Lower VAT rate for hospitality sector may be abolished

Department of Finance advises Minister that 9% rate, introduced in 2011, has ‘done its job’

Pressure to phase out the special 9 per cent VAT rate for the hospitality industry is building within the Department of Finance, a policy change which would be fiercely resisted by hotels and restaurants.

The lower VAT rate introduced during the economic crisis has "done its job" and increasing it would raise €500 million, the Department of Finance has advised the new Minister, Paschal Donohoe.

The 9 per cent rate for special tourism-related activities, such as restaurants, hotels, cinemas and other areas, was introduced in 2011 to encourage growth and employment in the sector.

Hospitality industry groups have consistently lobbied for its retention but the Department of Finance argues a return to the 13.5 per cent rate would yield €500 million per annum.


‘Temporary basis’

A briefing note prepared for Mr Donohoe says the lower rate was “initially introduced on a temporary basis to give a boost” to the hospitality sector and was retained in the last budget because of concerns that Brexit could impact on tourism.

“While all the indications are that the measure has done its job with robust growth in visitors and employment in the tourism area, the general recovery of the economy and increasing prices in the sector raises questions about its future,” the briefing note says.

“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.”

The note also says that, given the amount of money the Universal Social Charge (USC) brings in, any “substantial reductions” in it would have to be offset by other tax rises.

It also hints at future tax incentives to encourage the use of "alternative fuels" to help Ireland meet its commitments under the Paris climate change deal.

“There will be pressure to bring forward targeted tax measures, such as the introduction or incentivisation of alternative fuels, to effect changes in behaviour to decarbonise the economy.”

Tax case

The initial funding from the €13 billion the European Commission has said Apple must put in an escrow account because of last year's tax case will not be in place until the end of the year, the document says.

“Given the scale and bespoke nature of such a fund, the precise terms are still being developed and negotiated with Apple and the commission – involving commercially sensitive deliberations. It is expected that the arrangements (including signed contracts) will be in place and the initial funding paid over to the fund before the end of the year.”

Meanwhile, the Cabinet will discuss the summer economic statement today. Mr Donohoe is expected to announce this week that he will contribute around €1 billion into a so-called "rainy day" fund, out of €3 billion that was already earmarked by former minister Michael Noonan. The remainder will be allocated by Mr Donohoe towards infrastructure.