Paul O'Donoghue

TRYING TO INSERT reason into the conversation about Ireland’s hospitality VAT debate is somewhat akin to having a quiet chat in a hurricane.

But let’s give it another try anyway.

Because there’s something we need to clear up: the point of the hospitality VAT cut was not – repeat, not – to reduce prices for consumers.

There is no mystery around whether the reduction will be ‘passed on’ in the form of lower prices. 

It won’t be. 

All politicians, journalists, analysts, economists, etc, must repeat this 100 times over before discussing the measure.

Because it repeatedly crops up in the debate around the VAT cut.

For those not up to speed: the government is reducing the VAT for most of the hospitality sector, which will drop from 13% to 9%. 

It’s estimated the cost of doing this will be about €700 million a year. A lot of foregone tax revenue. 

So taxpayers / consumers / the general public want to know – of course – what they’re getting in return.

The answer? More ‘financially viable’ restaurants. That is – restaurants with healthier profit margins.

‘But, hang on?’ says you. 

‘Haven’t I heard that restaurants might cut their prices?’

Well, yes. Plenty of reports indicated that’s at least a possibility. 

But the point of the VAT cut was, is, and always has been, to boost profit margins for restaurants.

This is not a secret. It’s explicitly what the Restaurants Association of Ireland (RAI) campaigned on.

From the start, their argument can be summarised as this:

• Irish restaurants are making losses because of various rising costs.

• Without financial support, the sector faces a wave of closures.

• The VAT cut will boost profits, preventing closures and protecting jobs.

Now, whether you buy that argument is another thing entirely. I’ve personally argued that there is very little evidence supporting it.

It is likely true that many small restaurants are struggling with low margins and rising costs. But there’s a lack of detail for how a VAT reduction is the best way to solve this, and a particular lack of evidence around claims of a ‘closures crisis’.

However, going back and forth over whether the VAT cut will be ‘passed on’ is to miss the point entirely. 

There was never any suggestion it would be.

To illustrate this, let’s have a look at what the government has said on the topic.

For example, Enterprise Minister Peter Burke’s comments from during the week, after the cut was announced.

Asked if the reduced VAT rate will be passed onto consumers, he said: “I’ve said very clearly that this is a viability mechanism.

For those unaware: ‘viability mechanism’ here means ‘a way of boosting profits for struggling businesses’.

This is consistent with his statements before the Budget. 

In July, Burke referred to the reduction as a ‘viability measure’ and as a ‘jobs measure’. 

“They [restaurants] are under significant pressure. It’s so important to try and keep that sector sustainable,” he said.

This means he has fully accepted the argument from industry groups, such as the RAI, that the VAT cut is needed to boost profit margins. 

Now, is it possible that at least some restaurants will lower their prices?

Of course. But it is entirely at the discretion of each individual business.

The major restaurant representative groups have been clear that the money is needed to boost profits.

There could be some outliers who decide to lower prices. But most probably won’t.

And for larger chains in particular, there’s no reason to.

The likes of Supermacs and McDonalds are already making tens of millions in profits every year. Customers are clearly willing to pay their current prices. Where’s the incentive to reduce them? 

These firms can happily pocket the VAT reduction, getting a nice profit boost for zero extra work.

Confusion

Now, to be fair to those who thought prices could fall – the issue was confused a bit recently. 

Niall Collins, a government minister, said in July that he opposed the VAT reduction as there was “little to no evidence” that previous VAT reductions were “actually passed on to the consumer”.

Again, linking the idea of a VAT reduction with a fall in consumer prices.

And then, the Irish Fiscal Advisory Council (IFAC), the government spending watchdog, released a report just before the Budget which entirely focused on whether VAT reductions in hospitality are passed onto consumers.

Long story short:

• When VAT rises, restaurants normally raise prices.

• When VAT falls, restaurants are less likely to reduce prices.

It was a reasonable study to produce. But the timing of its publication was unfortunate.

Because, as discussed, the reason for this VAT cut was already clear. The IFAC study again raised the issue of prices being reduced. When, in reality, the government line had already been decided: the cut was a ‘viability measure’, a way to boost profits.

Win for lobbyists

Finally, it’s worth briefly reflecting that the fact that the hospitality VAT cut has been framed in this way – with a clear expectation that it will be used as a profit-booster – is a massive win for restaurant lobbyists.

Because previously, when the hospitality VAT rate was cut, there really was an expectation that it would lower prices for consumers.

In its modern form, the first VAT cut was in 2011 for this exact reason. The logic was: Ireland’s economy was in the toilet. People aren’t going to restaurants. 

Let’s cut the VAT rate, making it cheaper for people to eat out, and get some economic activity going.

That IFAC study did contain some valuable nuggets. One was that, after the 2011 hospitality VAT cut, only 50% of the reduction was actually ‘passed on’ to consumers.

That was back when the measure was explicitly introduced as a way to lower prices.

The VAT rate was put back to 13.5% in 2019, before being reduced again the next year due to the Covid crisis.

When it was reduced in 2020, just 6% of the reduction was passed onto consumers. Understandably so, it might be said, as this were one of the sectors hardest by Covid. 

But if restaurants are struggling as much as they say, it’s likely the ‘pass through’ from the VAT cut this time around will be closer to 6% than 50%.

So, let’s not kid ourselves. The vast majority of restaurants won’t pass on the VAT reduction. And that was never the intent.