Will VAT rate cut for hospitality be enough?

One of the shake-outs from last year’s general election and the subsequent Government formation talks is that cutting the VAT rate for the hospitality sector to 9 per cent from 13.5 per cent now looks almost certain to happen.

Ahead of last year’s budget the idea was knocked back, with Department of Finance officials particularly opposed to the idea, calling it unjustified.

“The cost is very significant. For instance the cost of a further temporary VAT reduction to 9% for a full year is estimated to be €764 million,” the department said at the time.

So what changed?

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Aside from the election and a new Coalition, Ireland’s budgetary position looks much more precarious as the impacts of Donald Trump’s tariffs ripple across the globe, with Ireland and its bounteous corporation tax revenue particularly vulnerable.

As a result, as Cliff Taylor notes, the Government has considerably less room to manoeuvre this year in terms of tax cuts than last year, and the mooted cut in VAT for hospitality is likely to eat up most of the available resources. The move has the potential to become a big political issue.

Firstly, there is likely to be much less by way of an income tax package for households. As Taylor notes: “If income tax bands and credits are not adjusted for inflation each year, then taxpayers end up seeing a bit more of their income taken in tax – for example due to a higher proportion of their income being payable at the higher 40 per cent rate.”

Just doing nothing, the tax burden creeps higher.

Secondly, other SMEs may wonder why they are being left out. And finally customers are unlikely to see much by way of a benefit, other than holding down the rate of inflation they face while eating and drinking out, at least for a while.

And what of the benefit for the hospitality sector? The sector remains under pressure with regular reports of businesses closing down, with high costs a frequently cited factor.

However, the sector faces a wide range of domestic price pressures, including sharply rising food prices and stubbornly high energy and insurance costs.

The more challenging issue for the sector and the Government is that Ireland is now the second most expensive country in the European Union with only Danes expected to pay more for a range of goods and services.

When it comes to alcohol and tobacco, prices here are the most expensive, while food and non-alcoholic drink prices in Ireland are third highest in the EU, though this is a slight improvement on recent years.

This is likely to be a factor in the decline in inbound tourism – a key pillar for the hospitality sector - this year, with the Central Statistics Office reporting a 4 per cent fall in tourism numbers in April and a 10 per cent decline in spending.

While a VAT rate cut may provide short-term relief for the hospitality sector, it is unlikely to deal with the structural challenges it faces.

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