Higher VAT will reduce consumer spending, Ibec warns

VAT INCREASE:INDUSTRY ASSOCIATIONS have condemned the Government's decision to raise the standard value added tax (VAT) rate from 21 per cent to 21.5 per cent, saying it will slow down consumer spending and may lead to an increase in the number of people crossing the Border to shop.

With effect from December 1st, the increase will apply to all goods and services which are currently subject to VAT at 21 per cent.

There will be no change in the zero rate, which applies to food, children's clothes and footwear, oral medicines and several other products. Moreover, the 13.5 per cent rate, which applies to new houses, labour intensive services, gas, electricity and home heating fuel, will also remain unchanged.

Retail Ireland, the Ibec group that represents the Irish retail sector, condemned the Government's decision, arguing that it would likely lead to a further fall in retail sales at a time when they have fallen sharply for the first time since the late 1980s.

"The increase in VAT makes Ireland less competitive by comparison with our nearest neighbour, Britain, where the VAT rate is 17.5 per cent, and will compound the problem of people crossing the Border to shop. It is not the time to increase VAT when consumer confidence is at an all-time low," said Torlach Denihan, director of Retail Ireland.

Avine McNally, assistant director of the Small Firms' Association, also expressed competitive fears.

"With the increase in online purchasing, which knows no borders, and the current strong euro, we need an incentive for people to continue buying in Ireland, thus supporting the economy and jobs here," she said.

The increase in VAT is estimated to yield € 208 million in 2009 and € 227 million in a full year. However, Aidan Fagan, a tax partner at Deloitte, said the move may not raise the sums forecasted.

"An increase in the VAT rate in a time of negative growth simply saps business confidence and reduces consumer spending," he said. "Any gains to the exchequer may well be negated by the lower spending. In addition, businesses will have to cope with the cost of amending their accounting systems."

Mark Redmond, chief executive of the Irish Taxation Institute, said the timing of the increase was not good news for the retail sector, as it comes at what is traditionally its busiest time of the year.

Charities such as the Simon Communities of Ireland also expressed disappointment with the measure.