VAT rate reduction

Ireland is to temporarily reduce its standard rate of value-added tax (VAT) from 23% to 21% with effect from 1 September 2020. The reduced rate of VAT is to remain in place until 28 February 2021. The secondary rate of 13.5% remains unchanged.

The reduction in the standard VAT rate will impact businesses from a systems and process perspective. Businesses will be required to update their invoicing and ERP systems.

There are a number of practical issues that taxpayers should consider. Some of these issues would include:

  • Price Changes – Irish businesses will need to consider whether they should pass the reduction onto customers through amendments to the price of goods and services as a result of the temporary VAT rate change.
  • Invoicing — The VAT rate in force at the time an invoice is issued is the VAT rate that applies. For example, the reduced 21% VAT rate should apply to goods or services supplied in August but invoiced in September (once in line with VAT legislation on invoicing). Credit notes issued on or after 1 September in respect of supplies of goods or services made to VAT-registered customers prior to this date must show the VAT rate in force at the time the original invoice was issued, i.e., 23%. For supplies to non-VAT registered customers, credit notes should be issued using the VAT rate in force at the time of the original supply.
  • Systems — The ERP system will need to be updated for the new VAT rate change.
  • Review of Agreements and Contracts — All businesses will be required to initiate a review of all commercial contracts to consider whether the price is impacted as a result of the VAT reduction or consider if the contract provides for VAT rate variations.
  • Reverse Charge VAT — For businesses with partial VAT recovery entitlement, VAT at 23% must be accounted for on the reverse charge basis on taxable foreign purchase invoices dated on or before 31 August, even if those invoices are not received until September 2020.This will require an 8 month recovery based on 23% and a four month recovery based on the reduced rate of 21%
  • Utility Bills – Revenue guidance notes that in the case of continuous supplies of utilities to non-business and other unregistered customers, the VAT rate applicable is the rate in force at the time the bill issues to the consumer. This applies where the company issues a bill at least every three months. If the company does not issue a bill at least every three months, then the VAT rate applicable is the rate in force at the time of supply. In the case of VAT registered customers, the appropriate rate of VAT is the rate applicable when the bill issues. It is important to note the difference arising between quarterly issued bills and those not issued quarterly.
  • Stock at the date of a change – Companies who are registered for VAT on the date of a change of a VAT rate must account for VAT at the new rate even though they may have been invoiced with VAT at the old rates. Such persons will already have been entitled to a credit for VAT on the purchase of that stock, subject to the usual conditions. This is an important point to note for a large number of business who may have begun the process of purchasing Christmas stock such as clothes shops, pharmacies, and perfumery shops pre the introduction of the reduced rate.