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9% VAT rate for tourism and hospitality unjustified according to Department of Finance

The Department of Finance believes reinstating the 9% VAT rate for tourism and hospitality businesses remains “unjustified”.

In a report on VAT, the department’s Tax Strategy Group said the opposition to the measure is based on the cost being very significant.

“For instance the cost of a further temporary VAT reduction to 9% for a full year is estimated to be €764 million,” the TSG says in its analysis.

“Even where the measure is restricted to food and catering services, the estimated full year cost is €545 million.”

“Therefore this would constitute an enormous fiscal transfer of taxpayer’s money to the sector which the evidence available at present does not support.”

The department also feels the measure would be unjustified because as inflation eases and households’ disposable income recovers, demand for such services as tourism and hospitality should rise, the report explains.

However, responding to this claim, the Restaurants Association of Ireland said it is bogus.

“This argument against VAT9 ignores the real issue that is crippling our industry: the unsustainable cost of doing business,” it said.

“Energy and food costs have skyrocketed, the minimum wage rose by 12.4% in January and statutory paid sick days have increased from three to five.”

“A slight uptick in customers in the coming months will not come close to offsetting the cost increases that businesses have faced over the past two years and, as such, will not save any of the members of the Restaurants Association of Ireland currently on the cusp of closure.”

The TSG also says the department feels there is no equity case for a lower rate of VAT in tourism and hospitality and the previous reduction, “whilst it served its purpose for a period of time could also be considered a regressive measure.”

It also points out that Ireland is not significantly out of line with other EU countries in relation to VAT in the sector, while employment in the whole economy rose to a record high between the end of 2020 when the 9% rate was reintroduced, and the final quarter of 2023.

The report also points to other forms of support provided to the wider economy, including the tourism and hospitality sector, including the changes to the tax warehousing scheme and the Increased Cost of Business grant.

The TSG says it is possible to change the VAT rate for just hospitality or accommodation, without reference to the other.

“However, if accommodation stayed at 13.5% while food/catering reverted to 9% this change would have to apply to all accommodation including B&Bs and small hotels because of the principle of fiscal neutrality which requires universal application to a sector,” the paper says.

“Revenue have advised that there would be significant practical operational concerns in having different VAT rates applying to hotel accommodation and meals given how the sector operates, with various packages ranging from bed and breakfast accommodation through to all-inclusive board and lodging packages.”

It adds that this could lead to the underpayment of VAT because the charge for accommodation and meals would have to be apportioned, giving rise to administrative and operational complexity.

The paper also estimates the cost of extending the reduced VAT rate for the supply of gas and electricity for another year at €319m.

On the question of reducing VAT on heat pumps to stimulate their take up, the TSG says there is scope to apply a lower rate, but a zero rate cannot be applied and the reduction could only apply to very specific systems.

While in relation to calls from cyclists for a reduced rate of VAT on bikes and e-bikes, the TSG says the estimated cost of lowering it to 13.5% would be €6m per annum.

“It is important to be aware that there is no guarantee that the reduced rate would be passed onto consumers,” it warns.

“This is because there is no obligation for a retailer to do so.”

It also says that there is no provision to apply a reduced VAT rate to the supply of scooters or electric scooters.

Regarding housing construction, the report says Ireland could now apply a reduced rate of VAT as part of a social policy, although it cannot zero rate it.

But it would have to define “social policy” it says which would require great care to prevent inappropriate exploitation by the construction sector.

It would also lead to there being three different VAT rates for social housing, private housing and non-residential construction, which Revenue has indicated would be very difficult to administer.

The total estimated cost of a reduction of the 13.5% rate to 9% for residential construction is €720m.

On the cost of living, the TSG paper also says as Ireland already applies a zero rate to most foodstuffs, there is little scope to provide further targeted interventions to mitigate such pressures.

Article Source – 9% VAT rate for tourism and hospitality unjustified according to Department of Finance – RTE

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