Vat hike will cripple hospitality sector

There appears to be a lack of joined-up thinking by the Government — or at least an element of contradiction — when it comes to taxing the hospitality sector.

A modest 9% Vat rate has been in place since 2011 for hotels, restaurants, and other hospitality providers such as cinemas and theatres. It also applies to enterprises such as hairdressing and newspapers.

According to the Department of Finance, this reduced rate costs the exchequer €360m a year but those working in the sector say it has allowed the creation of an extra 9,000 jobs. Despite this, Finance Minister Michael Noonan has indicated he is thinking of reverting to the higher rate of 13.5% for the hospitality industry in next Tuesday’s budget.

If he does, it will be a double whammy to a homegrown sector that has been fighting for survival since the downturn in 2008. The lower rate was introduced to help the hospitality industry recover, but since its introduction the Government increased the standard rate of Vat from 21% to 23% which affects alcohol served in restaurants. It also increased the excise rate on alcohol, particularly on wine, by over 40%.

That means that if Mr Noonan puts the Vat rate up again it will leave the hospitality sector much worse off than it was before.

Restaurants’ Association of Ireland chief executive Adrian Cummins has described the decision to reduce the rate for tourism services as “incredibly successful” as it helped galvanise a resurgence in the industry.

“In the past 18 months, over 10,000 new contracts were issued and this growth will continue with an additional 5,000 jobs to be created over the next year if Vat at 9% remains in effect,” he said.

He said there would be “shockwaves throughout the sector” if the measure was reversed. If so, it could be argued that owners of hotels and restaurants would have only themselves to blame if they had failed to pass on the Vat reduction to their customers.

According to the Consumers’ Association of Ireland, while some restaurants and hotels did pass on the reduction, many did not and used the saving to enhance their margins. In defence, hospitality providers argue that they were hanging on by a thread and the Vat reduction made the difference between going bust and staying afloat.

There remain some odd applications of the various Vat rates. For instance, all takeaway food like fish and chips or a Chinese is subject to Vat at 13.5%, while freshly baked bread is zero rated.

Similarly, the printing of books is zero rated while the printing of newspapers is subject to a Vat rate of 9%. In the latter context, putting a higher rate on newspapers would also place this great traditional industry in great peril as it struggles to survive.

Mr Noonan insists that the lower Vat rate was always intended as a temporary measure to kickstart an ailing sector. “If I don’t bring it back I have to find something like €360m elsewhere,” he said.

That may be so, but if he does reintroduce the higher rate it is likely to be at a cost of thousands of jobs.