The estimated cost of reducing the standard rate of VAT for six months is €440m, which implies expected consumption of €22bn on such goods and services in the period.
On taxation, the emphasis has largely been on measures to stimulate demand and help cash flow. A measure that had been widely reported on over the last week was a rebate for spend in the hospitality and tourism sector. This has taken the form of a €125 tax credit for spend over €625 on accommodation, food and non-alcoholic drinks between October 2020 and April 2021. While the hospitality sector was looking for a VAT rate reduction to stimulate demand, which did not feature, the tax credit being granted is equivalent to an 8.5% VAT saving (13.5% to 5%) on approx. €1,670 of related spend in the period.
While no change was announced to the 13.5% VAT rate, there was, however, a reduction announced in the standard VAT rate of 23% to 21% for 6 months from September. This mirrors VAT rate reductions in other countries, for example, Germany, Austria and most recently, the United Kingdom. The estimated cost of this measure is €440m which implies expected consumption of €22bn on such goods and services in the period. By way of context, in 2019 a 1% reduction in the VAT rate for the year was costed at €450m which is equivalent to a 2% reduction over 6 months. While consumption is not uniform throughout the year it suggests that Government are not expecting a substantial drop off in consumption on such goods and services over the 6 month period, compared with 2019.
Watch insights from our Head of Tax, Tom Woods, on the key tax changes for business.
Tax refunds and the warehousing of tax liabilities will allow businesses to focus their limited cash reserves where needed.
The package of tax measures for business has a clear focus – facilitate tax refunds for those businesses that were profitable in 2019 and ease the pain for those businesses that are struggling to pay their tax liabilities in 2020, with measures such as the waiver of commercial rates to the end of September 2020, the early carry back of losses to the prior period, the warehousing of VAT and PAYE liabilities, and the reduction of the interest rate on all tax debts to 3%.
We would particularly welcome the introduction of income tax relief for the self employed in respect of 2020 losses. We would see this loss relief as a first step to ensuring the self-employed get the same recognition and supports as corporates. The value of this measure in assisting self-employed individuals to weather the economic downturn is clear and should be retained as part of the tax regime for self employed individuals going forward.
Tax refunds and the warehousing of tax liabilities will allow businesses to focus their limited cash reserves where needed. However, stockpiling of tax debts for future payment will be a growing concern for businesses as the warehousing provisions are extended further. Revenue have to date been sensitive to taxpayers who have approached them with tax payment difficulties and it will be important that this level of support continues when warehousing measures are tightened. Businesses mustn’t survive the COVID crisis only to be crippled by warehoused tax liabilities once the measures are removed. We look forward to even more certainty for business in Budget 2021, which will be important in delivering a clear pathway for businesses to transition from these support measures.
The new Employment Wage Subsidy Scheme provides additional flexibility and support to employers by removing some of the employee eligibility criteria previously associated with the Temporary Wage Subsidy Scheme. New hires and seasonal workers should be eligible to qualify.
The Stimulus Plan provides for a new Employment Wage Subsidy Scheme (EWSS) which will apply from July 31st until the end of March 2021. It will run concurrently with the Temporary Wage Subsidy Scheme (TWSS) until 31 August at which stage the TWSS will cease.
Under the EWSS, eligible employers will receive a per-head subsidy on a flat rate basis. It is expected that the employer will receive a maximum of €203 per week for employees earning over €203 per week and €150 per week for those earning below that level. The scheme is expected to be open to all sectors and both new hires and seasonal staff will be eligible –such employees were previously outside of the scope of the TWSS.
The primary criteria for EWSS announced so far is that the employer must demonstrate that they are operating at no more than 70% turnover from the period July to December 2020 compared to the same period last year.
The EWSS provides employers with an important financial lifeline for the next 9 months. Such certainty will be invaluable to employers as they seek to evaluate and adapt business plans for the future. The government is setting aside €2.35 billion in employment subsidies under the EWSS which underpins the importance being placed on maintaining current employment levels within the economy, while the inclusion of new hires under the scheme will provide welcome support to employers who will look to expand their workforce in the future.
