Indirect Tax (VAT)

The key VAT change in the Finance Bill 2021 is a proposal that cancellation fees including forfeited deposits would be vatable on the basis that they are either payment for a vatable service or a right to access a vatable service. The proposal will delete the current provisions in VAT legislation that allow a business to adjust the output/ sales VAT it initially accounted for on receipt of a deposit where the deposit was subsequently forfeited.

The Bill also proposes that the temporary application of the zero rate of VAT to the supply of Covid-19 vaccines and in-vitro diagnostic medical devices and services closely linked to them has been extended to 31 December 2022.

In addition the Bill proposes that no VAT will be payable on the importation of goods by, and goods and services supplied to the Commission or other EU bodies, in the execution of tasks in responding to the Covid-19 pandemic, where those goods or services are not for onward supply. This provision is due to apply from 1 January 2021.

In line with the announcement in the Budget, the Finance Bill proposes a change to the rate of payment to non-VAT registered farmers to compensate them for the fact that they cannot recover VAT, known as the flat-rate addition, from 5.6% to 5.5%.

The Bill also proposes that businesses in a VAT group must notify the Revenue Commissioners of certain changes to the VAT group - a penalty will apply for each taxable period in which they were not notified.

Our View

The fact that there are limited VAT changes in the Finance Bill is good news for the majority of businesses. However, businesses that receive deposits from their customers or payments that can be categorised as cancellation payments will need to establish how the proposed changes will impact their income flows and indeed their “bottom line”.

We note the proposal to introduce penalties where certain notifications are not submitted to Revenue in a timely manner. While in principle it is understandable that penalties can apply for non-compliance with VAT legislation however, the introduction of penalties for businesses that fail to make notifications to Revenue should only apply where the failure to make those notifications has resulted in a loss of revenue to the exchequer. The position is further exacerbated by the proposal that the amount of the penalty would increase over time.

We welcome the extension to December 2022 of the 0% VAT rate that currently applies to the supply of Covid-19 vaccines, in-vitro diagnostic medical devices and closely linked services.