Indirect tax (VAT)
The Minister announced that the current VAT rate of 9% will increase to 13.5%, with effect from 1 January which has been estimated should generate an additional €466 million in VAT receipts for the exchequer in 2019.
The increase will mainly impact hotels, other short-term guest accommodation and restaurants, but it will also apply to other areas including cinemas, theatres, hairdressers, museums and art galleries. However, newspapers and sporting facilities have been excluded from the increase and will remain at the 9% rate. Additionally, the Minister has announced that the 9% rate will apply to e-publications which are currently liable to VAT at the 23% rate.
The 9% rate was introduced initially for a three year period and has cost the exchequer an estimated €490m in 2017 and €2.6bn in lost VAT revenue since its introduction. The increase in the rate follows a review by the Department of Finance which stated that demand for hotel accommodation and restaurant services was not expected to be materially affected by an increase in the VAT rate. Furthermore, it anticipated that the increase in the VAT rate should impact more on profitability of businesses, rather than prices charged to customers.
The only change to tax on the “old reliable” was an increase in excise duty of 50 cents per pack of 20 cigarettes and pro-rata on other tobacco products.
Motorists will welcome the fact that there has been no change to the rate of excise duty on petrol or diesel. However, a 1% increase in VRT on diesel cars was announced. The Minister then mentioned the adoption of a more accurate method of calculating CO2 emissions for vehicles which may further increase VRT for diesel vehicles by 2% in January and with this 2% also applying to all petrol and diesel vehicles. This would mean that there is a rise in VRT of 3% on diesel vehicles and 2% on petrol. This change in measurement may also have knock on effects to car tax liability if the new emissions measuring system pushes your vehicle from one emissions band to the next.
The downside for the hospitality sector of increasing the 9% VAT rate is that it will impact all related VAT registered businesses regardless of their size, location or turnover. However, on the plus side the VAT rate increase will have no impact on non VAT-registered businesses including the majority of those in the B&B sector where over three times as many B&Bs are not VAT registered. Consequently, the good news for those smaller operators is that, although they did not benefit from the introduction of the reduced VAT rate, they will not suffer any financial cost as a result of the increase in the rate.
With Brexit looming on the horizon and the resulting uncertainty there is a concern that any change to the VAT rate could negatively impact the level of UK tourists coming to Ireland. However, it is expected that the change in the VAT rate will not have a material impact on the number of UK visitors particularly as almost half of all British tourist stays in Ireland in 2016 did not contribute to the domestic accommodation sector as they stayed with friends and family.
The retention of the 9% VAT rate for newspapers and the reduction in the rate of VAT on e-publications from 23% to 9%, a saving of 14% for the latter, is very good news for the newspaper industry, particularly as the sale of newspapers over the internet has increased significantly over recent years while print sales have declined. The effect of these changes is that newspapers will be liable to a single rate of VAT regardless of the format in which they are sold.
However, that will not be the case for the book industry where books sold electronically will be vatable at 9%, which can be contrasted with books sold in traditional print format which are liable to VAT at the 0% rate. In our view the Minister should have reduced the rate on e-books to 0% which would support the sale and consequent reading of books with the ensuing benefits.