Irish Exchequer Largely Unaffected By Weakening Sterling And VAT Changes

by Jason Gorringe, Tax-News.com, London

24 March 2009

The Irish government has announced that it has received a report, which it requested in December, examining to what degree cross-border shopping has been affected by the UK and Irish Value-Added Tax (VAT) rate changes and the weakening of sterling. The report, entitled ‘The Implications of Cross Border Shopping for the Irish Exchequer’, was assembled by the Irish Revenue Commissioners and the Central Statistics Office (CSO) and released to the public on March 20.

The report notes that the main causes of price differentials between goods in Northern Ireland and the Republic of Ireland, are namely operating costs, profit margin (mark-up), taxes and the rapid depreciation of sterling against the Euro (depreciation of around 30% between January and December 2008). While changes in the standard VAT rates have widened some price differentials, their impact remains small compared to the size of the change in the exchange rate.

The report estimates the potential loss in exchequer revenues due to cross-border shopping arising from reduced VAT and excise yields in 2008 at between EUR58m and EUR90m (the higher estimate represents under 0.5% of the total VAT and excise revenue in 2008). In addition to the VAT and excise loss, there is a possible corporation tax revenue loss that is tentatively estimated to be in the range of EUR15m to EUR24m. However, it should be noted that all estimates for corporation tax revenue are provisional and should only be considered as indicative of the potential loss. In regard to 2009, if the exchange rate remains at close to current levels, the estimated VAT and excise revenue loss is put at between EUR72m and EUR112m, and a possible corporation tax revenue loss in the range of EUR20m to EUR31m.

Finally, the report refers to the significant difficulties in sourcing data regarding cross-border shopping and its exchequer implications, which required broad ranges for all estimates of cross border shopping and the resulting tax losses to be given in the report. With a view to improving the data available, Revenue and the CSO are working on questions to be included in the Quarterly National Household Survey that should facilitate a more detailed assessment of cross-border shopping in the future.

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