Indirect Tax (VAT)
Finance Bill 2019
The Finance Bill provides that, effective 1st January 2020, the VAT rate of 13.5% will apply to the sale of a range of oral food supplement products. The Department of Finance press release issued on 16th October 2019 confirmed that the current zero-rate for certain foods for specific groups (such as infant formula, baby food, diet-related foods) and for fortified foods enriched with vitamins and/or minerals would be protected. Unfortunately the Bill does not define what is meant by ‘food supplements’.
This measure has no impact on the current application of the zero-rate to human oral medicines that are licensed by the HPRA, such as folic acid and other vitamin and mineral products.
VAT Deductions: Transfers of Business
The Bill expressly removes the entitlement of a business to deduct the VAT incurred on services directly associated with a transfer of business, with Revenue taking the position that the deduction entitlement is covered elsewhere in VAT legislation.
Indirect Tax Climate changes
Under measures announced in the Budget and now contained within the Finance Bill, effective from 1st January 2021 only those owners of commercial vehicles with a C02 threshold of less than 140 g/km, down from 156g/km, will now be entitled to a VAT deduction.
The Finance Bill also legislates for the Budget’s increase of carbon tax of €6 per tonne which increased the price of diesel and petrol from midnight on Budget day, although hauliers will benefit from an increase in the diesel rebate scheme to offset against the increase in carbon tax. The corresponding increase applying to other fuels, including home heating oil, are effective from May 2020.
A new Nitrogen Oxide tax introduced by the Bill will replace the existing 1% diesel surcharge and will apply to the purchase of all passenger vehicles emitting nitrogen oxide from January 2020.
Vehicle Registration Tax reliefs for conventional and plug in hybrids will be extended to 2020, subject to CO2 emission thresholds specified in the Bill.
The Finance Bill also provides for changes to the duty on tobacco products (50c on pack of 20 cigarettes in most popular price category with a pro rata increase on other tobacco products) which took effect the day following the budget.
Other Measures Within the Finance Bill
- To prohibit the use of marked gas and oil (fuel to be used for commercial purposes) for private pleasure navigation.
- To give legislative effect to the increase in the small brewer excise duty relief which allows small breweries produce 50,000 hectolitres per annum (increased from 30,000 hectolitres) of alcohol related products and to avail of a 50% relief on excise duties applying to these products.
- To provide for a relief from betting duty for the first €50,000 of income for bookmakers.
While an increase in any VAT rate is never welcome, the measure within the Finance Bill will add to the uncertainty over which food supplements are to be charged to VAT at 13.5%. This measure was designed to replace an ageing concession which was felt by Revenue and industry to be no longer fit for purpose as advances in food supplement science had resulted in different rates of VAT applying to what many industry and consumers alike perceived to be similar type-products.
While the Department of Finance press release issued yesterday stated that the current zero-rate for certain foods for specific groups (such as infant formula, baby food, diet-related foods) and for fortified foods enriched with vitamins and/or minerals would be maintained, the absence of a definition of “food supplements” means the Bill fails to give the hoped for legislative certainty lobbied for by the food supplement industry. The fear is that without a legislative definition uncertainty will still prevail in the industry with any new Revenue guidance simply being viewed as one concession replacing another, with industry once again turning to the Courts as the final arbiter of what constitutes a ‘food supplement’.
VAT Deductions: Transfers of Business
On the face of it, by deletion of a specific provision Revenue appear to be curtailing the ability to take a full deduction of VAT in respect of services directly related to the transfer of a business where that transferred business was otherwise VATable. Revenue have stated that the deleted provision has proved to be unnecessary as the entitlement to deduct is already provided for elsewhere in the VAT Act.
However, the risk is that where a business took a full deduction of VAT relating to, for example, the sale of a tenanted property under the transfer of business relief where either the property asset itself would have been VATable or the rentals were VATable, the VAT on such costs is no longer 100% deductible falling instead to be treated as an overhead with deductibility based on the general overhead recovery rate.
Carbon Taxes & Excise
While these measures support the government’s Climate Action Plan, for many the increases in carbon taxes will be higher than stated once VAT is added. With the decrease in the level of CO2 emissions to 140g/km, fewer business owners of cars will be eligible for a deduction of the 20% maximum of the VAT incurred, with the future of this limited VAT deduction entitlement becoming increasingly uncertain. With a lead-in time of just over 14 months, those with cars on order for 2020 will still be able to avail of the 20% VAT deduction for cars under the 156g/km CO2 level.
Legislative Changes Expected Before 2020: Reforms to Intra-EU Trade
While not contained within the current draft of the Finance Bill, a number of changes will be made to VAT law effective 1st January 2020 to fortify the current VAT system relating to intra-EU trade. These provisions, which implement the domestic leg of EU-wide VAT harmonisation proposals, will affect goods under call-off stock arrangements and will also impact on the evidence that traders need to avail of the zero-rating for cross-border sales.
First, the Irish rules around call-off stock, whereby a supplier in one Member State moves its own goods to a warehouse in another Member State for onward sale to a locally identified customer there, will be clarified. An Irish supplier moving goods to another Member State in similar circumstances should face comparable local measures.
Further changes will amend VAT legislation to clarify the rules governing intra-EU chain transactions, how intra-EU movements of goods are to be documented, and to strictly align the availability of the zero-rate for intra-EU sales of goods to the supplier being in possession of a valid VAT registration number provided by the EU based customer.
With all Member States being required to enact these provisions from that date such clarity should limit the amount of disputes between both suppliers and customers, and suppliers and tax authorities. However, their implementation could also result in immediate VAT issues for Irish businesses that in January 2020 will have stock physically located elsewhere in the EU under existing call-off or consignment stock arrangements. Moreover, while businesses should use these changes as an opportunity to standardise internal controls throughout the EU the new rules of evidence could reduce flexibility and result in a possible requirement for immediate changes to current supply chains, IT systems and accounting processes. For further details on these changes please see our more detailed article on 2020 EU VAT Reform.