Officials warned against introducing different Vat rates for hospitality sector

Briefing documents given to Finance Minister Jack Chambers in advance of the budget outlined that while it is possible to have a separate Vat rates for food and accommodation, officials raised 'significant practical operational concerns'. Picture: Sam Boal/Collins

Department of Finance officials warned against introducing different Vat rates for the hospitality sector in the most recent budget, citing fears that it could increase the risk of tax avoidance.

Briefing documents given to Finance Minister Jack Chambers in advance of the budget outlined that while it is possible to have a separate Vat rates for food and accommodation, officials raised “significant practical operational concerns” with having multiple rates.

The documents released to the Irish Examiner under Freedom of Information, set out a number of reasons as to why the Vat rate for hospitality should remain at 13.5%.

The officials wrote that Revenue expressed the concerns, citing that it would be difficult to operate multiple Vat rates for hotels that provide both accommodation and meals, particularly given that options can range to include breakfast to being all-inclusive of food and lodging.

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

They added that Revenue’s view was that it would “undoubtedly provide opportunities for tax planning” that would be “difficult to police”.

This would give rise to administrative and operational complexity as well as increased risk of avoidance and scope for manipulation of the Vat system.

Officials also argued that the cost of cutting the Vat rate would be very high for the government to shoulder.

“A significant concern with this proposal is that the cost from an exchequer perspective would still be very significant. Food makes up a far greater proportion of the overall tourism and hospitality Vat revenue than accommodation,” the briefing note reads.

Estimates from the department showed that it would cost €764m a year to cut the Vat rate to 9% for the entire hospitality sector, falling to €545m if it only applied to food and catering services.

The briefing material adds that “government wants to maintain a healthy and profitable environment” for the hospitality sector going forward, but that there were no plans to cut the Vat rate.

It highlighted that hospitality operators were supported in other ways, including by retaining a 9% Vat rate on gas and electricity — which was extended until April 2025 in October’s budget.

Ultimately, Mr Chambers did not move to cut Vat for hospitality in Budget 2025, keeping it at 13.5%.

However, in a letter to Mr Chambers ahead of the budget, Enterprise Minister Peter Burke urged the Finance Minister to cut the rate to 9% for the hospitality sector “in some form”.

Its pre-budget submission also included rationale for the cut, saying that it would be most beneficial for smaller operators.

It included reports from the Department of Social Protection, which set out that larger hospitality operators reported stronger profits compared to smaller businesses.

The document itself was sent to Mr Chambers early in the budgetary cycle, arriving at the Department of Finance just two weeks after he was appointed as minister.

The Enterprise Minister also made a call for cuts to the rate of excise for the sale of beer in pubs across the country, which would have equated to 5c off a pint of stout.

At present, the tax charge on a pint of stout is 60c, which would have fallen to 55c if Mr Burke’s proposals had been agreed.