6 month temporary reduction to the standard rate of VAT

In response to the COVID-19 crisis, on 23 July 2020, the Irish Government announced the July Jobs Stimulus 2020 with a view to assisting businesses with getting back on their feet and to give the economy a much needed boost.

Among other things, the package contains a temporary reduction to the standard rate of VAT in Ireland from 23% to 21%. This 2% temporary reduction in the standard rate of VAT is effective from 1 September 2020 for a six month period to 28 February 2021.

The last change to the standard rate of VAT in Ireland took place in 2012 when the rate was increased to 23% from 21%.

The Financial Provisions (Covid-19) (No. 2) Act 2020 was signed into law on 1 August 2020 and provides, in Section 12, that the temporary VAT rate change proposal will be implemented by amending Section 46 of the VAT Consolidation Act 2020.

In a similar approach to other EU member states the Irish Government has chosen to introduce a general reduction in the standard rate of VAT. The UK, on the other hand, has targeted the hospitality sector, akin to what Ireland did in July 2011, when a temporary reduction in the Irish VAT rate in the hospitality, services and tourism sector from 13.5% to 9% was brought in.

The standard rate reduction is set to cost the Irish exchequer approximately €440 million.

Scope and opportunities

The temporary cut in the VAT rate is not targeted at any particular sector. 

Accordingly, most companies and traders in all sectors are impacted by this temporary change, therefore everyone should take action now in readiness for the rate reduction, in particular from a tax coding, system capability and invoicing perspective.

The change in the VAT rate may also be used by businesses as an opportunity to review their pricing policies and perhaps consider any efficiencies that could be made around the timing of supplies.

Given the timing of this temporary change the largest impact experienced by businesses may be from a systems and process perspective as tax coding, invoicing and ERP systems, along with routine controls, will need to be updated to account for the new standard rate of VAT. 

As the standard rate of VAT applies to a broad range of activities in Ireland the impact of this temporary change should be felt by all, traders and private individual alike, in some form. Examples of services and goods subject to the standard rate of VAT include professional services (i.e. fees of solicitors, accountants, tax advisors, architects etc.), adult clothing, alcohol, the sale of motor vehicles, electrical products and most household goods, non-basic foodstuff, many electronically supplied services and telecommunications. 

Revenue already have guidance around the procedures that should be followed when there are increases (or reductions) in VAT rates and how these should be managed from a VAT accounting perspective. It remains to be seen if there will be any additional guidance, in this regard, as a result of the impending change.

There are also a number of practical and commercial considerations which should be borne in mind as a result of this temporary VAT rate reduction.

VAT accounting

- Tax points and output tax

Generally speaking, the time VAT becomes due, is the earliest of the following:

• When an invoice is raised;
• When an invoice should have been raised; and
• The receipt of payment or part payment.

It is important to determine when a supply has been made so that the appropriate VAT tax point can be ascertained. There are a number of different rules surrounding the time of supply for VAT purposes depending on whether it is goods or services being supplied. It is therefore essential to apply the correct rules as this has knock-on implications for invoicing and VAT accounting requirements.

Ultimately, businesses need to fully understand how these rules work and how they apply within their business. Working out the tax point of particular supplies can, depending on the nature of the transaction (e.g. is it a once-off transaction or a continuous supply, has there been a payment made, are you dealing with a private individual or a business etc.), be very complex. It will however take on increased importance given the VAT rate change shortly due to be implemented.

- Payments or part payments received and invoices issued in advance of a VAT rate change

Payment or part payment is often received for goods or services which are not supplied until on or after the date of a rate change.

For businesses on the invoice basis of accounting, VAT is generally chargeable on the supply at the rate in force at the time the invoice relating to the payment is issued, or should have issued, whichever is earlier. 

For those accounting for VAT on a cash receipts basis, the appropriate rate is that which is in force at the time of supply as opposed to the receipt of the payment. 

- Credit and debit notes for returns and contingent discounts

Where credit or debit notes are issued, for returned goods or there is an amendment to the agreed consideration, the VAT rate shown should be that applicable at the tax point and time the original invoice was issued. This also applies to retrospective discounts such as volume-based bonuses.

