Tourism’s VAT cut will be an efficient State bailout if virus rates can be squashed
Reduction in VAT from 13.5 per cent to 9 per cent is to help businesses, not consumers
Minister for Tourism Catherine Martin: deserves credit. Photograph: Leon Farrell / Photocall Ireland
Anecdotally, there appears to be widespread confusion among the public as to the reasoning behind the Budget 2021 cut in tourism’s VAT rate to 9 per cent, as well as widespread reluctance from the Government and leaders of the industry to explain it to people properly. Given the real motivation for the cut, perhaps that reluctance is understandable from a public relations point of view.
So let us be blunt about it: this was not, as many people appear to believe, a VAT cut that was intended to be passed on to consumers in the form of lower prices to stimulate more demand.
It was conceived and designed with the intention that it be pocketed by businesses (those that are still able to trade) to stop them from going bust. It is a State bailout of the entire industry. Many in the sector will either deny this, or be slow to admit it. But it is the bald truth, and there is nothing wrong with acknowledging the truth.
The public confusion was evident in a letter from an Irish Times reader that was published in the newspaper on Wednesday. The reader, who was sceptical of the rationale for the VAT cut, wrote: “There has been a very good reason why I have not booked a hotel break and very rarely eaten out. It’s called Covid-19. It never had anything to do with the VAT rate of 13.5 per cent.”
She continued: “The newly reduced rate of 9 per cent announced in the budget now means even less money in the rapidly depleting government coffers but will not, I suspect, change the motivation of the sizeable number of people who feel similarly disinclined to spend leisure time out and about among people while the pandemic continues to spread.”
But, for the moment at least, this cut is not meant to benefit us, the consumers, by lowering prices to get us spending. It is meant to benefit them, the businesses, by boosting their income while keeping prices the same.
If social distancing takes away half of a tourism business’s capacity, then it must make the capacity that it retains twice as profitable to keep afloat. The reduction in tourism’s VAT rate from 13.5 per cent to 9 per cent adds 4.5 percentage points directly onto the margin of most transactions. That will, in many cases, make every individual customer almost twice as profitable as before.
If infection rates can be beaten back and restrictions eased to the point where hospitality and tourism businesses can trade to some degree, this measure’s laser-like efficiency will soon become apparent.
When the general public sees a cut in VAT from 13.5 per cent to 9 per cent, many people see it through the prism of a 4.5 per cent price cut. Reducing the price of something by less than one-twentieth in the middle of a pandemic is hardly a game-changer that will tempt people to go out and spend more.
So try to look at it this way instead. Let’s say you spend €100 on a hospitality product or service, perhaps a meal or an overnight stay. Under the old 13.5 per cent rate, the business’s revenue from that sale was actually €88.11.
At an average net profit margin of 5 per cent (pre-pandemic, when profits weren’t quaint fairytales), the hotel or restaurant might have pocketed €4.40 from that transaction after costs.
But under the new 9 per cent VAT rate, the hotel or restaurant’s turnover from the same €100 transaction increases to €91.74, a boost of €3.63. The consumer won’t have noticed a thing – the price was exactly the same as before. But for the hospitality operator, the benefit is exponential. That extra €3.63 is cost-free revenue, flowing straight to the bottom line. For many businesses, that may well be the difference between going bust and staying afloat.
It is to the credit of Minister for Tourism Catherine Martin that this measure was pushed through, because it involved convincing the Minister for Finance Paschal Donohoe to perform a perfect U-turn on the same tourism VAT increase he implemented exactly two years ago. Nobody likes doing U-turns.
I believed it was correct at the time to raise VAT on the tourism industry and had argued so for a few years. The sector was booming a few years back and the original 9 per cent VAT cut, which had only ever been intended as a temporary measure to stave off insolvencies in 2011, had long since done its job.
But the tourism and hospitality sector, which supports valuable export jobs in every nook and cranny of the State, is now in an existential crisis. The time is right to cut its VAT rate once again. It would be hard to conceive of a more targeted and effective financial measure to help such businesses, and it may end up being the best €336 million (the predicted annual cost of the VAT cut) that the State has ever spent.
If we end up at Level 5, the rate cut will be effectively moot for all but a handful of businesses
But there is a sting in the tail. The VAT cut is utterly useless unless businesses can actually trade and generate revenue from customers. Under Level 3 restrictions and above, the ability of tourism and hospitality businesses to do this is severely curtailed. If we end up at Level 5, the rate cut will be effectively moot for all but a handful of businesses, such as takeaways.
To get the full economic benefit of this VAT cut and to save jobs, it is now absolutely imperative that the virus numbers be suppressed enough to get back down to Level 2, where tourism and hospitality businesses can trade relatively freely once again and repair some of the damage by utilising the VAT cut. At that stage, some businesses may even choose to pass it on to consumers as competition intensifies.
By turning on its fiscal firehose in Budget 2021 on Tuesday and soaking the economy in cash, it could be argued that the Government has done its bit to stave off destruction of the sector. The onus now returns to the rest of us. We all know the personal hygiene and physical distancing measures that work.
Turning the tide and beating back the virus will save many people’s health and lives, and it will also save many jobs, livelihoods and futures.