Budget 2021 indirect tax vat


Indirect tax (VAT)

Budget 2021

Key measures

As expected the Minister has announced that the VAT rate for the tourism and hospitality sector will be reduced from 13.5% to 9%. The change will take effect from the 1 November which, in practical terms, is the earliest date that the reduction could be introduced, and will apply until the 31 December 2021. The reduction in the VAT rate follows the recommendation by the government appointed Tourism Recovery Taskforce that the rate be reduced to improve the competiveness of the tourism sector. Even at 9% the new rate will still be higher than the 5% rate that currently applies in the UK.

There are also a range of changes that impact motoring. The most immediate change is that carbon tax will increase by €7.50 per tonne of carbon dioxide with the increase for auto fuels effective from midnight and all other fuel from 1 May next. Also VRT relief for plug-in hybrid electric vehicles, which is due to expire on the 31 December, will not be extended and relief for battery electric vehicles will be allowed “taper”. In addition there will be changes to the motor tax regime.

The VAT “flat rate addition”, which is paid to non VAT registered farmers to compensate them for the fact that they cannot recover VAT on their costs, will increase from 5.4% to 5.6% effective from 1 January 2021.

Similar to last year’s budget the only change to tax on the “old reliables” is an increase in excise duty of 50 cents per pack of 20 cigarettes and pro-rata changes on other tobacco products.

Who will be affected?

The major change is the reduction in the VAT rate which should benefit hotels, restaurants, pubs serving food and other businesses in the tourism and hospitality sector including cinemas and theatres. It will also apply to hairdressing services and the sale of certain printed material such as brochures, catalogues and maps.

Unlike the previous reduction in the VAT rate for the sector in 2011, which benefitted all relevant businesses, on this occasion the benefit will only be felt by those businesses that are able to trade and other businesses will have to wait for the lifting of Covid trading restrictions before they can benefit. While there is no obligation on businesses to pass on the reduction in the VAT rate to their customers hopefully some businesses will be able to do so by way of reduced prices.

The changes to auto fuel brings an immediate cost for all motorists.

The farming sector will benefit from the change in the “flat rate addition” which is estimated will total €10m in 2021.

Our view

We welcome the temporary reduction in the VAT rate which is estimated will provide support in 2021 of €336m primarily to the tourism and hospitality sector. The reduction in the VAT rate will apply until the 31 December 2021 unlike the current 2% reduction in the standard rate of VAT to 21% which is scheduled to end on the 28 February 2021. Ideally the Minster would also extend the reduction in the standard VAT rate to the 31 December 2021.

The increase in the “flat rate addition” is a welcome support for the farming sector.

On the other hand the increase in tax on auto fuels will be an additional cost for business which is always challenging but more so in the light of the pandemic. We should also note that Brexit brings significant challenges for all businesses trading with the UK and is reflected in the fact that the Budget has been prepared on the assumption that the outcome of the negotiations with the UK will be a “hard” Brexit.



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