The standard rate of Irish VAT is due to increase to 23% with effect from 1 March 2021. The rate had been reduced to 21% for a six month period from 1 September 2020 to 28 February 2021. The Minister for Finance has recently indicated that he does not intend to extend the reduction and therefore businesses should prepare for the 23% rate applying once more to their supplies and purchases from 1 March 2021 onwards.
The standard rate of VAT applies to broadly 50% of activity in Ireland and to a wide range of goods and services including for example, the sale of motor vehicles, adult clothing, alcohol, non-basic foods stuffs, many e-services, professional services and telecommunications. The temporary reduction in the standard VAT rate was primarily aimed at boosting the retail sector as a result of the COVID-19 pandemic.
It is important to note that this VAT rate change will not impact all supplies. In particular, the targeted VAT rate reduction from 13.5% to 9% for certain goods and services, mainly in the tourism and hospitality sectors, will continue to apply until 31 December 2021.
How does the change impact me? The breadth of the application of the standard rate means the majority of traders in Ireland will need to consider the impact on their business and changes to systems to implement the revision back to the 23% rate.
You should consider how the change will impact your business and any actions you need to take between now and 1 March to ensure that you are ready for the change.
Typical issues that businesses need to consider
Systems What steps are required to update your systems for the VAT rate change? Depending on the particular systems, this may be a simple task of reversing the changes introduced on 1 September 2020 and re-activating the 23% VAT code, however, in other cases this may involve more significant work on tax codes and tax determination logic.
Pricing How should the VAT rate increase be factored into your pricing? This is particularly relevant for businesses who set their prices on a VAT inclusive basis such as retailers, and will likely depend on how the temporary VAT rate cut was factored into pricing from 1 September 2020.
Contracts Do your existing contracts state prices on a VAT exclusive or VAT inclusive basis and do you need to engage with any of your suppliers or customers in relation to the revision back to the 23% rate from 1 March 2021?
Timing How do you determine if the 23% or 21% rate applies for transactions spanning both periods? Working out the tax point of particular supplies can be complex but will take on increased importance.
Relevant factors can include whether the supply is a discrete transaction or a continuous supply, the time that the payment is made, and whether you are selling to a consumer or another business.
Partially exempt businesses If your business cannot fully recover VAT, can you maximise the benefit of the VAT rate cut prior to 28 February 2021? In addition, you will need to ensure that your system is capable of capturing the higher rate of VAT for any reverse charge VAT due on purchases from 1 March 2021.
Credit notes What if you raised an invoice charging 21% VAT but the customer requests a credit note after the VAT rate has changed? This may involve applying the 21% rate after the VAT rate has reverted to 23% – can your system deal with these scenarios?
Direct debit If your business pays VAT to Revenue on a monthly direct debit basis, did you previously reduce the direct debit payment in light of the VAT rate decrease? If so, you will need to consider if it is necessary to increase this amount again.
Advance payments You may need to consider how to treat advance payments/payments on account received in advance of the VAT rate change.
Non-Irish businesses Businesses established outside of Ireland may still be affected by the change. For example, UK businesses may have recently VAT registered in Ireland as a result of Brexit and this may be the first time they are applying the 23% rate. In addition, businesses making supplies to Irish consumers of electronically supplied services, broadcasting and telecom services, as well as distance sales of goods to Irish consumers above €35,000 per annum.