Budget 2021 | Indirect Tax Measures

13 October 2020

Fionn Uíbh Eachach, Indirect Tax Partner at BDO Ireland, provides a breakdown of the indirect tax measures and supports announced in Budget 2021.

Today’s Budget was framed by the financial and economic impact of the Covid-19 pandemic over the past few months. The stark reality is that the Government came into the financial year with a €1.5billion surplus and will see out the year with a €20.5billion deficit. 

The Government announced some indirect tax measures in Budget 2021 to stimulate certain sectors significantly impacted by Covid-19 and to improve exchequer intake. 

Temporary Reduction in VAT 

The reduced VAT rate of 13.5%, applicable to the hospitality and tourism sectors, is being reduced further to 9% from 1 November 2020 until 31 December 2021. 

This measure was previously introduced a number of years ago and proved to be a key factor in stimulating the sector by way of creating employment and increasing revenues. It is envisaged the new VAT rate reduction will reinvigorate the struggling Tourism & Hospitality sector, however, the full benefit of the rate change may not be realised until current Covid-19 restrictions are lifted.

As part of the July Stimulus, the standard rate of VAT was reduced from 23% to 21% up to the end of February 2021. This measure has not been extended beyond February 2021 as part of the announced measures today. 

All businesses should be equipped to deal and adjust for any changes in VAT rates. However, businesses will need to be aware and understand how their financial systems are set up to take account of a VAT rate change; how it will impact pricing; how advance payments and how credit notes should be dealt with. 

Farmers Flat Rate Scheme 

The flat-rate scheme compensates un-registered farmers on an overall basis for VAT incurred on their farming inputs. The Government, today, announced an increase in the flat rate addition from 5.4% to 5.6% for 2021. Whilst this is a small increase, it will be welcome by un-registered farmers. 

Motor Tax 

The motor tax regime is being reformed in line with the Government’s climate action commitments and in the context of the transition to the new vehicle emissions test procedure (“WLTP”). 

Accordingly, a new motor tax rates table will be introduced for WLTP cars first registered from 1 January 2021. There will be extra rate bands in the new system which will follow the environmental rational of the tax by tying it closely to the “polluter pays" principle. However, there should be not substantial increases across a range of vehicles under the new system and most motor tax rates will remain the same. The current motor tax rates table for vehicles registered between 2008 and December 2020 will remain in place; however, it will be adjusted slightly to reflect the Government climate action priorities. 

It should be noted that cars registered pre 2008 will still be taxed under the existing regime and no changes are being made to that system. Accordingly, there will be three motor tax tables in operation from January 2021 based on the date of registration of the vehicle. 

Vehicle Registration Tax 

Similar to the motor tax regime, the vehicle registration tax system is also being reformed from January 2021 in line with the Government’s commitments to reduce emissions from road transport. 

The existing 11 band table is being replaced by a 20 band table with a revised rates structure. It is hoped that this will incentivise consumers to make greener choices and encourage consumers to buy electric or hybrid vehicles. As such, vehicles will attract a lower rate of VRT than petrol and diesel vehicles. 
Under the new VRT system, the current VRT reliefs for PHEVs and hybrids will expire as the new system will provide for much lower VRT rates on such vehicles. 

Tobacco Products Tax 

The “old reliable” in the context of Budgets in years gone by - a pack of 20 cigarettes will increase by 50c with pro-rate increases on other tobacco products. 

In summary, it has been a turbulent year for many businesses and steps have been taken by the Government to assist business by adjusting VAT rates twice in one year. The focused and specific VAT rate reduction for the Tourism & Hospitality sector, are to be welcomed; however, with Brexit on the horizon, additional VAT and customs implications are only around the corner. 

If you have any queries related to the information above, please contact Fionn Uíbh Eachach at [email protected].