All the tax talk ahead of budget day focuses on income tax and the USC and the amount the Revenue takes from wage packets. This is no surprise as these taxes are the biggest contribution of households to the exchequer, amounting to a forecast €34.3 billion this year. But taxes on spending, while not as noticeable, also take a huge chunk, amounting to €21.8 billion this year in VAT receipts, or €28 billion when excise duties are added in. The income tax and USC burden averages at €19,000 per household, while the combined impact of VAT and excise averages over €15,500 per household.
So decisions on VAT and excise are a vital part of the budget day mix and really matter for household spending power, even if they do not have the high profile impact on take-home pay which comes from changes in income tax or the USC. And as the cost-of-living crisis hits, these indirect taxes have been in the frame, with important changes and key decisions to be made this year again. A key point is that these all have to fall within EU rules, which operate a tight framework for VAT.
Ireland’s standard VAT rate is 23 per cent and this applies to just under half of all goods and services bought and raises around two-thirds of all revenue from this tax. The other rates are 13.5 per cent, a lower rate of 9 per cent and a zero rate on items such as many foods, certain drink, medicines, children’s clothes, books and newspapers. If you averaged out the imposition VAT puts on our spending, it comes to a hefty 16 per cent of what we spend on goods and services. The cost of shopping and buying services is significantly increased by VAT and, in specific cases, by excises.
Here are the key points for households in the decisions in budget 2025.
Budget 2025 main points: Energy credits, bonus welfare payments, higher minimum wage and tax changes
Budget 2025 calculator: How this year’s budget will affect your income
Renters and households with children most likely to have income that doesn’t match needs - ESRI
Households worse off over failure to peg tax and welfare changes to income growth - ESRI
1. The price of energy
EU rules say that the standard rate of VAT – 23 per cent in Ireland’s case – should generally apply to household electricity and gas bills. Ireland, however, has exercised an option to apply a lower rate, which up to May 2022 had been 13.5 per cent. With energy bills soaring following the Russian invasion of Ukraine, the EU loosened the rules and the Government cut the rate – temporarily to 9 per cent in May 2022 and extended this in the subsequent two budgets. Currently, it is meant to revert to 13.5 per cent at the end of October.
However, the Government could decide to extend it again, but at a hefty enough annual cost of €319 million. On its own this does have a major impact on households – perhaps €40-€50 on an average annual electricity bill or a bit more for duel fuel users. But combined with other measures the figures add up. Households got €450 in total via three energy credits last winter. A key choice is whether to have one “final” round of these payments. A further complication of State policy is that the planned increase in carbon tax – which operates like an excise duty on fuel – will add to prices of most fuels in 2025 and raise a hefty €160 million for the exchequer (much of it ring-fenced for environmental and social spending).
2. On your bike
The Tax Strategy Group papers drawn up by senior civil servants to advise on budget options said that there had been representations to cut VAT on bikes and e-bikes from the standard 23 per cent rate to 13.5 per cent. If this was passed on by bike shops, it would represent a decent fall in new bike prices – about €55 on a €600 bike. More powerful e-bikes, scooters and e-scooters would not qualify. The Greens will like this one and, as it would only cost €6 million a year, it may be a runner.
3. Getting connected
An interesting proposal understood to be in the mix for budget day is a cut in VAT on internet connections from 23 per cent to 13.5 per cent. This would cost around €60 million and would benefit households (by about €40 a year on average) and businesses. The civil servants pointed to problems of separating out internet and TV service bills. But there seems to be a wind behind this one, as it would be in line with the National Broadband Plan and there is a feeling that the heavily regulated nature of the sector would make it more likely that the cuts would be passed on to consumers.
4. Is 9 per cent VAT returning for hospitality?
The lower rate on hospitality applied from November 2020 – in the wake of the Covid-19 hit to their business – to the end of August 2023, when it reverted to 13.5 per cent. The problem for the sector calling for a return is that the cost is substantial, at €764 million a year – its lobbyists argue this is an overestimate as it does not account for fewer businesses having to close were the rate returned to 9 per cent. The Tax Strategy Group argued strongly against its return. If the Government decides otherwise, it will have to find revenue elsewhere to pay for it, as otherwise it would account for half of the 2025 tax package.
5. What about VAT on new houses?
Under EU rule changes in 2022 the 13.5 per cent rate could be cut to 9 per cent on “the supply and construction of housing, as part of a social policy and to the repair and renovation of residential housing”. The civil servants don’t like this either, arguing that there is no guarantee it would be passed on to buyers and that EU rules require some potential complications to its application, such as defining what is part of social policy. If applied to all new houses it would cost €721 million a year, which makes it look unlikely.
6. Energy retrofitting your home?
From May 1st last year, a zero VAT rate applies to the installation of solar panels on private dwellings – care is needed here as the rate only applies in cases where the same company supplies and fits the panels and anyone getting work done needs to consult the Revenue rules. Now the Tax Strategy Group has turned its attention to heat pumps. There are charged at 23 per cent, though – as is normal in building projects – if the cost of the goods used in carrying out work does not exceed two-thirds of the total price, the 13.5 per cent rate which applies to the service then applies to the entire transaction. And this would generally be the case. However, there would be an option, for example, to reduce the rate to 9 per cent on all heat pump purchases, which meet rules set down by the EU on the subject. The Tax Strategy Group papers said that some work was needed to see if most of the pumps sold here would, in fact, qualify.
7. Will the old reliables be soaked?
There may well be more tax on tobacco, though the Revenue Commissioners have warned the Government that the law of diminishing returns is starting to apply here, with higher tax met by increased imports and illegal products, which now account for one-third of the market. An additional 50 cent on a pack of cigarettes would raise just €40 million. Higher excise on petrol or diesel look unlikely, though the Tax Strategy Papers again outline the argument for bringing the tax on diesel up to the level of petrol and the potential extra revenue from areas of motor taxation.
8. What about the long-term?
Experts believe that Irish tax revenues will have to increase in the medium term to meet the cost of ageing and climate change. There are two specific issues with indirect taxes – VAT and excise. One is that the revenues based on fossil fuel cars will drop off sharply assuming the switch to electric cars is successful and the exchequer will have to look at a way to replace these. The Fiscal Advisory Council estimated the annual losses would climb to €2.5 billion by 2030. The council – and previous Tax Strategy papers – have looked at ways to do this, via measures such as taxing cars on their weight, or congestion charges. None of this will feature in Budget 2025. Also, the EU Commission, the OECD and the Commission on Tax and Welfare have all argued for measures to get more revenue from VAT and broaden the base over time – and the lower rating of items to be carefully considered and reversed where needed. This is delicate as, for example, zero rating of food is of greatest benefit to the less well-off, who spend proportionately more of their income on essentials.
