Why are VAT rates increasing in Switzerland?

VAT, or value added tax, is an indirect tax levied on the consumption of goods and services. In Switzerland, as in many other countries, VAT is an essential component of public finances. The increase in VAT rates in Switzerland, effective from 1 January 2024, has raised questions about its reasons and implications. In this article, we explore the various aspects of this increase, including how the VAT rate is determined, the different rates in force in Switzerland, the historical development of these rates, and how VAT is calculated for periodic services.

How is the VAT rate determined in Switzerland?

In Switzerland, the rate of VAT to be applied is determined by the Federal Law on Value Added Tax (LTVA). Unlike some countries where there is a single VAT rate, Switzerland applies three different rates: the special rate, the reduced rate and the standard rate. The LTVA also lays down the rules for VAT on periodic services.

The choice of which VAT rate to apply therefore depends on the type of good or service sold. For example, basic necessities such as foodstuffs are subject to the reduced rate, while most other goods and services are subject to the standard rate. Accommodation services, on the other hand, are subject to the special rate.

The different VAT rates in Switzerland

As mentioned above, there are three different rates for calculating VAT:

The special rate

This rate, currently 3.8%, applies to certain specific services, including accommodation services such as hotels, inns and holiday rentals. This category also includes restaurant services provided as part of accommodation.

The reduced rate

Set at 2.6%, this rate applies to certain categories of goods and services considered essential for consumers. These include foodstuffs, books, newspapers and magazines, and certain medical services.

The standard rate

Until 31 December 2023, the standard rate in Switzerland was 7.7%. But from 1 January 2024, it will be increased to 8.1% and will apply to most goods and services not covered by the special or reduced rates. These include jewellery, watches, motor vehicles, clothing and alcohol.

Changes in VAT rates in Switzerland

Increases in VAT rates in Switzerland are often the result of economic and budgetary considerations. For example, the AHV reform voted for by the Swiss people in September 2022, which increased the retirement age for women and required additional funds for the AHV, led to a consequent increase in VAT rates to cover these growing financial needs.

However, the trend in VAT rates in Switzerland has not always been upwards. In the past, there have been downward adjustments in order to stimulate consumption or support certain economic sectors. These changes clearly reflect the political and economic priorities of the Swiss government at different times.

Since the introduction of VAT in Switzerland on 1 January 1995, the rates have undergone the following adjustments:

• 1 January 1995: the VAT Ordinance came into force, marking the introduction of VAT in Switzerland. On this date, the standard rate was 6.5% and the reduced rate 2.0%.

• 1 October 1996: introduction of the special rate for services in the accommodation sector, set at 3.0%. The other rates remained unchanged.

• 1 January 1999: VAT rates were increased in order to guarantee the financing of the AHV and IV schemes. The standard rate rose to 7.5%, the special rate to 3.5% and the reduced rate to 2.3%.

• 1 January 2001: the Value Added Tax Act came into force and VAT rates were raised to finance major rail projects (FTP). The standard rate rose to 7.6%, the special rate to 3.6% and the reduced rate to 2.4%.

• 1 January 2011: increase in VAT rates in favour of the IV, with the standard rate rising to 8.0%, the special rate to 3.8% and the reduced rate to 2.5%.

• 1 January 2018: rejection of the Federal Decree of 17.3.2017 on additional funding for AHV through higher VAT, and rejection of the Federal Law of 17.3.2017 on the 2020 pension reform. This led to a drop in the standard rate to 7.7% and the special rate to 3.7%, while the reduced rate remained at 2.5%.

• 1 January 2024: acceptance of the Federal Decree of 17.12.2021 on additional funding for the AHV through an increase in VAT. The new rates are set at 8.1% for the standard rate, 3.8% for the special rate and 2.6% for the reduced rate.

How is VAT calculated for recurring services?

For periodic services such as subscriptions or long-term contracts, VAT is calculated according to the date on which each service is provided. So if an annual subscription runs beyond 31 December 2023, VAT will be calculated using the rates in force for each billing period, with the old rates for the period before 2024 and the new rates for the period after 2024.

In short, the increase in VAT rates in Switzerland in 2024 is the result of various economic and budgetary factors, in particular the need to fund social programmes such as the AVS. This increase will have a significant impact on businesses and consumers, who will have to adapt to these changes in their financial management and consumption habits. It is therefore essential to understand the different categories of VAT rates in Switzerland, as well as the calculation rules for periodic services, to ensure compliance and sound financial management.