MINISTER FOR FINANCE Paschal Donohoe received a slew of emails in the wake of increasing the VAT rate in the hospitality industry in Budget 2019, with some business owners saying it could lead to them have to close down.
The minister was criticised for the “ignorant and disgraceful” decision and told by one person that the budgetary measure had given their business “a death sentence”.
The controversial VAT increase for hotels, restaurants and hairdressers from 9% to 13.5% took effect on 1 January, with businesses warning their customers that their prices may increase as a result.
Minister Donohoe announced the measure on 9 October, reversing the original decision to cut the VAT to 9% to stimulate the tourism industry during the recession.
He said that the reduced rate can no longer be justified because of the strong performance of the tourism sector, and said it was a “challenging” decision on when the right time would be to reverse the VAT reduction.
Speaking to TheJournal.ie at the start of the month when the measure took effect, Restaurant Association of Ireland CEO Adrian Cummins said a lot of businesses were “very fearful for their own future based on the VAT rate”.
And documents released to TheJournal.ie under Freedom of Information laws have shown the fury and the fears that restaurant owners and hairdressers had when the measure was first announced.
‘Road to nowhere’
A theme of the correspondence from the restaurateurs is that the VAT increase disproportionately affects those outside of Dublin and the cities.
One owner whose business is “on the road to nowhere” and employs around 15 people told Minister Donohoe: “We are totally dependent on the local community for our business. We have a number of farmers and single men who come into the town every day for lunch. This is a good social outing for them as some of them might not see another living being from morning to night.”
The man also worked a second job in a pub in Dublin, meaning between that and his own business he worked seven days a week.
“I travelled from work yesterday evening close to tears after listening to your thoughtless budget and the raising of VAT in January,” he said.
Why why why do all politicians look at the business that is being generated inside the M50 and think that the rest of the country is in the same league. Rural Ireland is struggling… Please please look at this situation and remember the large amount of people that are struggling in rural Ireland.
Another based in rural Ireland described the VAT increase as an “ignorant and disgraceful decision by a Dublin-based Minister for Finance with blinkers on as to what happens beyond the economic boom”.
He also described it as a “nasty, underhand stroke by Minister Donohoe” that “stinks to the high heavens of ‘Fianna Fáil-ism’”.
“In other words, screw small and medium business owners as much as possible while ensuring the protected elites get away scot-free,” the restaurant owner said.
Another wrote: “The reckless decision which the government has made today in this regard shows yet again that the country is Dublin-centred and the rest of us are considered also-rans.”
‘Reckless’
Other restaurateurs acknowledged that a VAT increase was in the offing, but that increasing it by 4.5% would have a huge, immediate effect.
One said: “The increase in the amount of VAT paid will the equivalent of one member of staff for us.”
This person said that they’ve maintained their prices in line with inflation and said they would be hugely damaged if they had to raise their prices or absorb the cost themselves.
They also suggested some measures to address the perceived disproportionate effect it would have on businesses in rural areas.
“While different VAT rates cannot be applied in different parts of the country – surely like other European capitals – a city tax could have been applied to raise the increased monies?”
Another said their business is left with three options, with each one unpalatable to varying degrees.
“We are realistic to reflect that conditions in the hospitality sector have vastly improved and there is definitely room for all of us to contribute more to the economy overall,” Minister Donohoe was told. “Don’t get us wrong, we honestly believe that the VAT rate should go up, we had braced ourselves for possibly a 2% increase.
From 1 January, we will be faced with 3 options: Pass on the full 4.5% VAT increase partially or in full to customers, take the VAT increase hit directly, cut staff hours or possibly lay off staff (an almost inconceivable idea until recently).
‘How can you sleep at night?’
Hairdressers were also extremely worried at the increase, and many warned Paschal Donohoe that the increase would fuel the “black market” in the industry where operators don’t pay any tax.
The so-called black market in the industry involves operators who work from their own home or visit their customer’s homes to provide their services but don’t declare their earnings fully and pay the correct amount of tax.
One hairdresser whose business employed 13 staff members said: “I am asking you to reconsider… with this increase even if I pass it on to my customers is doing to be damaging to my business. I feel this will fuel the black market/shadow economy and that is bad for everyone.
I do understand you need an increase and I would ask that you consider 11% for 2019 and then in 2020, if we still are seeing growth in the economy, raise it to 13.5%.
Another said: “Now you’re going to force hairdressers into doing more illegal nixers and less hours on the shop floor just to make ends meet… I’m sure plenty of salons will have to put up their prices just to stay afloat.”
A barber over a decade in the business told Donohoe he was working in an industry “riddled with the black economy”.
He said: “I have to compete with a growing number of hairdressers who work from home and calling door to door to their clients, they do not have to pay rates, insurance, probably no tax and therefore no VAT.”
Several hairdressers outlined their current business situation in detail, and pressed upon the minister the effect the increase would have on them.
One wrote: “I am currently in my 4th year of business and this is the first year I have felt financially safe enough to say it could be a long-term business for me and it’s the first year that I am able to give myself a wage every week although it may not be massive but it’s a secure weekly wage.
“In Budget 2019, you gave my business a death sentence… How can you sleep at night?
Another described how they’d been on social welfare before opening their own hairdressers:
I’ve put blood, sweat and tears into this and you as a party in government cannot let this happen. People are going to the black market to have these services and businesses will suffer greatly.”
Value for money
Donohoe was asked in the Dáil last year if his department had commissioned an assessment of the impact the VAT increase would have.
He began his reply by saying he kept it at 9% for so long to boost tourism and support increased jobs in the sector.
The minister said this review concluded that the VAT rate would not greatly impact the demand or employment in the sector.
“The Budget decision to increase the VAT rate was made following this analysis,” he said.
In 2019, the VAT increase is expected to yield €191 million from restaurants, and €27 million from hairdressers.
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