A tax measure being sought by Retail Excellence is the retention of the 9% VAT rate for all labour intensive sectors. Retail Excellence is a non-profit organisation that supports retailers throughout Ireland in their quest to becoming the best they can be.
Value Added Tax (“VAT”) is a tax on the spending of consumers. The majority of goods and services in Ireland are subject to VAT (Revenue.ie, 2018). VAT is a multi-stage tax on consumption. The term ‘consumption’ refers to services or goods that were supplied have been consumed. While the phrase ‘multi-stage’ signifies that VAT is applicable at each stage of both the production and distribution of goods and services (Irish Taxation: Law and Practice, 2018). VAT was introduced in Ireland in preparation for Ireland joining the European Economic Community (“EEC”), now known as the European Union (“EU”). There are a number of different rates of VAT that are applicable to distinct goods and services:
1. 0 %
2. 4.8 %
3. 5.4 %
4. 9 %
5. 13.5 %
6. 23 %
7. VAT-Exempt supplies
The first rate is referred to as the zero rate. There are a number of goods and services that are subject to VAT at the zero rate, to name but a few, goods exported to locations outside the EU, children’s clothing and footwear and books and certain other printed matter. The second rate is termed the livestock rate, it applies to the sale of livestock in general and certain horses. The rate of 5.4% is the flat rate. The rate of 9% is called the reduced rate, or the second reduced rate, it is applicable to labour intensive sectors, many of which are related to the tourism industry. The fifth rate of 13.5% is also named the reduced rate. This rate applies to various goods and services, which includes solid fuels, veterinary services, certain building services, and many more. When the supply of goods and services is subject to VAT, but does not fall into the categories of zero rate, reduced rate and is not exempt from VAT, then the standard rate of 23% is applicable. Finally, there are several goods and services which are not subject to VAT, in other words, they are exempt from VAT. For example, optical services, hospital services, dental services and insurance services. (Irish Taxation: Law and Practice, 2018)
The rate of VAT that Retail Excellence recommends retaining the reduced rate, or the second reduced rate of 9%. As discussed, above the reduced rate of 9% is applicable to labour intensive sectors, many of which are strongly linked to the tourism sector. The reduced rate of Value Added Tax was introduced on the 1 July 2011. It was originally only intended to remain at this rate until December 2013 but was extended indefinitely in the Budget of 2014. The 9% rate was originally a component of an initiative introduced by the Government in May 2011 called the “Jobs Initiative”. The aim of the reduced rate was to increase demand, urged by reduced prices, which would lead to an increase in employment (The 9% VAT Rate: Tax Receipts and Employment, Revenue.ie, 2018). The concept of “labour intensive sector” refers to an industry that involves a large volume of labour in order to produce its service or good. This rate applies to the following:
• the provision of food and drink in the course of catering (excluding alcohol, soft drinks and bottled water);
• the provision of food and drink by a vending machine;
• the provision of hot take-away food;
• hotel, guesthouse and caravan/campsite lettings;
• cinema admissions;
• admissions to theatres, certain musical performances, museums, exhibitions, galleries, open farms, historic buildings;
• admissions to fairground amusement;
• printed matter, such as, newspapers, magazines, leaflets, brochures, catalogues, maps, programmes or printed music;
• the sale and hire of horses (non-foodstuff);
• the sale of greyhounds. (Revenue.ie, 2018)
In relation to the categorisation of Value Added Tax, VAT is classed as an indirect tax. VAT is also classified as a regressive tax and is levied on expenditure. An indirect tax refers to a tax that is collected from persons other than those that are intended to bear the final burden of the tax (Irish Taxation: Law and Practice, 2018). The burden of tax essentially means who pays the tax in the end. In regard to VAT, the final consumer bears the final tax burden. The tax is collected through traders during the chain of supply. A regressive tax signifies that a tax takes proportionately more from people with less income. A regressive tax takes a decreasing proportion of income as the level of income increases (Irish Taxation: Law and Practice, 2018). In relation to classification by tax base, VAT is based on expenditure.
Canons of taxation
In my opinion, the VAT reduced rate of 9% is going to be increased by the Government in the Budget 2019. The reduced rate was introduced initially as a way of boosting demand and indirectly, increasing employment. The economic situation of Ireland and the global economy have changed dramatically since its introduction in 2011. Ireland was in the depths of a recession as well as the sudden collapse of the housing sector. Levels of unemployment have reduced nationally over the last few years. As of September 2018, the rate of unemployment in Ireland was 5.4%. This figure is a harsh contrast to early 2012 when the unemployment rate hit a high of 16% (Trading Economics, 2018). These figures demonstrate that Ireland is in recovery and employment is on track to recovering its pre-crisis levels.
As predicted by many, the reduced rate of 9% was increased to 13.5% on selected elements. The rise in the reduced rate will mainly impact on the tourism industry, while the rate of 9% will remain for certain goods and services, namely, newspapers and sporting facilities. The increase will take effect on 1 January 2019.