The timing of the VAT rate reduction for food businesses and hairdressers, from 13.5 per cent to 9 per cent, set to come in on Wednesday, is “prescient” given the increased costs arising out of the Middle East war, the Minister for Finance said on Tuesday.
The cut is “a permanent measure to reduce costs for these businesses”, said Simon Harris. “My political objective is really straightforward, give small businesses in rural and regional Ireland a break, provide breathing space, reduce the cost base on a permanent basis and this does that.”
The measure has been welcomed by those in the hospitality sector, with Adrian Cummins of the Restaurants’ Association of Ireland saying it would provide “stability” and “great confidence” to “those firms finding it difficult, thinking of throwing in the towel”.
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The cut, which will cost the exchequer an estimated €232 million this year and €681 million in a full year, will apply to all food services and catering businesses, as well as hairdressers, regardless of size or profitability.
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It does not apply to accommodation services, but does apply to food served in hotels and pubs.
Economists and Opposition TDs have been highly critical of the tax cut.
“This is an expensive and economically illiterate giveaway to a sector which is growing,” said Barra Roantree, assistant professor of economics at Trinity College Dublin.
“What’s more, it will disproportionately benefit owners of McDonald’s and Michelin-starred restaurants most. Cutting VAT will also further erode our dangerously narrow tax base and means other taxes are higher than they need to be.”
The Irish Fiscal Advisory Council said last year that the cost of the policy was equivalent to the cost of increasing the standard rate income tax bands by €3,000, hiring 11,400 nurses or 7,800 teachers.
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Meanwhile, the Social Democrats dubbed Budget 2026 the “McBudget”, in reference to the policy, which the party said would widen the profit margins, not just of struggling cafes and restaurants, but also of multinational fast food chains.
Cummins said the measure will “disproportionately benefit small and medium-sized businesses”, with 99.6 per cent of hospitality businesses classified as such. Even the best-known chain restaurants, he said, are generally run by local franchisees and it will be they who are boosted by it.
Minister for Enterprise Peter Burke, who lobbied heavily for the cut in the past two budgets, said the return of the 9 per cent VAT rate illustrates the Coalition’s commitment to the promises it made in the programme for government and “will inject viability into the sector”.
Recent economic assessment reports by PwC and Deloitte suggested the already small number of insolvencies in hospitality was down by about a quarter this year, but Harris said this was an “extraordinarily low bar” to set for Government action and the cut was about providing support before “it’s too late for intervention”.
Standing beside him at Tuesday’s event, Burke said that in the latest CSO figures, “we saw a reduction of 8.8 per cent in employment in the sector, about 16,000 jobs. That’s why a measure like this is so important to shore up the sector and supports the small businesses in the months ahead.”
