Business

Restaurants and cafes should be allowed to retain the 9% special VAT rate

It’s time to decouple accommodation and food services for VAT purposes in the tourism sector

Howth in north Dublin is a popular tourist location. It is time now to consider allowing restaurants to continue to benefit from the 9 per cent special VAT rate while hotels return to a 13.5 per cent rate from the start of September.

Eoghan O'Mara Walsh
Mon Jul 24 2023 - 05:00

Media stories of high Dublin hotel prices for a Taylor Swift concert in 12 months’ time might grab public attention but they add little to the debate about the underlying performance of Ireland’s largest indigenous industry and biggest regional employer – tourism.

Industry estimates suggest that a full post-Covid 19 recovery is still up to three years away. Revenue may be back to near pre-pandemic levels but much of it is fuelled by inflation and the profitability of business is under pressure due to relentless cost rises.

To the great frustration of the industry there is still no national data on international visitor numbers coming into the country. Remarkably, the Central Statistics Office has not reported on any meaningful tourism statistics since the pandemic began.

How many tourists are coming to Ireland? How long are they staying? How much are they spending? What markets are they coming from? It seems barely credible that these answers are not readily available, with a concern among tourism leaders that policy is being made in a data vacuum.

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Budget 2024 in October is of particular importance to Ireland’s tourism industry. There are many concerns for the sector including alleviating supply bottlenecks, improving labour supply and maintaining investment.

However, whenever the budget is mentioned, the discussion zooms in on the merits or otherwise of the 9 per cent hospitality VAT rate. This is ironic as the VAT rate is actually scheduled to go up to 13.5 per cent on September 1st, a full six weeks before the budget.

Tourism chiefs are strongly urging Government to reconsider this decision. They have always been of the view that 9 per cent is the right VAT rate for the industry and any increase will be inflationary, erode competitiveness, and damage regional Ireland most.

The food services sector is particularly vulnerable to a VAT increase. Fáilte Ireland’s latest barometer of tourism businesses shows that restaurants, cafes and pubs serving food are the most pessimistic about the season ahead with significant worries about viability due to cost rises and squeezed margins.

The public seem to be ahead of the politicians on this one. In a Red C survey last month only 25 per cent of respondents were in favour of an increase in the 9 per cent VAT rate for restaurants, pubs and hotels. With very little public support for more consumer taxes, the risk is that the Government ends up making a decision on VAT based on what is happening in the capital on a certain number of nights of the year. That is no way to set national taxation policy.

With one-in-five tourism bedrooms now nationally contracted to Government there is an increasing understanding that downstream tourism businesses miss out on visitor expenditure and so are particularly vulnerable to a VAT increase. A tax hike is the last thing that they need with debt warehousing to be repaid and food inflation in particular showing little sign of easing.

The idea of increasing the rate across the board for the 20,000 businesses that operate in the sector is nonsensical. Perhaps now is the time to look at decoupling accommodation and food services, as has been done throughout Europe, and leaving the latter on the lower rate.

Politicians and their officials need to be creative and innovative on this subject to underpin rather than undermine such an important indigenous sector.

Tourism minister Catherine Martin recently requested Fáilte Ireland to carry out research into why hotel pricing has increased. The report is due in the autumn but the findings are surely obvious. Economics 101 states that the best way to moderate prices is to increase supply and this applies to tourism as much as any other industry. There is a significant hotel shortage in Dublin and regional Ireland.

This is exacerbated by Government’s current overreliance on tourism accommodation to house refugees and asylum seekers. Tens of thousands of bedrooms have been contracted by Government and thus are unavailable to the tourism economy. This has an obvious impact on capacity and price.

Supply is being suppressed at the time that it needs to grow both in terms of stimulating new developments and developing a more comprehensive approach to how current and future refugees are to be housed.

It is very welcome that the Environmental Protection Agency reported a reduction in Irish emissions last year. A tentative step in the right direction and it is positive that the tourism sector played its part. Businesses are up for the challenge and many are doing very innovative things. But in terms of big-ticket items like green energy, electric vehicle infrastructure or retrofitting heritage buildings, the State has to make a step-change in its ambitions.

As an island nation it is self-evident that aviation and tourism are symbiotic. One of the exciting areas within the sustainability debate is that of Sustainable Aviation Fuel (SAF). It is the most realistic way in the near future of reducing emissions in the air.

The two main Irish carriers, Aer Lingus and Ryanair, as well as DAA and Shannon Airport are taking a lead on this but isn’t there a real opportunity for the Irish State to become an international hub for R&D and the production of SAF?

Why not build on our proud aviation history and take a bold brave step – with appropriate Government incentives and capital allowances so that Ireland can be at the centre of EU progress in this key plank of decarbonisation?

The recent Summer Economic Statement showed that the Irish economy, despite global headwinds, is in good health. However, the overreliance on a handful of multinationals for corporation tax receipts shows that Government must support and nurture indigenous industries such as tourism. Huge swathes of regional Ireland depend on a vibrant tourism industry. Government must tread carefully.

Eoghan O’Mara Walsh is chief executive of the Irish Tourism Industry Confederation

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