On Budget Day (Prinsjesdag), 18 September 2018, the Dutch government introduced the 2019 Tax Plan to the House of Representatives. One of the major changes this year is the increase of the rate of Reduced VAT from 6% to 9%. The Plan states that this will apply to items such as foodstuffs, medicines, medical devices, hotels, cinemas, museums, and hairdressers. A comprehensive list may be found here. So, what does this mean to you?
Businesses operating in the affected industries will be expected to re-price their items accordingly. This will inevitably have an effect on their profit margin, which is something to consider as budgets are set for the new year. Thus, the new rate will affect administrative records, prices of goods and services, and invoicing.
2018 Invoices vs. Payments
In the interest of lessening the red tape burden on businesses, the government made it clear that this applies to payments made on or after Jan. 1, 2019. There will be a full passing of this policy, with no transitional arrangements as “businesses already have substantial administration for tax-related purposes.”
Payments made in 2018 for services rendered in the future (such as concert tickets, season tickets, or paid contract work) would not need to be revisited, as the 2018 Reduced VAT rate of 6% will have been applied already. The same concept applies for returns.
However, if a service quote was given in 2018 for a 2019 fulfillment but payment has not been made, then the new Reduced VAT rate of 9% will apply to that payment. The service quote must thus be adjusted accordingly prior to the completion of the transaction. Government Support for Entrepreneurs suggests including this note in a separate written agreement with the client or stating it in your general terms and conditions.
If you are already an entrepreneur for VAT purposes and your services are tax-exempt, then this change naturally does not apply to you. However, the remaining VAT-entrepreneurs would need to adjust their invoicing and pricing according to the new plan.
If you are a VAT-entrepreneur who is tax-exempt in this case but are acting as a client, you might notice an increase in prices or quotes if your service provider is aware of your status. This is likely due to them being aware that you will receive this money again in your tax return, and is part of their conservation of their profit margin. Essentially, you are still paying the same price.
There is no doubt that the increase in VAT (standard or reduced) would affect the pricing of goods, which in turn would affect inflation rates. This is because higher prices affect the purchasing power of the currency unit within the tax-legislative region of concern (in this case, what one euro can do inside the Kingdom of the Netherlands.)
According to this logic, it is likely that the government found wiggle room to increase the Reduced VAT for the new plan. Why? Because the country has experienced relatively low inflation rates in the past 5 years (when compared to the 5 years prior.) In 2012, the rate peaked in the 10-year analysis period to 2.82%, whilst steadily decreasing in the years after resulting in a 0.11% low in 2016. Since 2016, the rate has been steadily increasing again, but remaining at non-concerning levels.
The European Central Bank (ECB) does not consider itself one for inflation-targeting, but states a general goal of price stability. That goal is defined by an inflation rate of 2% or under, which the Netherlands has been maintaining. This suggests the motivation for this policy, albeit a subtle change that only affects the Reduced VAT rate – not the Standard VAT rate. This is speculated to maintain the inflation rate within reasonable brackets.