Time to replace tourism’s VAT rate with targeted investment

Government should direct funding to rural areas struggling for tourists

On Monday, the DAA announced that 2.9 million passengers used Dublin Airport last month, its busiest June in 77 years

On Monday, the DAA announced that 2.9 million passengers used Dublin Airport last month, its busiest June in 77 years

 

On Monday, the DAA announced that 2.9 million passengers used Dublin Airport last month, its busiest June in 77 years. North American routes rose by 18 per cent, helped by a strong dollar.

A record 27.9 million passengers passed through Dublin Airport in 2016, up 11 per cent on the previous year.

Tourism in Ireland is booming. Last year a record 8.8 million overseas visitors came here, up 10 per cent on 2015. The value of tourism to the economy was €8 billion, an all-time high.

According to the then chairman of the Irish Tourist Industry Confederation (ITIC) Paul Gallagher, it was a “remarkable year” for the sector, with 20,000 new jobs created in the 12-month period.

“Tourism is now Ireland’s largest indigenous employer,” Gallagher declared in December.

On Thursday, Adare Manor will host the first of three recruitment days to fill a large number of staff positions as it gears up for its grand reopening in November following a multimillion euro refurbishment by JP McManus and his family.

It should be a magnificent hotel when it reopens. Bookings are being taken on its website for stays from late November onwards, with room rates ranging from €325 for a “classic king room” to €1,995 for a “signature suite”.

Rude good health

These are strong rates for a winter month at a hotel close to the western seaboard, and indicate the rude good health of the sector at present. Hotel rooms in Dublin are, generally speaking, in short supply and expensive.

Like most parts of the economy, the hospitality sector was hammered in the wake of the global financial crash in late 2008 as tourism declined and Irish people slashed their spending on eating out and weekends away.

In 2011, Michael Noonan introduced a special 9 per cent Vat rate to give the sector a leg-up and it’s worked a treat, as the figures above illustrate. But it was only supposed to be a temporary measure.

It is against that backdrop that officials in the Department of Finance, in preparing briefing documents for their new minister Paschal Donohoe, suggested that it has done its job.

“The general recovery of the economy and increasing prices in the sector raises questions about its future,” the briefing document says. “The rate was retained in Budget 2017 due to concerns regarding the effect of Brexit on tourism. It is estimated that the abolition of the 9 per cent rate and a return to 13.5 per cent for the goods and services in this sector would result in increased revenues of around €500 million.”

In response to this news, the hospitality industry was out in force to press for its retention.

Special rate

The Restaurant Association of Ireland’s chief executive Adrian Cummins said the special rate was needed now to assist Ireland’s competitiveness amid the threat of Brexit.

“Against this background of intense uncertainty for the Irish economy in general, and the accommodation and food services sector in particular, it does not make sense to increase the VAT rate, given the extra vulnerability that has arisen from the Brexit vote,” he said.

It’s a view supported by Maurice Pratt, the current chairman of ITIC, who argues that now is not the time to tinker with the industry given that the number of visitors from Britain, our largest market, was down by 7 per cent in the first five months of this year.

“This is not the time to make that decision,” he told me, adding that, at the very least, an in-depth review of the impact of changing the Vat rate should be undertaken.

Pat McCann, founder and head of Dalata, the State’s biggest hotel chain, said the arguments for abolishing the special rate were “fundamentally flawed”, noting that “volumes overall will fall” if prices rise from the Vat rate being increased. “That’s the reality of the situation,” he said.

Last year, Dalata’s average room rate in Dublin rose by 16 per cent to just more than €107 while it achieved a 9 per cent increase for its properties in regional Ireland. Its occupancy levels rose across the State.

This doesn’t support his argument around the price sensitivity of the market.

Others would argue that, while the likes of Dublin, Galway, west Cork, Killarney and other tourist hot-spots are thriving, many parts of the State are just about hanging on.

Difficulties

This is no doubt true. My colleague Mark Paul went to the Border area recently to meet businesses affected by Brexit, and did a fine tourism-related piece that highlighted the difficulties being experienced by many operators in various parts of the State.

But if tourism providers in Border areas and the midlands are still struggling after six years of a special Vat rate, and a remarkable recovery in the domestic economy, an extension of the 9 per cent rate isn’t going to make much of a difference to them. Instead, a more targeted approach is required, that could involve some of the €500 million in additional tax revenue being directly used to promote these regions to international visitors, or to support new product development.

Just as the motor industry’s car scrappage scheme was wound up, so the 9 per cent Vat rate for the hospitality sector should be ended, even if only on a phased basis to smooth out the impact.

Not that I think it will happen. Given the current arithmetic in the Dáil, Donohoe will probably just kick it to touch, just like Noonan before him.

@CiaranHancock1

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