As part of the Jobs Initiative outlined by the new Government earlier this year, a second reduced VAT rate of nine per cent is to be introduced from July 1 2011 to December 31 2013 to help the economy grow and increase job creation, especially in the tourism sector.
This will affect catering and restaurant supplies which are currently subject to VAT at the 13.5 per cent rate, including hot take-away food and food which can be supplied at the reduced rate when provided as part of a meal (ice-cream, certain savoury snacks and fruit juices but not including alcohol, soft drinks and bottled water ), certain supplies from canteens and vending machines, short-term holiday accommodation such as hotels or hostels, guesthouses or apartment lettings, entry into caravan parks and camping sites. Excluded also are promotion of and entry into cinemas, theatres, museums, art gallery exhibitions, fairgrounds and amusement parks, the use of certain sporting facilities operated by persons for profit such as subscriptions and green fees for non member-owned golf clubs and some swimming pools and sport pitches, hairdressing and supplies of certain printed matter including brochures, leaflets, programmes, maps and catalogues, but not including items wholly or substantially devoted to advertising.
It should be noted that the second reduced rate is not to be applied to other activities highly connected with the tourism trade such as the short-term hire of cars, camper vans, mobile homes or trailer tents, the supply of tour guide services, the sale of art produced entirely by hand such as original paintings, sculptures or statues, the sale of antiques and the sale of certain bakery products such as cake, crackers and biscuits (which are not wholly or partly covered in chocolate ). Also some of the services carried out behind the scenes that will be greatly impacted by any increase in tourism but which have not qualified for this second reduced rate of VAT include domestic fuel to be used by all, including those providing holiday accommodation, waste disposal services, repairs and other work on moveable goods, routine property cleaning services and building services.
In terms of applying the new rate of VAT, it can be generally accepted that the relevant goods and services listed above will be liable to the current rate of 13.5 per cent when supplied to private individuals before the end of June 2011 and will be liable to the new nine per cent rate of VAT when supplied between July 1 2011 and December 31, 2013.
However, when dealing with VAT registered customers, the timing of VAT invoicing can affect the VAT rate due on the supply. For example, goods and services provided before July 1 2011 but invoiced after July 1 2011 could avail of the reduced 9 per cent VAT rate. While this may decrease the VAT due on the overall supply, the cash flow effect of postponing invoicing to achieve this must also be weighed up.
In addition, where traders are required to raise credit notes for say, returned goods, after July 1 2011 in respect of goods or services already invoiced before that date, the VAT rate of the credit notes should be the same VAT rate as the original invoices. This makes sense as suppliers should not gain from the change in VAT rate.
Where a contract is entered into between two VAT registered persons prior to July 1 2011 but is not completed until after that date and there is a separate VAT clause stating that VAT is levied in addition to the agreed purchase price, the parties can avail of the nine per cent VAT rate. This will be beneficial for any purchaser who cannot fully recover the VAT due. Even where purchasers are fully entitled to recover all VAT charged, the new nine per cen VAT rate will reduce the cash flow cost of VAT overall as a smaller amount will be paid over to the supplier.
Where goods and services are to be sold to non-VAT registered customers and the VAT rate is built into the price agreed, it is expected that the trader would reduce the final sale price so that the VAT reduction is passed on to the customer in an effort to promote economic activity and jobs in the tourism sector.
If you would like to discuss and plan for the impact of the new reduced rate of VAT on your business, please contact KPMG Galway.
Dorothy Gallagher is VAT Director in KPMG Galway and has extensive experience in all areas of VAT, including cross border matters and property VAT. Dorothy can be contacted by email on [email protected] or by telephone on 091 534600.