There is a consumer strike going on in the UK .
It was recently reported that many retailers in the airports are charging a single price regardless of whether the traveler is flying to an EU or non-EU destination. Since the traveler flying to a non-EU destination can have their purchases zero rated for VAT purposes the price, logically, should be lower in many cases. In some cases the retailer is simply pocketing the difference. In others they appear to be adjusting the price for all travelers.
Yesterday we saw an Aer Rianta “denial” which is actually a confirmation they are doing the same thing that the UK public are up in arms about. The UK anger is righteous but in part is possibly missing the point at who the victim(s) are here, and the consumer response of not showing the boarding passes will ultimately hurt the consumers, and hugely help the tax man.
Tommy McGibney is also annoyed at this. His blog assumes that Aer Rianta are pocketing all the VAT on the RoW sales as some UK retailers seem to be doing. To be fair with the wording of Aer Rianta’s non-denial he may be right (and is well worth a read). I’m choosing to take the denial at face value and work from there.
In the UK the retailers in question are WH Smith & Boots many of whom make low level supplies many of which are zero rated in any event e.g. a newspaper or a sandwich.
In Ireland the main retailer is Aer Rianta selling perfume, jewelry, expensive cosmetics all of which would be standard rated.
The question an Irish journalist should ask Aer Rianta to answer is
Do you pay the same VAT to Revenue you would do if you didn’t average prices and accounted for VAT properly?
If they answer yes and don’t obfuscate about sales volumes etc I would be shocked for the following reasons.
Let’s say that Aer Rianta sell widgets (standard rated) in the airport departure area.
They buy it for €10 + VAT of €2.30 so €12.30.
It’s supposed to sell for €20 + VAT of €4.60 so €24.60 for EU travelers and is zero rated for RoW travelers so it should sell to them for €20.
Let’s assume that 2 EU and 1 ROW travelers is an average ratio for widget purchases in Dublin airport.. (I will engage in minor rounding to keep the numbers manageable)
What they are actually saying is that they are charging one price (2 x €24.60 + 1 x €20 = €69.20) and averaging it by dividing by three meaning that they’re selling it to everyone for €23. They’re saying that every one (besides the RoW travelers) wins accounting for €4.30 of VAT on the two EU sales on VAT exclusive proceeds of €18.70. They’re reverse engineering the VAT from the average price at 23%.
So at face value their denial is true. They’re charging one price and the price for VAT suffering EU travelers is lower than it would be if they charged two prices. They are passing the savings on, although how accurately they are doing that may be questioned.
But. If they charged the VAT on the normal €20 on the two EU sales they would have to account for output tax of €4.60 x 2 = €9.20 from which they could deduct their input tax of €6.90 (€2.30 x 3 as the zero rating means the input tax is recoverable on the widget sold to a RoW traveler) meaning that they would pay Revenue €2.30 in VAT in relation to the above 3 widgets sold.
Doing what they are doing they are accounting for output tax of €4.30 x 2 = €8.60 from which you deduct the €6.90 meaning they have to pay Revenue €1.70.
So they’re saving €0.60 VAT on the above 3 widgets sold.
I made the margins big on widgets to illustrate the point but given the amount of sales Aer Rianta make small VAT adjustments can rapidly add up. I’m assuming that there is normal input tax on all sales, in many cases there may not be, but as the tax advantage is in the output tax this point is not relevant.
The savings are being shared with the customers, but at a cost to Revenue by pushing down the consideration on the VATable EU sales. They are claiming that it simplifies things for their customers but I can’t see a risk of any confusion given they manage it for cigarettes & alcohol. If their tills can handle the duty their tills can handle the VAT.
The customer sees one price and thinks nothing of it. Revenue see one price and think nothing of it. But today’s denial is an admission that they are using their VAT exempt sales to deflate the VAT on their EU sales and that is the difference which Aer Rianta appear to be pocketing, not the total VAT on the non EU sales.
So, if travelers refuse to show boarding passes Aer Rianta will register fewer RoW sales (only RoW travelers can actually hurt the retailers by refusing to show boarding passes, if EU travelers do it will have no impact). If all of the RoW travelers refuse to show their boarding passes eventually Aer Rianta will have to charge everyone €24.60 and account for all of the VAT & Revenue would then collect VAT on the sales to the RoW travelers which should have been zero rated.
I can’t see any defense to it. Customers won’t be confused. The tills can handle it. It’s not as though if the widget in Dublin Airport departure lounge suddenly got €0.30 more expensive that you could nip out to the Omni Park in Santry to buy a cheaper one. There is also no reason to suspect that it would be cheaper in the Omni Park since they should be applying the correct VAT.
It may make the EU travelers think that Aer Rianta are cheaper than the Omni Park and thus buy more, but at the expense of both Revenue and the RoW travelers. So in that sense the denial is a complete non denial. If it is helping sales then it is enriching Aer Rianta. If the sales are stagnant then the Revenue and RoW travelers are causing them to be enriched.
Imagine if a small shop subsidized its VATable sales with its VAT zero rated sales in this way? If it charged more for bread to subsidize chocolate? It would lose bread sales and this strategy would not work.
But the market in Dublin Airport are trapped. If you’re travelling to the States and really want to buy shampoo because you forgot to pack it, and you’re paying the same price as a customer travelling to the UK, you’ll still buy the shampoo. If you want to buy perfume because you promised yourself you would, and it is still cheaper than the Omni Park because of the VAT angle, you’ll still buy it. By refusing to show your boarding pass the perfume will get to be the same price as in the Omni Park eventually (adjusted for other variables of course).
If one retailer decides to account for VAT properly they will gain RoW travelers and lose EU travelers as customers. But there is very little competition in the airport. This strategy means that there is a VAT subsidy for every retailer who uses the same strategy over accounting for the VAT properly.
In any event, an Irish Semi State should not be engaged in price manipulation at a cost to both some consumers and to the Revenue. It breaches the code of conduct for State owned enterprises.
Can Revenue do anything? With yesterday’s denial I would think so. Revenue could challenge them on the basis that they have now admitted they are manipulating the prices of the VATable sales to EU customers. If the VAT subsidy is taken away and is replaced with a VAT cost (of being forced to account for VAT on the unmanipulated price to EU consumers while charging the manipulated price) then that will remove a key benefit of the strategy. They may still engage in the strategy but the prices should rise and the State (otherwise than as a shareholder) would be square.
Which still leaves the customer manipulation issue, which also does not sit well with a State owned company.