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The debate on hospitality VAT goes on and on. Alamy Stock Photo

Planned €500m VAT subsidy for Irish restaurants shows how easy it is to spend taxpayers' money

The evidence underpinning the planned VAT change is murky at best, writes Paul O’Donoghue.

AS NATIONS RISE and all as day turns to night and night to day, only one thing on this earth can be set in stone, certain to endure for eons.

The debate about the special VAT rate for Ireland’s hospitality sector will never die.

You see, it’s been reported as pretty much a done deal that the government plans to give the sector a major tax cut.

In the next budget, VAT for food-led businesses, including restaurants and cafes, is set to be dropped from 13.5% to 9%. It will mark the fourth time in slightly over a decade that the industry’s VAT rate has been changed.

When hotels were included in the VAT cut, it cost about €700ma year. With the measure now expected to only apply to food-led businesses, it will cost the state about €545m a year in foregone tax revenue. That’s still a pretty massive chunk of change.

The tax break will basically function as a direct subsidy for businesses, which are mostly in agreement that the extra cash will go directly towards their bottom line.

So what has convinced the government to forego such a huge source of public funds?

Well, many politicians – such as Enterprise Minister Peter Burke – seem to have been swayed by loud cries from lobbyists that the restaurant industry is on its knees, with the VAT break needed to avoid catastrophic closure rates in the sector.

But when we actually take a look through some figures, the case doesn’t seem as clear. And it looks like the government might be throwing €500m of taxpayer funds per year away based on relatively sparse evidence.

How we got here

But let’s go back a bit. Where did this whole debate over the hospitality VAT rate start?

We covered this in detail in another article. But as a brief summary – up through the 2000s, a VAT rate of 13.5% applied to hospitality businesses, such as hotels, restaurants and cafes.

But then the Irish economy did an oopsie during the financial crisis. With a collapse in consumer spending, the government decided to cut the hospitality’s VAT rate to 9% as a way to stimulate lower prices and get people spending again after the crash.

It works like this: say a meal in a restaurant costs €100 without VAT. With the rate at 13.5%, the final price the customer pays will be €100 + 13.5% = €113.5. Scenario one.

With the rate at 9%, the price could be €100 + 9% = so €109. Scenario two.

Or, businesses could keep the price at €113.5, and pocket the extra €4.50.

The government rowed back on the measure when they became worried that, while scenario one was the aim, scenario two was more common in practice.

So the rate went back to 13.5% in 2019.

But then the world did an oopsie with Covid, and back came the 9% rate. This time, scenario two was the aim, as the government explicitly wanted to give cash to an industry devastated by pandemic measures and closure orders. Most people would agree this made sense.

In Budget 2023 – announced in October 2022 – the rate was restored to 13.5%, as the economy was doing much better and the government wanted the foregone tax revenue back.

But now, the rate will go back to 9%, despite the economy being in a strong place and with record low unemployment.

So, what gives?

Basically, in the last year or so a narrative has taken hold that the hospitality sector – mostly restaurants – is in crisis.

Is there a crisis? 

A quick search for ‘Irish restaurant closures’ brings up a slew of stories, most based on data from the Restaurants Association of Ireland [RAI], which says approximately 600 hospitality firms have closed in the last year or so.

Rising costs are blamed. Some of these are mostly out of the government’s control, such as an increase in the price of fuel.

But some are up to the state, such as the rising minimum wage. There have also been other costs over the last year or so, like improved paid sick leave for workers.

The likes of the RAI and other groups have said these state-controlled cost increases have cut into their margins to the point where many otherwise viable businesses are now going under. So, as the state is pushing these firms to the brink, it should give them a break in the form of the reduced VAT rate.

It’s a compelling argument. The problem is – there isn’t much evidence for it.

Let’s look a bit closer at the RAI’s figure of 600 restaurant closures a year. Most articles based on the crisis in hospitality have this statistic front and centre.

But looking at closures only tells half the story. If you’re a minister being asked to effectively spend €500m a year because 600 restaurants are closing, your first question should be: ‘Well, how many are opening?’

Because if the number of openings is above closures, then the number of businesses shutting down could be viewed as the normal churn in any industry.

