The Government is likely to delay the VAT cut for the hospitality industry until the middle of next year, creating more room for tax cuts in Budget 2026.
It is also possible that the lower VAT rate of 9 per cent will be extended only to hospitality – ie, food and drink in bars, restaurants and hotels – and not to accommodation.
The tax strategy papers due to be published today, which inform the budget process now under way within Government, are expected to say that such a separation would be complicated, but not impossible.
[ ‘Economic vandalism’: Unions condemn plan to cut VAT for hospitality sectorOpens in new window ]
Senior political sources involved in discussions on the issue stressed that it would be possible, if complex.
RM Block
Minister for Finance Paschal Donohoe said at the launch of the Government’s summer economic statement on Tuesday that the full-year cost for the VAT cut would be almost €1 billion – which would take up to two-thirds of the available resources for tax cuts in the budget.
However, three senior sources, all with knowledge of the discussions at the top level of Government on the issue, confirmed they expect the VAT cut for hospitality would be introduced in mid-year, possibly on July 1st.
This would dramatically cut the cost of the move for next year, creating room for other tax cuts in the budget. Current modelling suggests that the full year cost of reducing VAT to 9 per cent for hospitality and hairdressers would come to €715 million. New Central Statistics Office data out next week may drag that estimate up further, however.
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Sources indicated that an introduction halfway through the year would bring the cost down to roughly half that figure, although that could move marginally up or down due to seasonal factors.
The programme for government promises measures to support small to medium-sized enterprises, in particular those in the retail and hospitality sector.
It emphasises this will “entail changes to VAT, PRSI and other measures” as part of the budget process, but does not detail specific commitments. The Department of Finance has long-harboured a deep ambivalence about the benefits of such a measure. A previous cut was reversed in 2023 and there was intensive but unsuccessful lobbying from the sector to secure another reduction in last year’s budget.
Tax strategy group papers from last year noted the inherent difficulties in applying different rates to the industry – namely, that the higher rate would apply to all accommodation operators, including small B&Bs and hotels, as well as “significant practical operational concerns” including those relating to packages ranging from bed and breakfast accommodation through to all-inclusive deals.
Officials last year warned these could combine to lead to underpayment of VAT and additional complexity for Revenue and taxpayers, as well as increased risk of avoidance and scope for manipulation.
On Wednesday, Fianna Fáil Minister of State for Justice Niall Collins stated a personal belief that a universal VAT reduction for hospitality is “not merited”, arguing on Limerick’s Live95 radio station that there was “little to no evidence” that a previous temporary reduction was passed on to consumers.
[ Does the hospitality sector really need a VAT cut?Opens in new window ]
Trade unions also criticised the move, describing the suggestion that tax cuts worth up to €1 billion could be granted to hospitality as “economic vandalism”. They also argued that the facts about the hospitality sector do not justify tax cuts, saying the sector is now growing.
It comes as the Irish Fiscal Advisory Council said the Government’s ongoing spending overruns amount to “poor planning and budgeting”.
It follows the summer economic statement showing that planned expenditure for this year is now expected to amount to €108.7 billion, €3.3 billion more than set out in Budget 2025.
Some €90.5 billion was allocated in the budget to current expenditure, or the cost of delivering public services, and €14.9 billion to capital expenditure. Both have since increased.
