The Tax Strategy Group (TSG) is warning that in the absence of any action by the UK and Ireland, duty free sales would emerge between the two countries due to the UK's status as a 'third country ’ after the Brexit transition period.
The wider availability of low-priced tobacco and alcohol products in the State would have a negative impact on the public health policy and is also likely to promote further "fiscally motivated travel", it cautions, with the potential to significantly affect the Government’s Exchequer figures.
"As matters stand, a duty-free regime for UK / Ireland travel will create significant tax administration difficulties and compliance costs, will reduce indirect tax revenues and will have a negative and distorting impact on the retail sector in Ireland given the frequency of air / sea passenger movements involved," the officials claim in a TSG report on Brexit preparations.
It says legislation passed last year does provide an option to restrict duty free sales between the UK and Ireland, ensuring excise duty would apply to alcohol and tobacco sold in tax free shops here to people travelling to the UK post-Brexit.
"The policy intention was to commence the measure in the event that the UK decided to restrict the scope of duty-free sales on excise products (alcohol and tobacco products) on a reciprocal basis," it says.
However, it wasn’t possible to devise a similar measure in relation to VAT on goods sold in duty free shops.
"In the event that the UK is in a position to restrict duty-free sales in relation to excise goods from the end of the transition period, Ireland will seek to apply similar measures on a reciprocal basis, in the manner provided for in the 2019 Brexit Omnibus Act. These measures will be outlined in the new Brexit Bill," the report states.
Similar restrictions would also apply in relation to the sale of excise goods during passengers’ journeys to the UK.
"The Bill will also provide for an amendment to allow for tax free shops to be established at a port, as well as at an airport, where appropriate conditions are in place for the security of excise products and where approval has been granted by Revenue," the TSG says.
The group also warns that a substantial increase in VAT refunds on goods bought here by UK residents returning home following a visit could heighten the risk of abuse of the scheme.
The TSG says it is the view of the Minister for Finance that any scope for fraudulent abuse of the Retail Export Scheme (RES) should be minimised.
The RES enables travellers who are resident outside the EU to benefit from VAT relief on goods that are purchased in the EU and subsequently exported when the traveller leaves the EU.
Following the Brexit transition period the UK will become a "third country", making residents (excluding those living in Northern Ireland) eligible for VAT refunds on purchases of qualifying goods under the scheme.
"Due to the number of passenger movements between the UK and Ireland, the volume of refund applications is likely to significantly increase which simultaneously heightens the risk of abuse of the RES," the TSG report says.
"VAT fraud is a serious matter and it is the Minister for Finance's view that any scope for fraudulent abuse of the scheme should be minimised."
The report says the UK has yet to state its position on the scheme, but if it applies a full RES post transition, Ireland will reciprocate and a non-restricted VAT RES will therefore operate between Ireland and the UK.
"In the event that the UK either restricts the VAT RES or does not apply same to Irish passenger traffic, Ireland will apply similar measures to those provided for in the 2019 Brexit Omnibus Act to minimise the potential for abuse of the scheme and to reduce the possibility of diversion in retail consumption from Ireland to the UK, post transition," the strategy group says.
The report says legislation would be amended to make it that the value of goods would need to exceed €175 in order to qualify for a refund under the scheme.
Proof of importation of the goods into the UK, as well as proof of payment of UK VAT and duties would also be required.