Hotels squabble shines light on room for VAT hike

On Monday an unseemly spat broke out in the hotel sector about, of all things, the strength of the recovery in the industry.

It followed the publication of Hotels. com's latest survey of room rates in Ireland. It found that prices had risen by an average of 10 per cent in the first half of this year.

Killarney, the Kerry town much loved by Americans, was the most expensive destination, up 4 per cent at €111 while Dublin was up 15 per cent at €107.

Limerick was the most affordable destination at €74 per night while the average rate across the board was €101 per night.

This survey is part of a wider review of hotel prices around the world by Hotels. com and is based on bookings made on its website.

The survey results had barely been circulated before the Irish Hotels Federation, which represents more than 1,000 hotels and guesthouses, had "rejected" the claims in a statement.

It said price increases nationally are actually running at just under 3.5 per cent based on statistics from the Central Statistics Office.

"Less than one out of every 10 room nights booked in Ireland is sold through this booking site," said IHF president Stephen McNally, who is also deputy chief executive of Dalata, the biggest hotel operator here and the group behind the three-star Maldron brand.

“The vast majority are sold through other sources including directly with the hotel, over the phone or through the hotel’s own website. Hotels.com does not typically capture other categories of booking such as the key tour, conference and event market segments.”

The IHF went on to recommend that people “shop around and not rely on just one source when comparing accommodation prices”, adding that customers should make sure to check “hotels’ own websites where prices are often better and promotional rates may be available”.

Ouch.

The undertone was that this was nothing more than a cheap publicity stunt by Hotels.com, a company that can earn a commission of up to 25 per cent if it sells a hotel bedroom here, something that rankles with many accommodation owners.

There is another reason why the IHF came out so strongly against the findings.

We’re firmly on the run-in to the next budget (October 14th) and the IHF is keen to ensure the reduced VAT rate of 9 per cent that has applied to a number of categories of business since July 2011, including hotel lettings and the supply of food and drink, remains in place.

Lobbying efforts

A report flagging that hotel room rates are rising by 10 per cent a year isn’t exactly helpful to its lobbying efforts.

The reduced rate was introduced to help the broad hospitality sector get back on its feet after a couple of bruising years post the economic crash.

It seems to have played its part. In August, the CSO said the number of overseas trips to Ireland rose by 9.9 per cent to 4.2 million between January and July.

About 23,000 new jobs have been created in accommodation and food services since over the past three years.

Frenzy of buying

And there has been a frenzy of buying recently of Irish hotels by wealthy individuals and overseas property players, who presumably see an opportunity to make some money here.

It could be argued that it is now time to look at restoring the rate to its previous level of 13.5 per cent. Let’s not forget that the tax forgone by the State for this break amounts to a chunky €350 million a year.

The IHF would like the reduced VAT rate to become a permanent fixture. It argues that VAT on accommodation and food is either lower or nonexistent in many other European cities, giving them a competitive edge with price-conscious tourists.

It's also argues that while the recovery is well established in Dublin and has spread to the likes of Killarney, Cork, Galway and Westport, there are plenty of rural areas that have seen little or no benefit to date.

One hotel owner told me the reduced VAT rate was “working” in terms of aiding the sector’s recovery, rather than having worked. There’s still a long road to travel and it’s a “fragile . . . early-stage recovery”, he added.

VAT is effectively a tax on revenue. So increasing the rate means hotels either pass on the cost or absorb it themselves.

Increasing the rate would put businesses that are struggling to make ends meet in a bind.

Pass on the rate hike and they risk losing customers while absorbing the increase could tip them over the edge altogether.

Indefinite extension

Last year, the Minister for Finance

Michael Noonan

extended the reduced VAT rate indefinitely. The likelihood is that the Minister will probably leave the rate alone for this budget, given that it appears to be contributing to our economic recovery.

This might be the right call for now but that’s not to say that it should be left in place permanently.

If the economic recovery proves to be robust rather than fragile, there’s little reason why hotels, cinemas, hairdressers and nail salons should continue to benefit from this tax perk, when other service providers in the economy have to charge their customers a higher rate. Especially if the cost to the exchequer is €350 million a year.