Predictions for VAT in Budget 2012.

Most years, VAT is not a topic of discussion come Budget day, But this Government has targeted VAT as an area in which they can influence economic activity & income generation and we’re expecting changes in Budget 2012.

Already this year, we have seen the introduction of a new VAT rate of 9%, which applies to services such as hairdressing, cinema, food & drink including hotels & takeaways, newspapers & magazines. These were previously charged at 13.5%. The govt expects that this will cost €120m this year and about €350m next year, but thinks it will boost activity in the tourism sector.

Now, as confirmed by the German parliament, it seems likely that we will see an increase of the standard rate of VAT from 21% to 23% in Budget 2012. so what will this affect?
Well most products and services are chargeable at 21%. Here’s what’s at 21% per Citizens Information:

21% is the standard rate of VAT and all goods and services that do not fall into the reduced rate categories are charged at this rate. They include alcohol, audio-visual equipment, car parts and accessories, CDs, computers, consultancy services, cosmetics, detergents, diesel, fridges, furniture and furnishings, hardware, jewellery, lawnmowers, machinery, medicines (non-oral), office equipment, pet food, petrol, paper, tobacco, toys, tools, washing machines, bottled water.

Some significant items that are not at 21% are books, childrens clothes, some basic food stuff, and financial products, such as your home and car insurance. We did hear of some reports on Matt Cooper that VAT could be introduced on Books and bread, but we’d suggest these are less likely.

Increases to VAT was not one of the recommendations of the Commission on Taxation report of 2009. In fact they felt it necessary to comment on the potential regressive nature of VAT as an income generator, quoting Combat Poverty:

“The Distributional Impact of Ireland’s Indirect Tax System” concluded that “The indirect tax system appears to be regressive in the sense that households in the lowest deciles…pay a higher proportion
of their income in indirect taxes relative to households in the higher deciles”

It’s hard to say for sure when any changes would be implemented – While excise duty rate changes happen from midnight, VAT is normally planned in – so for 1 Jan for example. But the government would have to weigh up the political cost of increasing the price of toys just before christmas versus their need for money in deciding the date.

Looking through the different vat rates applicable to products, I thought it strange that tea is 0% vat, while bottled water is vatable at 21%? Put the kettle on – and get the shopping in before the Budget Vat changes are implemented (edit change confirmed as happening  January 1).