Reduced Vat for hospitality of 9% still slated to end in February, tax documents show

Analysis of various tax proposals is contained in a swathe of research released by the Department of Finance from its Tax Strategy Group.

Finance Minister Paschal Donohoe speaking to media in the Department of Finance following the publication of the Tax Strategy Group papers. Picture: Leah Farrell / RollingNews.ie

The Department of Finance plans to end the reduced rate of Vat of 9% for tourism and hospitality on its expiry date next February, according to research papers released ahead of the budget.

The hospitality Vat rate had been reduced from 13.5% to 9% and was subsequently extended by a further six months to take account of the inflation crisis facing many businesses still reeling from the shock of the Covid-19 pandemic.  

Extending the 9% rate for the further period cost the exchequer an extra €250m, but "no further extension to this measure is envisaged, so the 13.5% rate will apply to these sectors from March 1, 2023", the department said in the documents discussing potential options for tax measures in the budget.            

Tax Strategy Group research

The Department of Finance releases a swathe of research from its Tax Strategy Group which deliberates each year on the costs and gains to the exchequer from potential tax changes on budget day.

The Government currently levies Vat at various levels, including a standard rate of 23%, a reduced rate of 13.5% for utility bills and all types of construction, and a 9% rate for a wide range of businesses, including restaurants and newspapers. There is also a "super-reduced rate" of 4.8%, and a zero rate for goods such as food and children's shoes.

According to the documents, the tax group deliberated on cutting the 13.5% rate to a 9% rate for residential housebuilding only. However, it warned about administrative difficulties and the possibility of "accidental or fraudulent underpayment of Vat" that any reduction could entail. 

Among other Vat options, the cost of reducing the rate applied for newspapers and periodicals from 9% to zero would cost €41m, the documents say.

The Tax Strategy Group said it was undertaking "a cost-benefit analysis" of Section 481 of the Film Relief, which provides a credit of 32% for the costs of productions. The film relief cost the exchequer €98m last year, and the department said it will weigh whether it works as an "effective stimulus".       

Corporation tax

The Department of Finance reiterated concerns about the concentration of corporation tax receipts, which last year reached a new record of €15.3bn, most of which is paid by a handful of multinationals. It also repeated an earlier estimate that the overhaul of the global corporation tax regime could cost the Irish exchequer €2bn a year, but added "it remained very difficult to accurately estimate the impact at this stage".       

The tax group revealed that the 25% tax credit for research and development (R&D) cost €658m across 1,616 projects in 2020, and said "it is expected that the cost will increase again in further years". 

It also said that the uptake of the so-called Knowledge Development Box, which provides an effective corporation tax rate of 6.25% on intellectual property (IP) held in the State has been low so far. It is weighing options in this area ahead of the budget. 

The group also identified a low uptake since 2018 of the Key Employee Engagement Programme, or Keep, which is designed to help small firms provide share options, but that continuing the scheme beyond its expiry date "seems to merit appropriate consideration", it said.