It’s worth pointing out that the RAI doesn’t track restaurant openings at all.

Asked by The Journal why not, CEO Adrian Cummins said: “It’s a fair point.”

“The Department of Enterprise did that exercise and it showed there were potentially more openings, but it was a paper exercise and we would take issue with it. [But] I would acknowledge we don’t have all the data.”

The closest insight we have on openings comes from the Central Statistics Office, which found that in 2022, the most recent year that figures are available, 1,425 new businesses were started in the ‘Accommodation & Food’ sector. This was the third-most of any industry.

Now, there are some issues with these figures as well. One, the figures are over two years old. Two, there were still Covid supports knocking around in early 2022. Three, ‘Accommodation & Food’ covers hotels as well as restaurants.

But still, it is an indication that there could be a decent number of new food businesses starting up to replace others shutting down.

Sticking with the subject of closures, there’s also conflicting data around how many restaurants and cafes are really going out of business.

For example, while the RAI said about 600 food businesses shut over the last year, figures published by accountancy firm PwC found that there were 110 hospitality insolvencies in the nine months to September 2024.

Although some of the businesses counted by the RAI are likely sole traders who wouldn’t have created a corporate entity – and therefore wouldn’t show up in insolvency stats – it’s still a pretty big gap which clashes with the narrative of catastrophic numbers of restaurants shutting.

Figures which also don’t line up with the mass closures narrative are the employment stats published by the CSO, which show employment in the ‘Accommodation & Food Service’ sector is up by 9% over the year to September 2024.

This also isn’t just growth coming from a low base. There are currently 200,000 people employed in the ‘Accommodation & Food’ sector. This is compared to 178,800 as of September 2019 – that’s pre-Covid, when the industry was widely considered to be in decent shape.

Compare with Covid

To see what a crisis looks like, Covid saw an actual drop in employment. That 178,800 employed in ‘Accommodation & Food’ in 2019 plunged 139,000 as of September 2020. Clearly a crisis.

By comparison, the 200,000 currently employed in the sector is up from 183,000 in September 2023.

While it’s again worth recognising that other businesses such as hotels are also counted in the ‘Accommodation & Food’ category, the numbers don’t quite point towards an apocalyptic business landscape for restaurants and cafes.

This is a view which is also supported by the Department of Finance, which is staunchly opposed to the hospitality VAT cut, saying “the evidence does not support” the case for the reduction.

Now, all this isn’t to say that the restaurant sector isn’t facing issues.

It’s an industry which operates on thin margins at the best of times, and recent cost increases such as the minimum wage will of course have had an impact.

But the evidence that these are causing widespread closures seems murky at best.

If the government is minded to drop €545m with the explicit purpose of boosting the profits of private businesses, it could probably do with making sure in advance that it’s really needed.

We need more information

Especially – and this really can’t be stated enough – this €545m in foregone revenue is an annual commitment, not a one-off.

Half a billion less every year for the foreseeable future, when Ireland has a narrow tax base and is relying heavily on corporate tax windalls to avoid running deficits – money which could go as quickly as it came.

While no one likes lining the pockets of consultants, it would perhaps be worth spending some money on a proper report investigating Irish restaurant profitability and closures. To see if there is a crisis, and more importantly, to see if cutting the VAT rate will actually fix it.

Better to spend €500,000 on some consultants’ reports now, than €545m on the lowered VAT rate, only to find out later that it was never needed.

Because as things stand, we’re not really sure the restaurant sector has a problem in the first place.

And even if there is one, we can’t be sure if a VAT cut would be a panacea.

But hey, it’s only €545m of taxpayer’s money. Who needs fancy things like ‘evidence’ when it comes to spending it.

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    Mute Al Smith
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    Apr 30th 2013, 8:26 PM

    This president is amazing. MaryRobinson was a great for international relations but this little fella is what Ireland needs now. His articulation is perfect and his ideas are what we should be striving towards. BRILLIANT………..!!!

