Pre-Budget 2020 Indirect Tax

Perspectives

Indirect Tax

Pre-Budget 2020

VAT is fundamentally a European tax governed by overarching EU Directives and Regulations. Although it is the second largest contributor to our tax revenue in truth we have limited discretion in using it as a fiscal lever or as an economic. We can’t fundamentally change how the tax is applied but we do, within certain limits, have discretion to change the overall rate of VAT or indeed charge lower rates on specific types of good or service. We saw this with the reduced 9% rate that applied to the Hotel and Restaurant Sector for several years. This was designed to stimulate demand at a time when the sector was struggling. When the economy is buoyant it is rare for commentators to call for a cut in VAT rates but as we face into a range of economic head winds, now might be the time to use our discretion to support the economy and to continue to attract investment.

One area where we could introduce measures is in the provision of residential accommodation. Our shortage of residential accommodation either to buy or to let is well documented. The continued provision of affordable housing meets not only a pressing social need but is essential to position Ireland as a location for foreign investment. As Brexit moves into view decisions will continue to be made as to where to establish an EU hub. Having a functioning property sector that allows the attraction and retention of staff is an important decision in where to locate. Unlike many other Member States, Ireland taxes the development and sale of residential accommodation which is liable at the 13.5% rate. In the UK the construction of new dwellings is not subject to VAT, the sale of new dwellings is not subject to VAT and the refurbishment or conversion of older buildings is only subject to VAT at 5%. Although it may not be within the Government’s gift to secure zero rating for the construction, conversion or sale of dwellings we would call on the government to reduce the rate to 9%. VAT costs have a direct impact on the rate of return on investment/ IRR and with institutional investors having a greater role to play in the provision of certain asset classes, a less costly VAT regime should stimulate supply and alleviate some of the blockage currently being experienced.

There is a risk that the Government will introduce measures to apply the 23% VAT rate to all food supplements. Food is basically zero rated with a number of exceptions largely covering confectionery type items, soft drinks and alcohol. The food landscape has changed dramatically since the VAT Act was drafted and there are now a range of food products and supplements that are widely consumed that did not exist several years ago. These range from super food powders to energy tablets to meal replacement plans. We think it would be wrong to standard rate these products. They make up an important part of many peoples diets. For many they are now an essential and routine form of sustenance and should continue to benefit from the zero rate.

There will likely be a number of technical changes to bring Irish law into line with recent changes in EU law. These changes concern cross border trade in goods and whilst they are of real significance to businesses that trade cross border in goods, their fiscal impact is unlikely to be marked.

Read our pre-Budget document for more predictions

Our view

We believe now is the time to be bold in relation to VAT. Higher VAT rates across Europe are a legacy of the last economic crisis. However maintaining the status quo is not always the best answer and we would welcome a targeted reduction of the VAT rate in relation to the construction and provision of residential property.

Our prediction

Given the uncertainty over Brexit and the constraints on our discretion in relation to VAT we do not envisage that there will be significant VAT changes. There will likely be technical changes and some Brexit enabling measures. The most impactful change may be the levying of VAT on food supplements however we hope that this particular temptation is resisted.

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