VAT increase to 23% confirmed

The higher rate of VAT is to be increased from 21 per cent to 23 per cent, the Minister for Finance has confirmed.

The much-publicised VAT rise, which was disclosed last month in a document distributed to the German parliament, is expected to raise €670 million of the total €1 billion that is to be raised by the exchequer next year.

About half of the goods and services in the State will be affected by the 2 per cent increase in the higher rate of VAT, according to the Institute of Taxation, though Minister for Finance Michael Noonan stressed that most food, children's clothes, and oral medicines will remain at 0 per cent, while home heating oil, residential housing, general repairs and maintenance will stay at 13.5 per cent.

The 23 per cent VAT rate applies to a wide range of goods and services. Among the items that will be subject to the 2 per cent increase are: motor vehicles, petrol, electrical supplies, furniture, adult footwear and clothing, alcoholic and soft drinks, and tobacco. In terms of services, accountancy services, legal services, tax advisory services are all subject to the higher rate of tax.

Mr Noonan said he does not expect any increase in cross-border shopping as a result of the VAT increase. "For the majority of the past 20 years, the VAT differential between the Republic and Northern Ireland has been 3.5 per cent and it was as high as 6.5 per cent as recently as 2009," he said. "After the increase I am announcing today, the differential will be 3 per cent."

He also noted that 20 out of the 27 EU countries had increased VAT in the last four years and further increases are being considered by several Member States.

The Minister disputed recent claims that the VAT increase will cost households €500 per annum on average, as they have not taken account of the fact that businesses contribute significantly to the estimated VAT yield.

According to Anthony Smyth, head of tax at Walkers law firm, the increase in VAT on services may also have an indirect impact on households. "Banks, for example, will see an increase in the costs of some of the third-party services they receive because of the VAT changes. This cost may be passed on to customers."

He also questioned whether the Government will succeed in raising €670 million from the VAT change. "The increase in VAT will limit the purchasing power of people. The question is, if there is going to be a shortfall, how will that shortfall be made up."

The decision to increase the higher rate of VAT had been signalled by the last Government, who had agreed with the IMF and the European authorities to increase VAT by 1 per cent in 2013 and 1 per cent in 2014. Today's Budget has frontloaded those measures, though the Minister for Finance reiterated his Government's commitment not to increase the VAT rate past 23 per cent during the lifetime of the Government.