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    Mute Con Ó Domhnaill
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    Apr 30th 2013, 9:07 PM

    Nice planet you live on there Al – yourself and Michael D. If you manage to get back to Ireland 2013 join the protests tomorrow evening again austerity, cuts, water charges, evictions, emigration and property tax imposed on us by Michael D Higgins’ Labour, the 4.5% Party

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    Mute Strongbow63
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    May 1st 2013, 5:14 AM

    Al, 100 per cent agree.

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    Mute Kerry Blake
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    Apr 30th 2013, 9:15 PM

    That flag needs to be out flying in the fields and roads of Ireland so we can reclaim this country from the failed politics of FF, FG and LAb.

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    Mute Derek McKenna ✅
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    Apr 30th 2013, 8:26 PM

    These charlatans in the Labour Party have no concept of what the Starry Plough really stands for. The great men of the Irish Citizen Army would be appalled to be associated in any way with today’s Labour Party in any way. Just words from Higgins, if he meant them he would have taken a different journey than staying in the Labour Party for all those years

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    Mute C.P. Horan
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    Apr 30th 2013, 8:38 PM

    A new version of Irishness? Is that an app I can download or what? This guy is a joke and the biggest yes man going.

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    Mute Niall Waters
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    Apr 30th 2013, 9:13 PM

    A lot of vitriol in these comments towards Michael D. Higgins who is just about the last person in the sphere of Irish politics who deserves it.

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    Mute S L
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    Apr 30th 2013, 8:28 PM

    Agree with you Al, but in my opinion he wasted as president, feel like he has a lot more to say but can’t go that far

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    Mute Odran Ó Corcráin
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    Apr 30th 2013, 8:41 PM

    It must be so easy for Higgins to lecture us, the plebs, on morality and hardship with his 6 digit salary and pension. Then again I can’t say I am surprised, he is in Labour after all.

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    Mute Killian Lynch
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    Apr 30th 2013, 8:21 PM

    What do they mean by the ‘conservation’ of the flag? Are they repairing the original one or is it a special ceremony or what?

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    Mute Eamonn Bolger
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    Apr 30th 2013, 11:13 PM

    A new version of Irish ness? One that includes jailing bankers, not paying back illegal gambling debts, and taking care f our citizens first?

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    Mute Colm M
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    Apr 30th 2013, 8:22 PM

    Good God…this man reminds me more and more of Uncle Albert every day! How much does the office of President cost us again?

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    Mute the lost lenore
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    Apr 30th 2013, 9:00 PM

    I have a yearning that politicos would cease these meandering, worthless discourses on claptrap like “renewing Irishness” and actually come up with something tangible and workable for once.

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    Mute the lost lenore
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    Apr 30th 2013, 8:57 PM

    Whenever I hear a politician talking about Irishness, I know meaningless navel-gazing waffle is forthcoming and plenty of worthies will be having a good old jaw over four course dinners on the topic, itself a complete abstract and totally irrelevance.

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    Mute Strongbow63
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    May 1st 2013, 5:16 AM

    Enlighten us with your philosophy. Anything positive to say?.

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    Mute William Grogan
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    Apr 30th 2013, 8:50 PM

    That Communist prat is way by his sell by date. He’s not supposed to be “political” so how come he’s not fired.

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    Mute Derek McKenna ✅
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    Apr 30th 2013, 8:58 PM

    @William the fact that you call him a communist shows that you have absolutely no clue what you’re talking about

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    Mute William Grogan
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    Apr 30th 2013, 9:31 PM

    What’s the difference between Higgins and a Communist then?

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    Mute Kev O Dowd
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    Apr 30th 2013, 10:07 PM

    Higgins constantly talks about being a social democrat for one. He often refers to the need of a defined “social floor”, a floor that people in our capitalist society should not be allowed to fall under. Words over actions aside, he seems fine with the capitalist system as long as there are those safety nets for the most vulnerable in our society. How does that make him a “communist”? (switch off Fox News pal, it hinders your perception)

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    Mute Piarais Mac An TSaoir
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    Apr 30th 2013, 10:30 PM

    The only real communists on this planet are Buddhists William, you may have noticed our Uachtarán lives in a big house in the middle of town.