Additional information on the operation of the EWSS will be set out in the Financial Provisions (COVID-19) (No.2) Bill 2020 due to be published shortly.
Businesses will need to move quickly to ensure their systems are capable of applying the rate reduction from 1 September.
The stimulus plan contains a temporary reduction to the standard rate of VAT in Ireland from 23% to 21% for a six month period from 1 September 2020. This is the first change to the standard VAT rate in Ireland since 2012 (when the rate increased to 23% from 21%). This has been costed at €440 million for the period of the stimulus. This mirrors VAT rate reductions in other countries, for example, Germany, Austria and most recently in the United Kingdom.
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 and professional services. It will provide a boost to many in the B2C sector including retailers and publicans with the potential for price decreases to stimulate demand. For some, the question will be whether to pass on the VAT rate reduction or retain it.
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 VAT rate reduction. For example, the introduction of additional coding in an ERP system which can require significant lead in time, impact on pricing especially where prices are VAT inclusive. Other areas businesses will need to consider include the treatment of supplies that cross over the period of the VAT rate change, the issue of credit notes, vouchers etc. The change is also relevant for those in the financial services sector for whom VAT is an irrecoverable cost.
It is important to note the VAT rate change will not impact all supplies. Importantly, the change will not impact the VAT treatment of most sales in the hospitality and tourism sector. For example, the VAT rate for restaurant meals or hotel accommodation which remain subject to the reduced VAT rate of 13.5%.
It may come as a surprise to some that the Government introduced a general standard VAT rate reduction (following the approach applied in Germany) rather than perhaps a more targeted VAT rate change as the UK had introduced for the hospitality sector and as Ireland previously did in 2011 when temporarily reducing the hospitality and tourism VAT rate from 13.5% to 9%.
The capital spending measures announced underpin the need to continue to invest in enhancing the infrastructure that enables our competitiveness.
The announcement of a €1bn increase in planned capital spending next year and an immediate capital programme of €500m is welcomed. This underpins an appreciation of the need to continue to invest in enhancing the infrastructure that enables our competitivenes
The immediate stimulus programme gives effect to some of the themes in the Programme for Government with:
The stimulus also references the likely permanent demand for greater flexibility in our ways of working which will necessitate increased investment in digital and regional infrastructure. The programme includes increased investment in rural transportation to support this.
We would have expected to see a significant amount of the funding announced allocated to capital projects identified as ‘shovel ready’ or ones that can be easily fast tracked. However, when it comes to identifying projects to accelerate this is no easy task. Many of the projects referenced yesterday are not new and how accelerated they can actually be are yet to be determined.
The Programme for Government has set out a commitment to review the National Development Plan in October. In addition to the additional €1bn of spending for 2021 announced, consideration should also be given to how to deliver faster and better while removing the blockages in our system. We have given suggestions to Government in the last week on measures to address those blockages which would speed up project delivery in areas such as housing, health and energy at no additional cost to the State.
The proposed enhancement of the Help to Buy scheme is to be warmly welcomed.
For a short period (to 31 December 2020) the Help to Buy scheme will be substantially extended in 2 important ways
This will apply to both new purchase contracts entered into in that period and to self build projects where the first loan drawdown is in that period. Both of these measures can substantially improve a purchaser’s ability to generate a deposit for a new home.
The proposed enhancement of the Help to Buy scheme has the capacity to greatly facilitate the building of new homes as well as to create and restore employment in the homebuilding sector and will enable a greater cohort of buyers to access the relief. This is a key measure to assist in both the housing supply and COVID rebuilding agendas.
The time period is short and we would hope that on review it will be extended out to 31 December 2021 which would be consistent with the scheme generally.
A balance will need to be struck between making it easy for taxpayers to claim Stay and Spend Incentive, whilst also protecting the exchequer.
