Hotel room excessive price hikes may cost tourism its 9% VAT rate

The ongoing furore about the stratospheric rise in the cost of hotel rooms in Ireland has raised fears within the wider tourism sector that the issue could cost the industry any further extension of its special 9 per cent VAT rate, which is due to run out next Spring. It sounds like 2018 all over again.

Four years ago, in the run-up to the budget, it became obvious that the Government was positioning itself to raise the sector’s VAT rate back up to 13.5 per cent. Many food service businesses and other tourism operators privately blamed the hotel sector for the subsequent decision. Properties in Dublin were especially blamed for attracting a raft of negative publicity with steep price rises and frothy rates.

The lower VAT rate was subsequently restored to the sector when it was desperate for assistance at the height of the pandemic. But now the negative headlines are back – some rural Senators say they are sleeping in their cars because they can’t find affordable rooms in Dublin, while GAA county boards are contemplating 10-hour return drives to play matches at Croke Park because of hotel costs and a lack of rooms.

Leo Varadkar, the Tánaiste, has already warned the industry that recent pricing decisions in the hotel sector could affect the wider tourism industry’s VAT rate. Certainly it is giving the Government a handy excuse to do what it wants to do anyway once the latest extension runs out next February – raise the sector’s VAT rate back to 13.5 per cent, which could bring in more than €400 million for the exchequer.

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If that happens, and it seems likely at this point, it will spark an outbreak of bitter recrimination within the tourism sector and hotels will get the blame again. The prospect could even cause a rift in the sector’s lobbying. Other types of operators, such as food service businesses, are thought to be mulling whether they might have greater success on a campaign to split the VAT rate – that would mean arguing to let the hotels go back up to 13.5 per cent but leave the rest of the tourism sector alone.

That would be difficult to do under European Union VAT rules, which limit the scope for multiple reduced thresholds below 15 per cent. But there are a handful of European countries that have split their rates in this way.

Public criticism of hotels over their room rates certainly has been intense in recent weeks. Widespread reports of weekend room rates this summer of €300-€400 per night even for modest hotels in Dublin have eroded political and public support for the sector following the pandemic. There have also been sharp rises in holiday hotspots, such as Killarney.

`Price gouging’

Fianna Fáil Senator Timmy Dooley accused hotels last month of “price gouging”, which many within the sector denied. His party colleague, Senator Eugene Murphy, revealed he slept in his car on a handful of occasions while travelling back to Roscommon, after being unable to secure accommodation in Dublin. Sinn Féin TD Pearse Doherty has argued that it would be cheaper to fly to Rome for a couple of nights to see Bruce Springsteen next year, than to stay in Dublin for a couple of nights around his gig here.

Meanwhile, Kerry’s GAA county board gambled €13,000 by prepaying for accommodation for the senior footballers on the day of the championship quarter finals, before it was even sure it would qualify – the team did qualify after beating Limerick in the Munster final. Kerry’s hurlers flew home recently after a Joe McDonagh cup game in Croke Park because they had nowhere to sleep in the capital.

The latest Central Statistics Office inflation figures this week suggest hotel prices in May were up almost 22 per cent over the previous year, although hotels were in a full lockdown in the comparison month of May 2021, which may help to explain some of the jump. Restaurant prices, meanwhile, were up only 4 per cent over the same period, the CSO numbers suggest.

Many hoteliers argue that prices are rising and the market is distorted because thousands of hotel rooms have been taken off the market to house refugees from Ukraine and also for the Government’s direct provision system for asylum seekers from other nations. About 4,000 rooms are thought to have been used by Ukrainian refugees, while 5,000 were being contracted recently for direct provision.

The bulk of those rooms were contracted outside of Dublin but even a few thousand in the capital would have a distorting effect, as the entire inventory of rooms in the city is only about 23,000.

Hoteliers’ arguments that rooms for refugees are distorting market rates do have an obvious flaw, however. The hoteliers make it sound as if their capacity has been slashed. But while using rooms for refugees reduces the inventory in the market for tourists and other visitors, hoteliers don’t need to jack up the rates to make up for lost capacity. The refugees’ rooms are paid for in full by taxpayers. Hoteliers are jacking up the rates on the rest of their stock because they can, not because they have to.

It also must be acknowledged that there is a competitive dilemma for those hotels that do not jack up their room rates. If a hotel chooses not to raise its rates, but its direct competitors does, then the first hotel puts itself at a competitive disadvantage.

It is a bit like trying to talk and be heard in a crowded room. If everybody in the room talks at a normal volume, then nobody has to shout in order to be heard in their conversation. But once a few people in the room start to shout louder above the din, then everybody else must raise their voices in order to be heard or they are at a disadvantage. Similarly, once a few hoteliers hike rates, the rest must follow suit or be left behind.

If the Government raises the VAT rate from 9 per cent next spring, the tourism sector still will have had one full, burgeoning post-pandemic season to make the best of the reduced rate. It won’t be the end of the world if it goes up. But if there is to be any chance of a further extension, hoteliers somehow must be reined in.