- Existing contracts

In general, for existing contracts and any agreements agreed to before 1 September 2020, but relating to supplies for which the tax point will be between 1 September 2020 and 28 February 2021 the reduced VAT rate must be applied.

Where a contract has been entered into at a particular VAT rate and that rate changes before the contract is fulfilled, an adjustment to take the rate change into consideration may be required. 

Businesses should also consider whether existing contracts state prices on a VAT exclusive or VAT inclusive basis. This could lead to a need to engage with suppliers or customers in respect of the VAT rate change and to update agreements.

Notwithstanding the above, given the complexities that can exist in contracts we would always recommend that contracts are reviewed and considered on a case-by-case basis to determine appropriate treatment.

- Continuous supplies, ongoing services, vouchers

Consideration should also be given to the appropriate VAT rate applying to continuous supplies, the provision of ongoing services as well as services which are rendered in sections or parts. The issue of vouchers should also be borne in mind.

Practical and commercial issues to consider

In conjunction with some of the VAT accounting issues, flagged above, businesses will need to deal with a range of other issues which may include:

- IT/systems issues: 

• Systems impact and configuration in ERP – some of the key general IT/systems considerations include what is required to update the relevant systems, what systems are impacted and depending on the current set up of the systems there could be considerable work required to update tax codes and ensure correct tax logic;
• Implementation and lead time – who can carry out the updates, how long will the updates take, how easily are any changes reversed;
• VAT General Ledger accounts;
• VAT documentation and records;
• VAT invoicing; 
• Updating EPOS and cash register systems; and 
• Personnel – notifying accounts payable and accounts receivable teams, employees dealing with orders and bookings, informing IT departments, shared service centres and the wider finance function, legal departments, treasury, procurement, sales and marketing staff. Provision of relevant guidance and training.

- VAT reporting:

• VAT reporting systems;
• Rate changes midway through a VAT accounting year;
• Pro-forma invoices;
• Employee expenses;
• Acquisition VAT/reverse charge VAT and timing considerations (basis for accounting for VAT on bought-in services is particularly relevant where there is restricted input VAT recovery); and 
• Import VAT.

- Commercial and other issues:

• Pricing – will the VAT rate reduction be retained to support running costs or will it be passed on to customers/the end user? Depending on the option chosen the business should consider whether the pricing policy needs to be updated. This aspect would be very relevant to traders who set their prices on a VAT inclusive basis such as retailers. It also should be borne in mind by suppliers to businesses with limited/restricted input VAT recovery;
• Advising customers on the changes and responding to customer queries; 
• Intercompany adjustments/agreements and arranging settlements within groups/related companies;
• Partially exempt businesses – where there is input VAT blockage, businesses should consider if there are opportunities to maximise the benefit of the temporary VAT rate cut whilst ensuring all VAT reporting requirements are being met;
• Import guarantees – traders with an import VAT deferment account should consider if the level of bond or guarantee could be reduced to take account of the temporary lower import VAT payables;
• Direct debit – businesses who pay VAT by monthly direct debit may be in a position to reduce their direct debits temporarily bearing in mind the reduced VAT rate; and
• The impact on cashflow – for most transactions between VAT registered traders, with full input VAT recovery, the change will be cash neutral.

- Other COVID-19 initiatives:

The warehousing of tax liabilities allows businesses affected by COVID-19 to delay payment of their VAT and PAYE obligations in part or full for a set period with no sanctions (interest or penalties) once the returns continue to be filed.

The July Jobs Stimulus further announced that where taxpayers are experiencing difficulties with settling tax liabilities, the interest rate applying to agreed repayments of all tax debt will be reduced to 3%, on the proviso that an agreement has been reached with Revenue prior to 30 September 2020.

Section 4 of the Financial Provisions (Covid-19) (No. 2) Act 2020 provides for this special warehousing and interest regime by introducing a new Section 114B into the VAT Consolidation Act 2020. 

With only a few weeks to go until the temporary VAT rate change is implemented businesses should prioritise considering how the change will impact them and take action to ensure that they are ready for the change. 

Should you wish to discuss the impact of this impending temporary VAT rate change on your business, along with any other VAT matter, please do not hesitate to get in touch with Ciara McMullin or your usual Deloitte Ireland contact.