Low rates of VAT should be avoided, tax commission tells Government

The Government should avoid special low rates of VAT like that currently in place for the hospitality sector, the Commission on Tax and Welfare has advised.

It has also said that more environmental taxes should be levied in order to make up for disappearing revenue streams as the economy decarbonises, and argues that more money should be committed from windfall corporation tax receipts to a rainy day fund or to paying down debt.

It is understood that the commission’s report, which is unpublished, recommends “placing an emphasis on limiting use of zero and reduced rates of value added tax” in an effort to broaden the base of consumption-oriented taxes.

Hospitality and hotels

Low VAT rates for the hospitality and hotels sector have been an important part of successive governments’ approach to alleviating economic stresses on the sector. A lower rate for hospitality was among the measures introduced by the Fine Gael-Labour coalition during the austerity period, and it proved politically contentious every time a government considered shelving it.

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In 2020, the current coalition introduced a lower 9 per cent rate following intensive lobbying from industry. It was due to expire at the end of this August, having already been extended in last year’s budget, but was extended again in May to early next year.

Zero VAT-rating applies to exports and staples like tea, coffee, milk, bread, books, children’s clothes and shoes, as well as oral medicine for humans and animals.

The report also finds that “long-term over-dependence” on corporation tax receipts poses “significant sustainability risks” and should be avoided. The report lends its support to proposals to give excess income in the area over to the rainy day fund or to pay back debt rather than funding tax cuts or permanent increases in expenditure.

It also finds that overall level of revenues raised from tax and PRSI as a share of national income should “increase materially” to meet challenges and threats to fiscal sustainability in the medium term. It argues that the Government should focus on broadening the base across all different categories of taxation.

Budget decisions

The commission’s report is set to be published in the coming weeks, a spokesman for Minister for Finance Paschal Donohoe said on Wednesday. While it had not been expected before the budget on September 27th, sources indicated that there was a possibility it could be sooner.

“The report was submitted to Minister Donohoe in July. It is intended to bring the report to Cabinet and subsequently publish it in the coming weeks. The contents of the commission’s report will be considered by the Minister and colleagues in government in the context of future budget decisions,” the spokesman said.

The Irish Times reported on Wednesday that the commission also recommends a shift in approach to wealth taxes, with the overall yield from taxing property, land, capital acquisitions and capital gains to grow “materially” as a proportion of overall tax revenues, if the advice is implemented.

In addition, the commission is understood to recommend more extensive property taxes, the introduction of a separate site value tax and the imposition of congestion charges on city centre motorists as ways of funding increased spending on public services in the future.