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For our latest Brexit VAT & Customs commentary, click here.

This is a budget which will be framed in the context of a potential hard Brexit mere weeks away and also with the twin threat of Covid 19 to the Irish economy, writes Glenn Reynolds Head of Indirect Tax.

Year on year VAT accounts for approximately 25% of government exchequer receipts in at just over €15 billion last year. 

Customs brought in just over €350 million last year with 80% paid to the EU but this year more than ever Customs is in the headlines because of the potential impact tariffs could have on trade with the UK post Brexit absent a free trade agreement.  

The government is expected to frame the tax aspects of the Budget on the basis of a “no-deal” Brexit and the Minister has indicated that there will not be any major taxation increases.

Exchequer receipts

Looking at the year so far, exchequer VAT receipts to September 2020 were down by €2.4 billion (just under 20%) compared to the same period last year, reflecting the significant decline in personal consumption. Customs and excise receipts were also down in the period also.  

21% VAT rate

As part of the July stimulus plan, we have already seen government action to reduce the standard VAT rate from 23% to 21% until March 2021 as a temporary measure to stimulate demand in addition to relief measures introduced in relation to deferment of VAT payments and warehousing of VAT debts.

In addition to calls for the new temporary 21% VAT rate to be extended, there are calls for further more targeted stimulus measures to assist the tourism and hospitality sector. While an extension of the temporary 21% rate is rather unlikely in the Budget, we potentially could see a repeat of the 2012 measure and a decrease in reduced VAT rate from 13.5% to 9% or even further. 

The government has scope to decrease the rate to 5% under EU rules.  Each 1% decrease would cost the exchequer circa €280 million in a normal year. A decrease in the reduced rate would complement the “Stay and Spend” temporary tax rebate scheme which came into effect at the start of October. 

Other measures that would be welcomed by SMEs would include an increase in the threshold for the cash-receipts basis of accounting (which currently stands at €2 million) and the VAT registration thresholds.

Brexit measures

 Regarding potential specific Brexit measures the governments hands are mostly tied as Ireland must operate in line with EU rules on the operation and collection of VAT and customs.

This gives certainty for business in Ireland as they know the new VAT and Customs rules that will apply from 1 January 2021 but there is limited scope for Ireland to take unilateral action on additional measures to help Irish business prepare for Brexit and the challenges ahead. 

Postponed VAT accounting for imports

One measure we do expect to be confirmed in the Brexit Omnibus bill is the introduction of postponed VAT accounting for imports which should eliminate the requirement to pay or defer and pay VAT on importing goods into Ireland from Great Britain (not Northern Ireland) or other non-EU countries and this should be available to all VAT registered businesses importing goods into Ireland. 

Under the revised Protocol on Ireland and Northern Ireland, Northern Ireland is to remain legally part of the customs territory of the UK but effectively remain within the EU Single Market and VAT area for the movement of goods.  Therefore, the postponed accounting relief would not impact on “NI to ROI” movements as these will continue to be treated for VAT purposes in the same simplified manner as cross-border supplies of goods into Ireland from other EU Member States.

Increases to excise duty

Increases to excise duty typically appear as an “old reliable” in Budgets. Given calls to address climate change issues and Ireland’s targets in this area, increases in excise on petrol and diesel as well as changes to the Vehicle Registration Tax regime may feature. However Ireland already has some of the highest excise rates on alcohol in Europe and although there are some indications that the decline in international travel may be boosting domestic sales of excise products, any increases in excise on alcohol at this time would be viewed very unfavourably by the hospitality sector in light of the various severe challenges posed by Covid-19. 

Conclusion

The government is expected to frame the tax aspects of the Budget on the basis of a “no-deal” Brexit and the Minister has indicated that there will not be any major taxation increases. 

Given the various challenges facing businesses, focused indirect tax relief measures would be welcomed including a VAT rate reduction for sectors such as hospitality that have been particularly badly hit by the impact of Covid-19.

Regarding Brexit, other than the introduction of postponed VAT accounting we are unlikely to see other material Brexit measures on VAT and customs introduced in the Budget or Brexit Omnibus bill and no measures will replicate the benefit associated with the current single market and customs  trading regime with the UK which will fall away from the start of next year.

However, the existing VAT and customs rules do provide scope for business to mitigate some of the potential negative impacts of Brexit even absent a deal being reached on a free trade agreement and it is critical for businesses to fully understand how they may be impacted, including mapping any potentially impacted supply chains, and implement any final steps needed now with Brexit imminent.  

Get in touch

For further information on any of the potential Budget measures mentioned in this article, and how they might affect your business, please contact Glenn Reynolds, Head of Indirect Tax.

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