority of goods and services - Under the EU VAT Directive, the standard VAT rate in each Member State should be set not lower than 15% and there is general political agreement that it should not exceed 25% (despite this Hungary increased their rate to 27% in 2012)

Member States may have up to two reduced VAT rates of not less than 5% for a specified number of goods or services which are set out in Annex III of the VAT Directive 2006/112. Member States also have the option of maintaining, at a reduced rate, not less than 12%, any items not listed in Annex III, provided they carried a reduced rate on 1 January 1991. These items are considered to be parked and Ireland’s parked rate is 13.5% - examples of items at this parked rate includes fuel used for heat or light (gas & electricity) and commercial construction.

  • Reduced rate of 13.5% applies mainly to residential housing, labour intensive services (such as construction services), general repairs and maintenance – this rate is also applicable to supplies of gas and electricity (Schedule 3, Part 4, 17) however a temporary reduction was announced for gas and electricity.
  • Second Reduced rate of 9% applies mainly to tourism services including hotel and holiday accommodation, restaurant services, and various entertainment services - this rate was initially introduced in 2011 with some variations to timings/applicability over the years and its application is extended to February 2023.
  • Super Reduced VAT rate 4.8% - limited to livestock sold by VAT registered persons. Unregistered farmers are also allowed to apply a flat rate addition of 5.4% on the sale price of agricultural produce to VAT registered persons.
  • Zero rate applies to most food, children’s clothes and shoes, and oral medicines. A supplier of zero rated goods/services is generally entitled to recovery VAT incurred on costs. The zero rating for goods and services can be retained where it was in place on 1 January 1991, however the zero rate could not generally be applied to new items.
  • Exempt goods/services would typically include services provided by charities, non-profit organisations, schools/hospitals etc, and certain financial services and some property transactions. Suppliers of exempt goods/services do not charge VAT on their supplies and cannot reclaim VAT incurred on the goods and services they purchase which are directly related to exempt supplies made.

Article 102 of VAT Directive 2006/112 provides that, after consultation with the EU VAT Committee, a Member State may choose to apply a reduced rate to the supply of natural gas, electricity, or district heating. The Minister for Finance confirmed that the ‘Commission recently indicated that this provision could be used by Member States without the requirement to consult the VAT Committee in advance.’ Article 102 is not transposed into Irish legislation because Ireland, in line with the VAT Directive and by way of special derogation from the general rule, maintains several “standstill” provisions and derogations that allow Ireland to maintain reduced rates to certain supplies for historical reasons (i.e. the ‘Parking rate’ from 1991). The Minister further confirmed that it is on this basis that Ireland applies the 13.5% reduced rate to supplies of fuel, gas, oil, and electricity services. The ‘parked rate’ which applies to these energy products is governed by Article 118 of the VAT Directive which contains the ‘standstill provision’ applicable from 1991 and provides that the rate cannot be reduced below 12%. If Ireland chose to apply a reduced rate to the limited items covered by Article 102, those items may not be able to rely on Ireland’s derogation and could potentially, if an increase is considered, have to be returned to the standard rate of VAT in the future.

A report by RTE on 25th March stated During an intense meeting of EU leaders on the energy crisis during the second day of a two-day summit in Brussels, Ireland secured language in the final communiqué that will allow the Government to continue to seek flexibilities on the VAT issue. After the meeting, the Taoiseach said: "We were anxious that… if we reduce excise duties below, and VAT below, a certain level that we don't, because we have a derogation, end up going back up to 23%. "And that's what the [EU] legislative framework ordains at the moment. So we have, in the [EU summit] conclusions, today put in a paragraph that enables us to engage with the commission in terms of exploiting the flexibilities to the fullest degree possible." He added: "It's progress. But there's more work to be done in terms of the technical details of all of that." Emphasis in bold added.

Amending VAT rates has been discussed a number of times in the Dail particularly in light of rising energy prices for consumers. The Government published the National Energy Security Framework contained the following, so the headlines and proposed changes are still legitimate, however given the EU reluctance to give a green light on reverting to current rate we will have to wait for the amending legislation for absolute confirmation.

