Restoring 9% hospitality VAT rate 'remains unjustified'

The Department of Finance also said that a separate VAT rate for hospitality and accommodation would have .significant practical operational concerns'. File picture

The Department of Finance has said that cutting the VAT rate on hospitality services from 13.5% to 9% “remains unjustified”, despite sustained calls from the industry.

In a series of Tax Strategy Group papers published in advance of October’s Budget, it said the cost of this reduction in one year would be €764m. “Even where the measure is restricted to food and catering services, the estimated full year cost is €545m,” it said.

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

It said that the domestic economy is performing strongly, allowing demand to be supported for these sectors such as tourism and hospitality.

The papers also point to other supports given to the sector, such as changes to tax debt warehousing, an increased cost of business grant, and the extension of reduced VAT on gas and electricity through to this October.

It also said that a separate VAT rate for hospitality and accommodation would have “significant practical operational concerns”.

Extending the VAT cut on gas and electricity, which lasts through to the end of October, meanwhile would cost €319m for the year. Reducing VAT on residential construction services from 13.5% to 9% would cost around €720m.

Climate action measures

The tax strategy papers also make clear that Ireland “must deliver” on agreed climate action measures with taxation playing a role to achieve that.

Highlighting measures that could be changed, it said that the lower rate of almost 10c a litre applied to diesel fuel compared to petrol is costing the Exchequer around €400m a year.

It said this could be phased out over a number of years, with the shortest time frame of three years likely to result in an additional €147m in tax collected each year.

If the phasing out of this “diesel gap” was fully passed onto consumers, it would mean it would cost an extra €8.56 to fill a 60-litre tank full of fuel, it said.

The increase in carbon tax of €7.50 per tonne of CO2 emitted in 2025 will bring the overall amount charged per tonne to €63.50, the papers said. The estimated return to the Exchequer from this increase is €143m in 2025.

It also points out that a number of schemes to mitigate the impact of the carbon tax are available, such as the double income tax relief for farmers and the residential retrofit programme.

“However, over the long-term national and international commitments to phase out fossil fuel usage will involve unwinding of such subsidies,” it said.

What's your view on this issue?

You can tell us here

Looking at the taxation of vehicles, the papers said that if Ireland’s climate action targets are to be met by 2030 then vehicle taxation for average emission vehicles will need to increase. This is to provide “strong enough incentives to motorists in the market for a new car to make ‘greener choices’”.

If the Government wanted to raise revenue from vehicles, a VRT increase to cars with above average emissions would raise around €26m.

It also examines in depth the idea of a car parking levy, the introduction of a €200 per annum flat rate paid by an employee where a car parking space is provided by an employer in an urban area.

The papers say such a levy, proposed as far back in legislation as 2008 for environmental reasons, could be viewed as “grossly unfair” to many workers. The Department of Finance recommended against such a measure.