HOSPITALITY BUSINESSES WILL close as a result of the increased VAT rate which kicked in yesterday, according to representatives from the sector. 

The 9% VAT rate for hotels, restaurants and hairdressing was increased to 13.5% in last year’s budget and customers have been noticing the increase in the last couple of days. 

The increase came into force yesterday but restaurants and cafés opening after the new year have been advising customers that their prices may have increased as a result.

The VAT tax was temporarily reduced to 9% in 2012 to stimulate the tourism industry but Finance Minister Paschal Donohoe says the reduced rate can no longer be justified because of the strong performance of the tourism sector. 

Donohoe said in his budget statement that it was a “challenging” decision to decide when to reverse the VAT reduction but that he determined now was the time. 

The government estimates it will raise €466 million this year. 

The increase was opposed by the Restaurant Association of Ireland with CEO Adrian Cummins telling TheJournal.ie today that it basically means a hike in a business’ VAT bills

“I think a lot of businesses are very fearful for their own future based on the VAT rate, it’s basically 50% of their VAT bill every month,” Cummins said.

A lot of them are taking stock financially, the vast majority are telling me that they will pass it on to their customers. It is a consumer tax, they aren’t able to absorb it themselves and we would feel it should be changed in light of Brexit happening in less than 80 days.

“We have appealed to the minister to change his mind but he’s not for turning, we’ll see what happens after Brexit but I can assure you there will be closures and there will be job losses.”

Cummins argues that the government could alternatively have looked towards what he described as “VAT anomalies”, where some items could be charged at a different rate than they currently are.

VAT is charged at different rates between 0% -23% depending on the good or service and Cummins feels all could be looked at as an alternative.

“The Department of Finance didn’t think this through at all, there are a lot of decisions made based in Dublin and not listening to regional and rural Ireland, I think there’s a big disconnect between what’s happening in the capital and down outside the M50,” he added.

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While Cummins points to what he says are different realities inside and outside the capital, Dublin-based business owner Colin Harmon similarly says the VAT increase will hurt café owners there too. 

Harmon owns Dublin coffee shops 3FE and Five Points and says that they will be increasing their coffee prices as a result of the VAT increase.

“We’re going to put up coffee but on some items we’re just going to suck it up. We don’t do a huge amount of tea and with the food we’re going to see if we can spread out the cost, but it’s difficult,” he explains.

The thing to consider most is the staff, because the staff will get it in the ear from a lot of people. And a lot of people won’t understand that essentially our prices are staying the same, that it’s the government that is putting their price up.

Harmon says that people often argue that the margin made on coffee sales is large. He agrees it can be but says other costs on business owners have grown in recent years, meaning many in the business are operating on a tight budget.

“People talk about the margin in coffee being massive, and it is, in some places it’s 70-80%. But that’s a gross margin and once you start taking out rent and rates and employing staff and all that, most cafés at the end of the year if they’re going well will put it out at about 5%.”

I know a lot of café owners in the city and a lot of them are treading water as they’re slowly going out of business. It’s a very tough industry to get it right when you’re competing with a lot of companies, the high-street brands who do a different style of coffee. They’ll pay a fraction of the prices for their coffees that the independents will. 

Harmon says making good coffee may lead to a healthy turnover but that doing so is an expensive exercise, cutting in on any potential profit.

“If you want to do a quality coffee, the price is there and it’s inescapable. So if a café was really thriving they might do a €1 million-a-year, and there aren’t many café’s in the city that do that.”

“But if you knock the VAT off that you’re down to like €850,000, then 5% of that and it’s not even €50,000. For a seven day a week business it’s not the cash cow people think it is.”