Response 1: Continuation of the excise duty reduction on petrol, diesel and marked gas oil until the Budget in October 2022

  • Led by Department of Finance
  • Due for implementation: Q2 2022

In the electricity and natural gas sectors, a temporary reduction in value added tax (VAT) will be introduced. This will reduce the VAT on electricity and gas bills from 13.5% to 9% reducing the cost of electricity and natural gas bills.

Response 2: VAT will be reduced from 13.5% to 9% on gas and electricity bills from the start of May until the end of October

  • Led by Department of Finance
  • Due for implementation: Q2 2022

The EU Commission confirmed, in December 2021, the unanimous agreement reached by EU finance ministers (ECOFIN) to update current rules governing VAT rates for goods and services.

The amendments had been tabled as part of the 2016 VAT Action Plan with the proposed aim of introducing more flexibility for EU Member States to change the VAT rates they apply to different products. Following years of discussion between Member States, ECOFIN were able to adopt a common position on 7 December 2021. The Act was published in the Official Journal on 6 April 2022 and immediately came into force.

The new rules will provide governments with more flexibility in the rates they can apply and is expected to ensure more equal treatment between Member States. The Commission also noted that ‘the updated legislation will bring VAT rules into line with common EU priorities such as fighting climate change, supporting digitalisation and protecting public health’.

The amendments are designed to

  • Updated the list of goods and services (Annex III to the VAT Directive) to which all Member States can apply reduced VAT rates. New products and services added to the list include those that protect public health, are good for the environment and support the digital transition. As the rules come into force, Member States will for the first time also be able to exempt from VAT certain listed goods and services considered to cover basic needs.
  • Removing the possibility by 2030 for Member States to apply reduced rates and exemptions to goods and services deemed detrimental to the environment and to the EU's climate change objectives.
  • Making derogations and exemptions for specific goods and services, currently in place for historical reasons in certain Member States available to all countries to ensure equal treatment and avoid distortions of competition. However, existing derogations that are not justified by public policy objectives other than those in support of EU's climate action will need to end by 2032.

Under the amended rules, EU Member States will be able to apply up to five VAT rates depending on the product or service:

  • One standard rate, which will to continue to apply to most goods/services
  • Two reduced rates of not less than 5% - these rates can be applied to a max of 24 ‘points’ of (the amended) Annex III of the Directive; “points” in the Annex refer to the categories of goods and/or services.
  • A reduced rate of less than 5% (a super low rate)
  • A Zero rate, (also referred to as an exemption with the right to deduct)

For the last two rates jointly, these can only be applied to a maximum of seven specifically designated ‘points’ of (the amended) Annex III. Added to Annex III, among others, are:

  1. rental of immovable property for residential use;
  2. access to the live streaming of events (if physical access this can also fall under the reduced rate but only from 2025);
  3. the supply and installation of solar panels;
  4. the supply of electricity and heat;
  5. the supply of children's clothing; and
  6. the supply of (electric and non-electric) bicycles

The “super low rate” and the “zero rate” can be applied to food, water distribution, pharmaceuticals, medical devices, transport of people (including goods they carry such as luggage, bicycles, vehicles), books and magazines and the supply and installation of solar panels. There will also be a zero-rate scheme with a right to deduct for certain relief goods, regardless of the amendment to Annex III.

In addition, all Member States that now apply derogations under the relevant “stand-still provisions” must list them so that they can be used by all other Member States under the same conditions.

Finally, the application of a reduced VAT rate to products that are harmful to the environment will be phased out before 2032 or, if earlier, at the time of adoption of the “Definitive VAT system”.

We have already seen some countries take advantage of the new rules, in Belgium for example, a similar temporary reduction to gas and electricity to 6% applies until 30 September 2022, and following the amended Annex III, a reduced rate of 6% was introduced for the supply with installation of photovoltaic and thermal solar panels, solar boilers, and heat pumps in residential buildings - this applies from 1 April 2022 until 31 December 2023.

The fact that Member States can now amend VAT rates on various supplies of goods and/or services does not automatically mean that these changes will be implemented in a specific country. We await details on how Ireland intends to use this added flexibility and expect that further updates will issue in the lead up to the budget in October.

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