Almost four years ago when Finance Minister, Michael Noonan, agreed to reduce the VAT rate for tourism services, he did so on a temporary basis and attached some clear conditions to the tax concession. The 9 per cent lower rate was subject to annual renewal, and if the tourism sector failed to pass on the tax saving to customers – in the form of lower prices in hotels, restaurants and related services – the relief would be ended. The aim of the tax cut is to help restore competitiveness to the tourism industry sector, increase investment, raise employment, and attract more visitors to Ireland. The initiative has surpassed expectations.
Mr Noonan in his budget statement last October said "an extra 23,000" had been employed in the sector since mid-2011. And economist, Prof Alan Ahearne, in a recent report published by the Irish Hotels Federation (IHF), claimed that one third of net new jobs created in Ireland in the four-year period have been in the tourism sector. Tourism numbers have also risen.
But as Mr Noonan also pointed out, the lower VAT rate for tourism services was only possible because it was funded by the 0.6 per cent private sector pension levy – as part of the Government’s Jobs Initiative programme. At a time of serious fiscal imbalance, a tax concession for one group was paid for by a punitive tax imposed on some others – the owners of private pensions.
The IHF is pressing the Government to turn a temporary tax relief, renewable annually, into a permanent feature of the tax code. That, however, was never the intention. And to accede to that request now when Irish hotel prices – 10 per cent higher in 2014 – have risen sharply would be wrong. A temporary tax incentive offered by Government to facilitate the recovery of a depressed sector, should mean what it says. The concession should be withdrawn when recovery has been achieved. Meanwhile the sector should be scrutinised closely to ensure that it does not abuse the unique tax privilege that it continues to enjoy.