Brexit woes reignite row over tourism VAT rate

Anecdotal evidence from restaurant operators suggests that, despite the booming Irish economy, business is softening for venues in Dublin city centre due to factors such as a downfall in British visitor numbers.

If this is replicated in hospitality businesses across the State, expect the Government to come under renewed pressure to quickly revisit last October’s budget move to axe the sector’s 9 per cent VAT rate.

The special rate, increased to 13.5 per cent in last year’s budget, was introduced in 2011 during the last recession, dressed up as an emergency measure to facilitate price cuts for restaurants and a host of other sectors. This was never the full truth, however.

Hotel and restaurant prices were already on the floor by 2011, dragged down by competition from repossessed “zombie hotels”. Most businesses did not use the VAT move to cut prices further. Instead, many kept prices the same and used the VAT reduction to repair their margins and stay in business. The VAT cut was a hugely effective State bailout of an industry in peril.

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Low-rate addiction

The Government should have reverted to the normal rate once the industry had sufficiently recovered by 2013 or 2014. By the time it was axed in 2018, the industry had become addicted to the lower rate, hence the anger in the sector at its removal.

Tourism numbers are still at record highs, but the Brexit-related plunge in sterling has made Ireland expensive for UK visitors, and this is feeding through to visitor numbers. With Boris Johnson threatening a no-deal Brexit as UK prime minister, sterling may soon fall further, compounding the issue.

With Brexit on the horizon, the Government’s timing in reinstating the higher VAT rate was dire, even if its excuse for acting – that tourism was booming – was probably sound.

The Department of Finance made a rod for its own back by delaying the VAT move for so long. By all accounts, the industry is gearing up to lash Ministers over it in the run-up to October.