Government strategy group rejects calls for reduced Vat rate for hospitality

Reducing the Vat rate to 9% for the hospitality industry "would constitute an enormous fiscal transfer of taxpayer’s money to the sector which the evidence available at present does not support”, the Tax Strategy Group stated.

Revenue advised that there would be 'significant operational concerns' in having different Vat rates for the food and accommodation sectors. 

The reintroduction of the reduced 9% Vat rate for the hospitality and tourism sector would constitute an “enormous transfer of taxpayers’ money” to businesses operating in these areas, the Government’s Tax Strategy Group (TSG) has said, calling the proposed taxation measure “regressive”.

The (TSG) is chaired by the Department of Finance with membership comprising of senior officials and political advisers from a number of civil service departments and offices.

The reduced rate reverted back to 13.5% on September 1 last year despite extensive lobbying by industry representatives. The representative organisations have been campaigning ever since to have the reduced rate reinstated, even calling on the Government to apply the rate to just the food and catering sector and not the accommodation sector.

However, the TSG made it very clear that the measure was unlikely to be reintroduced for a number of reasons.

It cited the cost, which is estimated to be €764m over the course of a year. Even where the measure is restricted to food and catering services, the estimated full-year cost is €545m.

“This would constitute an enormous fiscal transfer of taxpayer’s money to the sector which the evidence available at present does not support,” the TSG stated.

It went on to say that households are now on a “stronger financial footing” and this will “support demand for contact-intensive services, including the tourism and hospitality sectors”.

“In this respect, there is no equity case for a lower rate of Vat,” it said, adding that it could be considered a “regressive” taxation measure.

The group’s report also looked at whether it is possible to split the food and catering sector from accommodation, but Revenue advised that there would be “significant operational concerns” in having different Vat rates given how the sectors operate.

“This could lead to the underpayment of Vat because the charge for accommodation and meals would have to be apportioned,” the TSG said.

In its analysis of the income tax burden, the TSG found that Ireland has “one of the most progressive income tax systems in the developed world”, with the top 10% of earners paying over 63% of the income tax.

The top 10% earn more than €102,000 a year. The top 1% — which earn more than €290,000 a year — pay 24.4% of the total income tax taken in.

“The question, from an economic and fiscal perspective, as to whether this level of progressivity is appropriate or whether it places an excessive burden on other income earners,” the TSG said.

“The risk is that high marginal tax rates may have adverse consequences inter alia for work incentives and competitiveness, including the ability to attract inward investment linked to the availability of high-skilled workers.” 

The TSG also noted that since many of these high-pay jobs are concentrated in the many multinationals based in Ireland, a “shock to one or more of the small number of high-income sectors could also represent a significant vulnerability for the public finances”.

This will also likely impact corporation tax receipts, which are also a point of concern for the TSG.

In addition to the Vat and income tax analysis, the TSG conducted analysis of corporation tax receipts taken in 2023. It shows that the proportion of corporation tax paid by Irish multinationals grew to 5% last year, up from 4.1%.

The vast majority of net corporation tax receipts, 83.8%, were from foreign-owned multinationals, but this is down year-on-year from 86.5%. In total, the multinational sector accounted for 89% of net corporation tax receipts in 2023 — down from 91% in 2022.

The 10 largest corporation tax players contributed €12.3bn, or 52%, of total receipts in 2023, down from 57%.

The TSG reiterated the Department of Finance’s concerns about the over-reliance on corporation tax, saying the best way to mitigate this risk is to keep public expenditure growth at sustainable levels, “which will be achieved by following the appropriate budgetary strategy”.