IT’S HARD TO think of a sector-specific tax policy which has had as much digital ink devoted to it as the Irish hospitality industry’s VAT rate.
As many readers will know, hospitality used to have a ‘special’ low 9% VAT rate, below its ‘normal’ 13.5% rate.
Initially introduced as a temporary support for businesses during the recession, it ended up sticking around for the better part of a decade following some intervention from a global pandemic and a cost of living crisis.
In Budget 2023 – ie, October 2022 – it was finally raised back to 13.5%.
Officials in the Department of Finance had long pushed for the move, saying the lower VAT rate costs the state about €500 million a year in foregone tax revenue.
But two years later, here we are still talking about it, following a concentrated lobbying effort from the restaurant sector.
And one thing which is striking now about the debate – restaurants are in broad consensus that if the VAT rate was brought back down, it would go straight to their bottom line.
Essentially, paying 4.5% less tax would act as a support to businesses at a time when they argue their costs are rising significantly. For some examples, see here, here and here.
But while this might appear logical, it’s actually at odds with why the VAT rate was lowered in the first place. The initial aim was to lower prices paid by consumers, to make hospitality firms more competitive.
So how did one morph into the other? Let’s take a look.
Ireland has a few different VAT rates. Most goods and services fall into one of three categoriess – the ‘normal’ rate of 23%, a reduced rate of 13.5%, or an even lower rate of 9%.
During the financial crisis, consumer spending dropped sharply as austerity and rising unemployment meant people had less money to spend. For hospitality, this meant less people eating out and many businesses closing down.
While restaurateurs might hope the government was worried about their companies going down the drain, its primary concern was actually the drop in the state’s tax take. Ireland was running a deficit at the time and the state was looking for ways to stimulate economic activity and boost the amount of taxes it was taking in.
It came up with the idea of lowering the hospitality VAT rate from the ‘reduced’ 13.5% rate to the even lower 9% rate.
The change meant Irish restaurants paid the fourth-lowest VAT rates in the EU, above just Cyprus, Poland and the Netherlands.
However, let’s not forget hotels – the ‘hospitality’ change applied to accommodation providers as well as restaurants. It also applied to a host of other businesses, such as amusement parks.
The aim of the change was cleanly stated in a review published last year by the Oireachtas Parliamentary Budget Office: “The purpose was to reduce the cost of goods and services in the hospitality sector, boost tourism, and stimulate employment.”
Initially, it was intended to operate for just 2.5 years, between July 2011 and the end of 2013. The government estimated the move would cost the state €350 million a year in foregone tax revenue, but then get people spending again to boost economic activity.
The measure seemed to help.
Figures collected by the CSO (Central Statistics Office) for ‘Food and Accommodation’ are generally used as a benchmark for the hospitality sector.
Employment in the sector dropped steadily during the financial crisis, bottoming out in 2011. From there, it looks like the lower VAT rate started to help, with the number of people employed in the industry rising sharply.
In fact, a government review published in 2018 found that employment in the “9% rate sectors” had been growing faster “than in all other service sectors since 2011”.
Importantly, the move seemed to have done the trick as well when it came to prices. In 2010, overseas tourists were basically split evenly as to whether they thought Ireland was good or bad value for money.
By 2016, tourists overwhelmingly had a more positive view.
And it was around then that government officials started getting restless.
That same review published in 2018, which was basically a broad look back at how the 9% VAT rate had worked, essentially suggested that the lower rate was no longer needed.
It found that for hotels and restaurants, profits had grown slightly faster than wages and turnover – with profits up by 17% between 2011 and 2016, while turnover rose by 14% over a similar period.
But of more concern for policymakers, was that the measure was found to be ‘regressive’ – benefitting better-off households more than poorer ones. This was because spending on the likes of meals in restaurants or stays in hotels form a larger share of the budget of better-off households.
It also found the lower VAT rate was costing more than expected, with an estimated €490 million in tax foregone in 2017.
From then, the lower VAT rate’s days were numbered. Shortly afterwards, it was confirmed that the rate would go back to 13.5% as of January 2019.
Then Covid happened and the VAT rate was lowered again to 9% in November 2020.
This was where the language for the measure changed somewhat, when then-Finance Minister Paschal Donohoe said the purpose of the restoration was to “provide significant additional support to businesses”.
Like before, the measure was meant to be temporary, until the end of 2021. The spike in inflation in 2022 saw the can kicked down the road for another year, but Department of Finance officials were again eager for a cut.
This is where some view restaurants as making a mistake. Remember how we mentioned that the ‘hospitality’ VAT rate applied to both hotels and restaurants?
In the summer of 2022 there were a string of negative stories about hotels, alleging that the sector was ‘price gouging’. The negative publicity gave the government the political cover it had been looking for to put the 9% VAT rate back up to 13.5%.
Since then the idea has emerged of separating restaurants and hotels for the purposes of VAT.
The most recent estimate is that the 9% rate would cost €764 million in a year if applied to both sectors, and €545 million if it was restricted to food and catering.
So let’s take a look at the the rationale for the state to stick at the 9% rate long term.
The 2023 Oireachtas report referenced earlier noted the theory that VAT reductions “are passed onto consumers automatically in the form of price reductions to help stimulate demand”.
However, it said in practise, this does not appear to happen.
It said instead, VAT reductions tend to be used to “protect profit margins of businesses”.
“This is supported by international literature which examined who benefited from reductions in taxes such as VAT,” it said.
It also repeated the point made in earlier studies that VAT cuts for restaurants are ‘regressive’, benefitting wealthier households more than poorer ones.
Perhaps taking the hint, restaurants now tend to steer clear of suggestions that a lower VAT rate will translate into lower price.
The argument normally put forward is that the move is desperately needed to deal with a host of rising costs, such as higher energy prices and an increased minimum wage.
Restaurants also point to industry data which says there have been 600 closures in the last year, something lobby groups directly link to the higher VAT rate.
However, this doesn’t count new restaurants opening, which would likely end up employing people let go at closing businesses.
The data for that is less clear. The 2023 Oireachtas report referenced earlier found that between 2019 and 2023, there was a reduction in workers in the accommodation and food sector of 2.4%.
However, more recent figures from the CSO indicate that, as of August 2024, there are slightly more people employed in the sector now compared to 2019.
The stats do also show that employment growth in the sector is stalling, down 0.4% year-on-year.
Even if there has been some contraction, it doesn’t quite point to a large-scale collapse in the industry – although that could change if a larger number of smaller restaurants on the edge go over it in the coming months.
But whatever happens with Ireland’s restaurant/hospitality VAT rate, one thing is sure. Its initial mission statement – to provide lower prices for consumers – has been largely set to one side.
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