Reduced Vat rate for hospitality sector would 'benefit higher-income households more'

During the pandemic, the Vat rate was reduced from 13.5% to 9% to help support the industry hit hard by the crisis. It was brought back to 13.5% last month. File picture

Reducing the hospitality Vat rate would “benefit higher-income households more” and would not “automatically translate into reduced prices for lower-income households”, a new report has claimed.

The paper from the Oireachtas Independent Parliamentary Budget Office (PBO) analysed the rationale for a reduced Vat rate for the hospitality and tourism industries ahead of Tuesday's budget.

These industries have urged the Government to switch back to the 9% Vat rate given the challenges facing their businesses in recent years from covid-19 and the cost-of-living crisis.

During the pandemic, the Vat rate was reduced from 13.5% to 9% to help support the industry hit hard by the crisis. It was brought back to 13.5% last month. 

The reduced Vat measure had also been used following the economic crash and raised again in Budget 2019.

“The rationale for Vat reduction is to reduce consumer prices, increase demand, and boost sectoral employment,” the PBO report said.

Yet it is inconclusive whether this was achieved, with economic literature identifying Vat reductions boosted profit margins rather than translating into reduced consumer prices.” 

However, Restaurants Association of Ireland chief executive Adrian Cummins said he disagreed with the rationale put forward by the PBO.

He said the likes of takeaways are also bought regularly by lower-income households, so any hike to Vat would see them having to pay more.

“And nobody has ever said and categorically stated why we must be on 13.5%,” Mr Cummins said. 

“We say ‘let’s look at the rest of Europe’, and ask why we are being imposed with 13.5%."

He said other countries support their hospitality sectors with lower rates and Ireland should do the same.

The 9% Vat rate is a key ask ahead of the budget from the hospitality sector, as a whole.

The Vintners Federation of Ireland described the move from 9% to 13.5% as a “tax on the consumer”.

“The special Vat rate was a vital intervention that allowed pubs serving food some respite from the soaring cost of doing business,” its president John Clendennen said. 

Customers are already feeling the pinch with cost-of-living increases so this is a short-sighted move by Government that will lead to concerns about long-term viability.” 

The Restaurants Association of Ireland also urged the Government to move to a 9% Vat rate to “bring some certainty” to a sector facing “immense business challenges”.

It said through difficulties in recruiting and retaining staff, higher energy costs, and more expensive food prices, the capacity to deliver "business as normal" was proving very challenging for many businesses”.

“While it is accepted that it may be politically difficult to maintain a reduced Vat rate for sectors where significant consumer price increases are being experienced, the restaurant sector is in a very different situation,” it said.

Mr Cummins added that many restaurants were facing viability challenges and we could see many closures in the new year.

“But it’s important to say. The door is not shut. It’s still on the table. If there’s no bespoke package for hospitality in this budget, I would say that’s a failure.”