It’s critical that tax credits like the Stay and Spend Incentive are easy to claim. There are long running challenges with ensuring that taxpayers claim tax credits for health expenses, flat rate expenses etc. In reality, if it takes more than a few minutes to complete the claim, taxpayers likely won’t claim it. In this regard, enhancements to Revenue’s receipts tracker app to claim the incentive would help maximise the uptake of the incentive and ultimately ensure that the incentive is effective in supporting the hospitality sector over the winter period. Taking the UK’s “Eat out to help out” as an example, it is claimed at source by the restaurant or cafe who registers with the HMRC in order to claim the incentive, with customers seeing an immediate discount on their bill. By comparison, the Irish regime will place an additional burden on the customer to claim the tax credit. A balance will need to be struck between providing a user-friendly experience for taxpayers, whilst also protecting the exchequer. As the tax credit will apply to certain expenditure types (e.g. excludes alcoholic beverages), visibility on the nature of expenses will likely be required as Revenue is unlikely to be in a position to easily validate compliance at source (e.g. using Payment Service Providers).
The collective credit supports offer a range of credit products across the spectrum of the Irish economy - from micro businesses to large caps.
The additional liquidity measures announced by the Government in the July Stimulus Package includes top-ups to existing Government Credit Schemes and the announcement of new Credit Supports:
As with all supports announced the efficiency of deployment will be a critical factor in determining how successful these measures will be. As we have seen with the COVID-19 supports available to date, there is a potentially a disparity emerging in businesses eligible for credit supports relative to actual funds drawn. The Government must not only increase the approved lender pool and remove lender portfolio caps, but Government and lenders must work together to ensure funds are being deployed quickly.
Overall the quantum of supports announced in the July Stimulus Package, particularly when considered along with the existing measures, capture the broad spectrum of businesses that constitute the Irish economy, from micro companies to large corporates. It is extremely positive and a clear signalling of Government’s intentions to support Irish businesses through this recovery.
Smaller retailers in particular will benefit from a number of measures in the plan.
Many retailers, especially those without a significant online presence, have seen their businesses suffer an unprecedented decline in trade, and measures included in the July Stimulus Plan such as the decrease in the higher VAT rate, the extension of employment subsidy scheme and grants will be critical to allow the sector recover. Public investment for the improvement in town centres could also be a significant boost to the high street, where smaller retailers in particular will benefit from a number of measures in the plan. The plan's success in supporting businesses within the retail and manufacturing sectors will depend largely on the speed of deployment of the measures announced, and the ease of access to supports available.
Commitment to increase capital expenditure by €1 billion should support the delivery of key capital projects in Cork and in Munster.
The introduction of a number of measures are welcome for businesses and specifically indigenous SMEs and those self-employed. The aim from government is clear, reduce tax liability pressures, support cash flow and stimulate demand. The enhanced measures around Help to Buy Schemes are very welcome.
Measures such as the 2% reduction in VAT effective from September, the waiving of commercial rates and the options available around tax refunds and warehousing will help to relieve pressure on SME’s and the self-employed. In addition, the extension and increasing of the restart grant to €25,000 will offer support to those businesses that have not yet re-opened. The introduction of income tax relief for the self-employed in respect of 2020 losses is a positive step. At KPMG we would hope this loss relief would be a first step to ensuring the self-employed get the same recognition and supports as corporates.
Hospitality and tourism sectors are very important to the Cork and Munster economy. The €10 million Restart Fund for the Tourism sector and the €125 tax credit for spend over €625 on accommodation, food and non-alcoholic drinks between October 2020 and April 2021 will stimulate demand and generate cash flow in the local economy. The tax credit being granted is equivalent to an 8.5% VAT saving (13.5% to 5%) on approx. €1,670 of related spend in the period.
The Government’s commitment to increase capital expenditure by €1 billion is also very welcome and should support the delivery of key capital projects in Cork and in Munster such as the Events Centre, Dunkettle interchange, M28 and the M20, and Cork to Limerick Motorway.