Restaurants are closing on the back of it, and it was a key issue in last week’s general election, with many of the big parties promising change if elected. VAT, or value added tax, a consumption charge on goods and services, has become a key point of contention in the Irish economy.
Ireland is not the only country where VAT has become a political hot potato; consider the British Labour Party’s decision to impose VAT, at a rate of 20 per cent, on private school fees in the UK, from January of next year, leading many parents to pull their kids out of such schools.
Here in Ireland, the controversy over VAT is largely contained to the hospitality sector. While it had enjoyed a lower rate of 9 per cent in the aftermath of the Covid-19 pandemic, this returned to 13.5 per cent in September 2023. Now the restaurant industry says that the higher rate is causing a flurry of closures.
In the run-up to the election, political parties of varying hue made promises to change the rates.
Despite participating in a budget back in October, in which no VAT cut was announced, Fine Gael has promised a rate cut for hospitality from 13.5 per cent to 11 per cent – a sort of halfway house on the rate of 9 per cent that applied post-Covid for a time, adding that it would also extend this rate to gas and electricity.
Sinn Féin, meanwhile, has said it will cut VAT on hospitality to 9 per cent. Fianna Fáil won’t cut VAT on hospitality, but said it would keep the rate on gas and electricity at 9 per cent for the next five years – it is due to go back to 13.5 per cent in April of next year. The Social Democrats want a 9 per cent rate, but just for restaurants.
But it is not just about the rate at which it is levied that’s important; what you have to pay it on also matters.
Revenue raiser
No wonder the Government hasn’t capitulated on calls to cut VAT rates, at least not until the looming general election saw it change its tune. It brings in a lot of money for the exchequer. Last year, for example, figures from the Department of Finance show the Government collected some €116 billion in taxes. VAT, at some €20 billion, accounted for 17 per cent of this.
VAT receipts are now at an all-time high. Presumably, it is for reasons such as this that the Tax Strategy Group, which advises government in advance of the budget each year, said during the summer that cutting VAT was a bad idea. Reducing the 13.5 per cent back to 9 per cent would cost €764 million a year in tax forgone; and even restricting to just food and catering businesses would still cost a hefty €545 million.
This “would constitute an enormous fiscal transfer of taxpayers’ money to the sector, which the evidence available at present does not support”, the group said.
While all the pre-election focus on VAT tended to look at its impact on specific business sectors, a potentially bigger issue is what it means for the finances of lower-income households.
A study by the Parliamentary Budget Office earlier this year found that indirect taxes, such as VAT, are “highly regressive”, with low-income households facing disproportionately larger liabilities. It found that households pay an average of €104 a week in VAT on goods and services, most notably energy products.
The report said VAT accounted for 19.4 per cent – almost €1 in every €5 – of the weekly income of the poorest 10 per cent of households compared with 5.8 per cent – €1 in €17 – for the richest 10 per cent.
Indirect taxes as a whole, including things such as excise duty and carbon tax, ate up more than 29 per cent of the poorest 10 per cent’s household weekly income but just 7.9 per cent of the household income of the richest 10 per cent of households in the State.
Anomalies
Given such vast receipts, it is no surprise that the burden of VAT is hurting businesses and households alike. It’s not just about the rate, however; how VAT is applied can also confuse.
While the standard rate of VAT in Ireland is 23 per cent, a reduced rate of 13.5 per cent applies for some goods and services (and an even lower rate of 9 per cent on electricity, for example). Still other products have no VAT on them.
Consider a packet of Rich Tea biscuits. You’ll pay the reduced rate of 13.5 per cent on these, so you can get a 300g packet for as little as 65 cent at Tesco (including nine cent of VAT). But add some chocolate on top and all of a sudden you’ll pay 23 per cent in VAT for that chocolate digestive or finger.
But in another quirk, if the chocolate is inside – as with chocolate chip cookies – then the reduced rate applies.
Tampons and other period products are now zero rated but you’ll pay VAT at 23 per cent on loo rolls. Caviar, that most luxurious of food items, is zero rated but you’ll pay 23 per cent on your toothbrush and toothpaste. And, if you buy coffee in the supermarket, no VAT applies, but if you buy it from a coffee shop, VAT is charged at 13.5 per cent.
Children’s shoes are famously exempt from VAT but so too are a host of other items, including food items such as milk and bread; books, including ebooks and audiobooks; medicine; fruit trees; newspapers; hormone-replacement therapies; plays; and financial services.
The anomalies extend even to your home. If you buy a new house, you’ll pay VAT at 13.5 per cent on it but if you are buying a previously occupied dwelling, no VAT applies. And the oddities don’t end there. If a new property is resold within five years of its completion, it is taxable for VAT if it has not been lived in for at least two years.
Here’s another anomaly. If you drive to France and stock up on cheap wine and booze and get the ferry home, you won’t be liable to VAT/customs duty on your purchases – at least if your purchases are limited to €430 and are within Revenue’s alcohol allowances. Anything above those limits and charges will apply.
If, however, you simply sit at home on your computer and order the wine – even up to the aforementioned limit – your purchase will incur VAT and customs duty. And VAT will also apply on customs duty.
International comparison
But how does VAT in Ireland compare with countries across Europe?
Rates across the EU are governed by the VAT Directive but, in effect, countries are entitled to set their own rates, subject to two rules. First, there must be a standard rate (that is not less than 15 per cent) for all goods and services. A reduced rate (no less than 5 per cent) can be applied – but only to goods or services listed in the VAT Directive. A zero rate can also be levied on approved goods and services.
So where does Ireland fit in?
According to the Tax Foundation, Ireland had the ninth-highest rate of VAT across Europe in January 2024. The EU has an average “standard” rate of 21.6 per cent – significantly more than the minimum VAT rate that could be applied.
Outside the EU, VAT rates tend to fall in line more or less with the EU average – 20 per cent in the UK, for example. Switzerland is the big outlier here, with a rate of just 8.1 per cent.
VAT rates: sample charges on a range of goods
Book for €15: VAT charge = €0
Coffee for €3.90: VAT charge = €0.46
Electricity bill for €100: VAT charge = €9
Wooden cabinet for €248: VAT charge = €57.04
Flight from Dublin to Rome €150: VAT charge = €0
New house for €395,000: VAT charge = €46,982
Old house for €450,000: VAT charge = €0
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