After much speculation, Minister for Finance, Michael Noonan, confirmed that the standard rate of Irish VAT is to increase from 21 per cent to 23 per cent with effect from midnight 31 December 2011. This VAT rate change is earlier than set out by the Government under the National Recovery Plan where it stated that the standard rate of VAT would only increase to 23 per cent in 2014.
The standard rate of VAT applies to most goods, including cars and vans, electronic goods, white goods and luxury items. It also applies to professional services such as legal, accounting, audit, tax, marketing and consultancy services. Government have confirmed that there is no change to the 13.5 per cent VAT rate which applies to items including construction services, sales of certain property and other consumables such as ESB and home heating oil. There is also no change to the 9 per cent VAT rate which has been temporarily introduced with effect from 1 July 2011 for certain hospitality and tourism related services.
Traders will be required to account for VAT at 23 per cent on all sales from midnight 31 December next. In advance of the change, traders will have to decide whether they can pass on the increase in VAT depending on their customers’ VAT position and on their competitors’ pricing models. For shops, pubs, internet sites selling goods into the early hours of New Year’s Eve, a decision will have to be made in advance whether to increase prices to take account of the higher VAT rate or whether to suffer the higher VAT rate out of sales proceeds thus reducing profits. For such traders dealing with private individuals, there is no obligation to raise a VAT invoice at the point of sale. Therefore, either the EPOS system or till roll will have to record sales made at the new VAT rate from 1 January 2012.
For traders supplying goods or services to commercial VAT registered customers, it will be 3 January 2012 before many are back to work. Therefore, this will be the date that the new VAT rate really kicks in for most business to business transactions. Again, even traders with business customers will have to decide whether to pass on the full VAT rate increase to customers. Where the increase in VAT is fully passed on to customers, the VAT invoice template will need to be changed to show this increase in VAT. Where the increase in VAT cannot be charged on to customers, no changes will be needed to the VAT invoice template. Instead, the trader will account for the higher VAT rate from the same income received.
Business arrangements which have already been agreed and that straddle New Year may cause the most difficulty. Where a contract has been agreed and the price is quoted as a VAT inclusive fixed price or subject to VAT at the specific rate of 21 per cent rather than at the standard rate of VAT, the supplier may not be in a position to pass on the VAT increase to the customer. In order to pass on the VAT increase to the customer, the price should have been agreed exclusive of the standard rate of VAT in force or to be in force throughout the contract period.
In relation to purchases, traders will generally have more cash tied up in Irish purchases or imports of goods from outside the EU. Even where traders are entitled to fully recover VAT on standard rated purchases, such VAT reclaims will generally be 2 per cent higher.
Where traders supply goods or services to VAT registered customers, a VAT invoice is required to be issued to each customer. Where the full supply and payment for same has occurred before 1 January 2012, the VAT rate applicable on the invoice will be 21 per cent. Where the final delivery of the good or service is not completed until after 1 January, but an advance payment has been received before this date, it may be possible to reduce the VAT rate from 23 per cent to 21 per cent on any advance payments received where the trader issues a VAT invoice for the advance payment prior to 1 January 2012. This would be important for sales to large customers which may be VAT registered but which generally cannot recover VAT charged to them, including those providing financial or insurance services, private hospitals and nursing homes, local authorities and other public bodies.
For supplies made to non VAT registered customers before 1 January 2012, the VAT rate of 21 per cent will apply. In the case of advance payments received before 1 January 2012 for supplies which will not be completed until after 1 January 2012, the VAT rate applicable to the advance payment should still be 21 per cent. Where traders raise invoices for such payments before 1 January 2012, this will create a VAT saving for the customer.
All landlords which lease commercial or residential properties subject to the standard rate of VAT will be affected by the VAT rate change. Generally, for leases of commercial property, landlords should be in a position to pass on the increase in VAT to the tenant. For leases of residential property which are in the VAT net, it is more likely that a fixed amount of rent has been agreed and that landlords will not be in a position to pass on the VAT increase to tenants. In such circumstances, the increase in VAT will be a cost to landlords.
EU VAT Rates
Twenty of the 27 EU Member States have increased their standard rate of VAT in the last four years. Some countries still have a much lower rate of VAT compared to Ireland, including, Spain at 18 per cent, Germany at 19 per cent and France at 19.6 per cent. However, we have recently seen the UK increase its standard rate of VAT to 20 per cent with effect from 1 January 2011. Portugal’s standard VAT rate is already 23 per cent with Italy moving to the 23 per cent rate with effect from September 2012. With tougher finance budgets across Europe, increases in the standard rates of VAT is a trend expected to continue.
Dorothy Gallagher is VAT Director in KPMG Galway and has extensive experience in all areas of VAT, including cross border matters and property. Dorothy can be contacted by email on [email protected] or by telephone on 091 534600.