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    Mute David Whelan
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    Apr 30th 2013, 8:44 PM

    Love that prez

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    Mute Leslie Alan Rock
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    Apr 30th 2013, 8:44 PM

    I hope the champagne socialist didn’t show up.

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    Mute Malachy Quinn
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    Apr 30th 2013, 9:38 PM

    I can only imagine how our Irish Citizen Army heroes feel about how Labour had turned there back on the working classes since the 1980s!

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    Mute Slim Browne
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    Apr 30th 2013, 9:44 PM

    That man lives in a Fantasy world far removed from what’s going on outside the Park

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    Mute Richard McCarthy
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    Apr 30th 2013, 9:21 PM

    Even though i voted for Mr Higgins it was by process of elimination rather than any admiration,i knew his ideas were socialist left,and me being a free market man who provided employment for people in my life,i still cant get my head around the fact that Ireland admires such people as poets more than those that create the wealth the country needs for its citizens.

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    Mute Piarais Mac An TSaoir
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    Apr 30th 2013, 10:27 PM

    Nobody needs wealth Richard. What we need is stability, security and freedom from the shackles of past ideologies. Creating wealth got us into this mess, and it’s not going to get us out. What’s wrong with admiring Poets? I have to say that Higgins was not even on my radar as a politician, but as Uachtarán I think he has come of age.

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    Mute Kev O Dowd
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    Apr 30th 2013, 10:30 PM

    because the propagators of the free market only care about personal profit. They’re hardly going to be popular in a country where people are directly paying for the collapse of a unregulated the neo liberal, free market economy. I can see where you are coming from in relation to the “wealth creators” but the balance of regulation is so important. A balance that protects the ecomony from wreckless, short term profits while at the same time ensuring that the market is not over regulated, stifling investment and expansion of the private sector. I’m living in Canada at the moment and you can really see how this method (particularly in their banking system) had worked for them in comparison to the “free market” Americans.

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    Mute Richard McCarthy
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    May 1st 2013, 12:57 AM

    Sounds good but the fact is we will only survive as a country by creating jobs for our people.

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    Mute Strongbow63
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    May 1st 2013, 5:27 AM

    There is unfortunately no alternative to capitalism as an economic system. It promotes innovation and is highly ptoductive, even Marx acknowledged that in his Manifesto. It is the type of capitalism that we allow that is the problem. Unregulated and unhindered by trade unions it will devour itself. In the USA fir example the average industrial wage has remained static while the income of the top decile has increaded by about 23 per cent. In the globalised labour force capital can be shifted around electronically , undermining the economies of nation states and exploiting poor workrrs, resulting in disasters like that collapsed building in Bangladesh. I for one think President O Higgins is on the money. He is a welcone voice out there in a cacophony of neo liberalism.

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    Mute Johnny Hegarty
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    Apr 30th 2013, 10:05 PM

    I hope he is right in what he says. Capitalism doesn’t believe in society but I do.

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    Mute censored
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    Apr 30th 2013, 11:26 PM

    Irishness: does he mean the gombeen tendency or the sheep like obedience to the master?

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    Mute William Delaney
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    Apr 30th 2013, 11:46 PM

    Ya ya ya…… Zzzzzzzzzz.

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    Mute David Giles
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    May 1st 2013, 8:55 AM

    Although I am not a Socialist, I admire Michael D and I consider he to be the best President for Ireland in these difficult times. The Plough and the Stars is a wonderful historical flag and reminds us of the land where so many of us have come from and the Stars which we look up to on a good night.

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    Mute Ollie O'Cleirigh
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    May 1st 2013, 6:06 AM

    Great insightful speech by President Michael D.

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    Mute Patrick Collins
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    May 1st 2013, 9:43 AM

    It more like we’re yearning for a revolution

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    Mute James Keane
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    May 1st 2013, 7:53 AM

    I remember last year some criminals sawed off the stars for scrap. Good to see the statue back to its original glory, never gets enough attention.

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    Mute Republic Of Zen
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    May 1st 2013, 10:02 AM

    In what sector in Irish is individualist? The govenment grew under the PDs.

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    Mute anthony byrne
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    May 1st 2013, 11:26 AM

    It’s good to see that the president is addressing the important issues facing Irish society today.

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