Increasing VAT rates may negatively affect inflation, employment, the less well-off and impact on cross-border trade, according to the Tax Strategy Group.
VAT accounted for €15.4 billion or approximately 22.5% of the overall tax yield to the Exchequer in 2021 - a significant increase of €3 billion in comparison to the figures for 2020.
The group says this tax yield is projected to increase again this year as the economy regains productivity.
The group does look at options open to Minister for Finance, Paschal Donohoe, which include increasing or decreasing VAT rates, as well as restructuring or streamlining the VAT rates.
The cost of increasing the 9% VAT rate by 1% would result in an increase of €126 million to the Exchequer, and decreasing the rate would result in a decrease of the same amount.
The cost of increasing the 13.5% VAT rate by 1% would result in an increase of €308 million to the Exchequer, and decreasing the rate would result in a decrease of the same amount.
The cost of increasing the 23% VAT rate by 1% would result in an increase of €542 million to the Exchequer, and decreasing the rate would result in a decrease of the same amount.
Another option open to the Minister is to restructure the VAT system on a revenue-neutral basis which would result in composite VAT rates:
Rates being merged Revenue neutral rate
0%, 9%, 13.5% and 23% 16.3%
9%, 13.5% and 23% 18.2%
If the Minister opted to streamline VAT rates, it would yield the following:
New streamlined rates Yield
0%, 5%, 15% and 25% €1,042m
5%, 15% and 25% €2,894m
Separately, the TSG says the Department of Enterprise, Trade and Employment has suggested that given the current inflationary pressures prevalent in the economy that the VAT registration thresholds should be raised for small businesses.
Small businesses with a low turnover are not obliged to register for VAT, thereby avoiding the administrative burden that VAT registration entails. The current thresholds are €37,500 for services and €75,000 for goods, in a 12 month period.
The group says that while costing such a measure is difficult, the Department has estimated that the last upward adjustment in VAT thresholds in 2008, which saw the thresholds for services and goods move from €35,000 to €37,500 and €70,000 to €75,000 respectively, removed 2,700 companies from the VAT net and cost €20.5 million in a full year.
On this basis it suggests that a move to approximately €40,000 and €80,000 for services and goods respectively would cost a similar amount.