Caveat: A VAT hike hurts, but Irish tourism and hospitality can cope

The primal scream from tourism and hospitality operators over the return of their VAT rate to 13.5 per cent is understandable, given the scale of disappointment among those, especially the rural based, who hoped the 9 per cent would be retained yet again.

But the reaction since budget day has also been somewhat overwrought. When the dust settles, it will become apparent to the level-headed that the world has not ended.

Following the #keepvat9 hashtag on Twitter over recent days, I was struck by the outsized levels of despondency among some smaller operators. They seem to have forgotten that the success of their businesses is founded, not on a VAT rate, but on their owners’ abundant creativity and skill. None of that was abolished on Tuesday.

The rise in the tourism VAT rate will undoubtedly make life more difficult for some smaller restaurant and hotel operators in certain parts of Ireland. But this sense that they are all going to have to absorb the increase is overdone. With record inbound visitor numbers and an economy growing at more than 5.5 per cent this year, there is scope to pass the increase on to customers, most of whom will understand.

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Alcoholic drinks

A restaurant dish that was €20 before will become €20.82 under the new VAT rate. A hotel room that was previously €75 will rise to just over €78. A €2.50 coffee will become €2.60. The price of a glass of wine or a pint will remain unchanged, as the reduced rate never applied to alcoholic drinks anyway.

Operators would obviously prefer not to have to raise prices at all, and may be nervous about doing so. But the increases outlined above are not game changers, especially if all local competitors are equally affected, which they will be.

Some operators who know their markets well may still decide they have no scope to raise prices, and so will absorb the hit. Restaurants, where margins are tighter, are more vulnerable. But according to the latest industry research – and contrary to some of the recent OTT commentary – rural hoteliers are, broadly, performing okay.

The financial consultancy Crowe publishes the most respected annual analysis of the performance of Irish hotels. It is widely accepted as a clear-eyed and empirical snapshot of the sector's health. The latest Crowe report, which covered 2017 performance and was released just two months ago, shows that the room revenue growth rates of hotels outside Dublin have overtaken those in the capital.

According to Crowe, which gets its figures directly from the finance departments of individual hotels, profit before tax in the southwest of the country last year rose by almost 20 per cent to €12,064 per room, on average. On the western seaboard, average profits per room rose 17 per cent, according to Crowe. In the midlands and east, excluding Dublin, average profits per room rose 14 per cent.

Known unknowns

Nobody is saying that every individual operator is doing well, or that there are not particular areas that are suffering. There are. But the point is that the hotel industry as a whole, right across the country, saw its profitability rise impressively last year. How could it be otherwise, with record inbound tourism numbers of almost 10 million?

There are known unknowns on the horizon such as Brexit, which is likely to have a disproportionate effect on the Border areas. But Ireland isn’t likely to turn into some sort of a Mad Max dystopian desert overnight. Ignore the doomsdayers. The hospitality industry needs to trust that it will be able to cope.

Both the Government and the industry’s proponents fashioned rods for their own backs in their respective approaches to the VAT issue in recent years. That’s what made Tuesday’s rise harder and riskier for both sides.

The Government should have had the political mettle to restore the temporary VAT rate to 13.5 per cent about three or four years ago, when it had become undeniable that the tourism sector no longer needed any stimulus. Instead, ministers bowed to the populism of rural TDs at each successive budget, and pulled their punch.

This, understandably, led the industry to believe that the 9 per cent rate could be retained in perpetuity.

Crutch

The 9 per cent rate was only ever meant to be a crutch for the tourism industry, to be cast away when it got back on its feet after the recession. But operators became so used to it, it turned into more of a prosthetic leg.

The crux of the problem isn’t that the Government has restored the higher rate, but that the industry became addicted to the lower one.

Meanwhile, the tourism industry’s effective lobbyists sought to link every last bit of growth over the last six years or so to the lower VAT rate. The truth is that macroeconomic factors, such as a stronger US dollar, more air routes, and the global economic rebound, did most of the heavy lifting.

By crediting the 9 per cent for everything that was good, now that it is gone, it must seems like everything is lost for some operators.

But it isn’t. Irish tourism has all the capabilities – the people, the product, the skills and the imagination – to push the sector on to greater heights by itself.

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FOOTNOTES

- Accounts recently filed for the two biggest Dublin football rivals, Shamrock Rovers and Bohemians, show that nobody is getting rich in the Irish domestic game.

Rovers may be sitting a few places ahead of Bohs in the league table, but their bitter rivals stoutly outperformed them in the financial stakes last year, the two sets of accounts show.

Shamrock Rovers FC Limited recorded a loss in the year to the end of last November of €288,000. After several difficult years, Bohs, meanwhile, returned a surplus of €54,000. Bohemians reduced its balance sheet deficit to €309,000, meanwhile, while Rovers extended its black hole to €1.18 million.

Rovers did spend about €400,000 on its academy, which perhaps shows it has an eye on the future. The accountants at both clubs, meanwhile, appear to have an eye on everything else.

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- US domestic goddess Martha Stewart was among the speakers this week at the Bank of America-backed Global Forum for women business leaders, which was held in the Shelbourne hotel in Dublin.

She found time, however, to amble her way over to Exchequer Street, where she popped in to the Sprout & Co cafe, part of a growing chain founded by Jack Kirwan. He is a cousin of the Pratt family behind Avoca Handweavers including director, Simon Pratt, who is also an investor in the Sprout business.

Stewart was apparently so impressed with Sprout’s high-end salad concept, she walked around taking pictures of it with her mobile phone. Just wait until she gets back to the US and tells all her friends that it’s true: Ireland really is full of greenery.