We know you’ve seen loads of content talking about the reduction in the standard rate of VAT from 23% to 21%, effective from 1st September 2020 to 28th February 2021. The change is part of the Jobs Stimulus Plan, announced by the Government of Ireland in July as an answer to the COVID-19 crisis and aims to support businesses at all levels that are negatively impacted by the pandemic. The rate will revert to the usual 23% with effect from 1 March 2021.
For the uninitiated, the standard rate of VAT applies to a wide range of goods and services – from clothing to electronics to professional services and everything in between!
You might feel lost on how it would change things for you as a business owner, what to do and how to apply the VAT change. That’s why we thought a small guide would be useful. We have all the answers you’re looking for right here. Really, scroll down now!
1. What do I do with my payments received and invoices issued before the VAT rate change?
We see it everywhere. Payments and part payments can be received for goods and services that are scheduled but haven’t been supplied until on or after the date of a rate change. Are you wondering what to do with those payments and invoices? The answer is based on accounting: VAT is chargeable on the supply at the rate in force at the time the invoice relating to the payment is issued or should have been issued, whichever is earlier.
Translating it to human language (because we consider people in accounts and finance smarter than us, regular humans without those mathematical superpowers!) the VAT due on your invoice is the one valid at the time the invoice was circulated. So, if your invoice was published on the 31st of August, the VAT is 23%. On the other hand, if an invoice was issued on the 1st of September, then the equivalent VAT due is 21%. Simple, hun?
2. What should I do with my current contracts?
It depends on the contract! Ok, this is a bit tricky, so we will break it down in topics for you:
- Existing contracts agreed before the VAT change and related to supplies with tax points in between September 1st and February 28th 2021: in these cases, the reduced VAT rate must be applied. That means that if you have a contract for goods and services that will be supplied in the period of the VAT reduction, they will need to apply the VAT change.
- Existing contracts with state prices on a VAT exclusive or VAT inclusive basis: for these cases, the best solution is to review the contract with your suppliers and update the previous agreement;
To facilitate things a bit, try to review all your contracts and contact each customer/supplier to review the agreements on a case-by-case basis.
3. How will the VAT change affect the credit notes?
If a credit note is issued on or after 1st of September in respect of supplies of goods or services made to VAT-registered customers prior to this date, it is essential to show the VAT rate applicable when the invoice was issued or generated. That means that all credit notes should be printed with the current/valid VAT on it (if issued before September 1st, 23%, if issued after it, 21%).
4. How should I deal with advance payments?
As per Revenue, advance payments received from an unregistered person is subject to VAT. This means that the VAT rate at the time of the payment is the one that must be applied to it. Any advance payment, including deposits, that were received from a registered person, should apply the same rules as the invoices section above.
5. What services are not covered on the VAT changes?
Ahá! That’s an easy one, isn’t it? So any financial, medical or educational services along with live theatrical and musical performances, where food and beverages are not served, are exempted from VAT. Additionally, goods bought from outside the EU up to a value of €22 are VAT free.
Retailers get to decide if they’d like to pass on the VAT cut to customers and reduce their prices by two per cent. They can even choose to keep prices the same and keep the 2% themselves, and the final decision won’t be penalised in any way. Amazon, Spotify, Netflix, Aldi and a series of other companies have decided to pass on the VAT decrease for Irish customers. On the other hand, Eir has decided against passing on the VAT reduction to its customers.
We hope this guide will help you evaluate what to do with your systems and your company during the VAT reduction period. If you still have questions, you can read the full Revenue document about it and see how the changes are applied to your industry and company.