THE REDUCTION in the VAT rate to 9 per cent on tourism-related activities will not apply to short-term car hire, despite this being a measure aimed at promoting the tourism industry. VAT is charged on the supply of goods and services, and the rate is subject to the requirements of European Union VAT law with which Irish VAT legislation must comply.
According to the Department of Finance, the majority of tourist-related services are being made subject to a new temporary, reduced VAT rate of 9 per cent from July 1st. However, it said it was not possible to extend this treatment to the short-term hire of cars and other vehicles.
“This is disappointing, but in this instance it appears that there was nothing that the Government could do about it because it is out of their control,” says Paul Redmond, chief executive of the Car Rental Council of Ireland. “The reduction of 4 per cent would certainly have helped in terms of pricing.”
His comments follow the phasing-out of a vehicle registration tax (VRT) relief scheme that had been applied to cars bought for the rental market. The car-rental fleet shrank from 30,905 units in 2006 to just 6,359 so far this year.
The goods and services to which Ireland applies a reduced rate of VAT, including car hire, is provided for in an EU derogation, which states that as a reduced rate was applied to these items on January 1st, 1991, Ireland is entitled to continue applying that reduced rate to those items.
However, this continuation of reduced-rate application is conditional on the rate being no less than 12 per cent. These are known as “parked” items, and are provided for under Article 118 of the EU VAT directive. It would not be possible for Ireland to apply a rate of 9 per cent to all of the economic activities that currently apply at the 13.5 per cent rate.
According to a statement from the Department of Finance: “It is for this reason that the jobs initiative introduced a 9 per cent VAT rate in respect of tourist activities such as restaurant and hotel accommodation services, while other tourist activities such as tour-guide services and the short-term hire of cars, boat, caravans and mobile homes remain liable to VAT at the 13.5 per cent. However, it should be noted that in the majority of EU member states, where the derogation under Article 118 does not apply, short-term car hire would apply at their standard VAT rate, which is much higher than the 13.5 per cent applying to short-term car hire in Ireland.
“Other activity subject to the parked rate includes construction and sale of property, electricity and domestic fuels, and repairs and maintenance.”
The statement goes on to note that while it is possible to reduce the VAT rate applicable on car hire to 12 per cent, this could only be achieved through the application of a 12 per cent rate to all goods and services that will remain at the 13.5 per cent rate from July 1st, 2011.
“This is because under the EU VAT directive a member state can only apply two reduced rates and from July 1st Ireland will apply two such rates at 9 per cent and 13.5 per cent,” the department explained.
“Furthermore, such a reduction from 13.5 per cent to 12 per cent for all items that will be remaining on the 13.5 per cent rate would be very expensive for the exchequer to implement,” it added.