YEP, IT’S TIME to talk about restaurants and VAT again.

For the unaware, the government is expected to reduce the VAT rate for the food sector from 13.5% to 9% in the upcoming budget.

This is expected to reduce the state’s tax take by somewhere between €550 million to just under €700 million per year, depending on which businesses are ultimately included.

As it’s set to become permanent, that means the state will have about €600 million less per year, every year, for the foreseeable future.

It’s a big decision. And, as we’re going to explore, it’s not based on much evidence.

The main reason given for the VAT reduction is the ‘crisis’ in the Irish restaurants sector.

See examples of the claim here, here, here, here, etc. The claims tend to share a common source – the Restaurants Association of Ireland (RAI).

It has claimed that twice as many restaurants are closing down now, compared to the financial crisis.

The argument has been accepted by government ministers, who have said the VAT reduction will be reduced to ‘protect jobs’.

If there’s no closure crisis, the argument for the VAT cut is dramatically weakened. So, where’s the evidence?

Spoiler alert – there’s very little.

Squeezed margins

Let’s start off with the key claim from the RAI – about 600 restaurants per year are closing in Ireland, or about two per day. It has directly linked this to the restoration of the 13.5% VAT rate in September 2023. It claims reducing the rate would help stop the closures.

In isolation, 600 businesses shutting sounds alarming. But it lacks vital context.

Some of that was provided, ironically, in a report published by the RAI earlier this month.

The study argued that the VAT cut is needed as the industry is under pressure due to the rising cost of doing business, such as minimum wage rises and sick pay requirements.

It said these have squeezed restaurant margins, placing many in financial difficulty.

This may well be true. But it is not evidence that there is a wave of restaurant closures happening right now. Or has happened over the last two years, since September 2023.

The report even states this, noting: “CSO (Central Statistics Office) data for food and beverages ‘deaths’ (or closures) for 2019 was 1662 and births were 1695.

“In ‘normal’ times the turnover of food and beverages enterprises is very large and probably larger than the figures identified by the Restaurants Association of Ireland.”

So the RAI’s stats about 600 closures probably well undershoots the number of restaurants shutting per year. It’s likely that well over 1,000 closures is normal.

But, the RAI doesn’t track the number of new restaurants opening. So we have no idea of the change in the ‘net’ number of restaurants – openings minus closures.

Openings

The RAI itself has conceded before that it doesn’t track openings, acknowledging that “we don’t have all the data”.

I spoke to Mr Foley, who also acknowledges that there is not evidence of widespread closures.

“The basic fact is that the RAI figures aren’t proof of a disastrous performance, relative to what would be the historic norm,” he told The Journal.

“The RAI figures are gross [closures] figures, and don’t take into account any openings. The primary argument I would see [for the 9% VAT rate] isn’t closures. It’s that the sector’s margins have fundamentally reduced.

“[This is] due to labour cost increases, government policy and market forces.”

Ok – so the logic for reducing VAT for the restaurants sector is that their margins are under pressure. That could be justification for support – but that isn’t how the VAT cut campaign has been sold.

The RAI hasn’t said ‘margin pressures mean more restaurants may close in the future’.

Its consistent message has been: Lots of restaurants are closing right now. And because of that, the VAT cut is needed right now.

See examples here and here.

If we don’t have evidence it’s actually happening – what is the argument to cut the VAT rate?

The best figures on closures should be the ones from the CSO. Unfortunately, these are often out of date.

Restaurants are grouped into the ‘accommodation and food services’ category for most CSO stats.

Growth

The data shows the number of businesses in the sector rose steadily from just under 18,000 in 2014, to 19,400 by 2019.

There was a slight dip to about 19,000 again during Covid. But the most recent figures available, published last August, show that there was a rise in 2022, to just over 20,000.

This is despite the RAI warning of widespread closures in 2022, claiming there was an incoming ‘recession’ for restaurants.

It’s possible the ‘crisis’ started in 2023, and we just don’t have the data yet. But there are other indicators which point to a crisis as being unlikely.

As pointed out previously, employment in the sector has held up well in recent years. The RAI correctly pointed out that hospitality employment dropped slightly in the most recent CSO survey, falling from just over 184,000 to 182,000. If the trend persists, it could be strong evidence. But for now, it’s a one quarter decline after multiple periods of steady growth.

Finally, it’s worth reiterating: it’s very possible that small restaurants are genuinely struggling.

The RAI report makes a decent argument that smaller operators have genuinely seen pressure on their margins.

But again, there are no official, independent figures confirming this.

It’s also worth noting that many large food businesses have no such issues. As previously highlighted by The Journal, plenty of Irish chains and fast food outlets are reporting huge profits.

The likes of McDonald’s, Domino’s and Pizza Hut have recently given multi-million payouts to their owners. These firms would also benefit from the VAT reduction, when they clearly aren’t struggling.

What appears relatively likely is that something of a two-tier situation is arising in Irish restaurants. Where many small operators may be facing difficulties, while large fast food chains are doing just fine.

Alternative support

If that is the case, why not target support at the smaller restaurants which actually need it? Restaurateurs themselves have contacted me saying they would be in favour of such a move.

Conrad Howard, owner of the Market Lane Group, which runs five restaurants in Cork, suggested that the VAT reduction should only go to businesses “buying more than 50% of their food from local and regional suppliers”.

He said this would “ensure that the dividend for the VAT reduction stays in the community”.

That’s one idea, but there are a million ways to slice it so that financial support would be better focused.

The RAI says a broad VAT reduction is better because grants can be difficult to access, and aren’t permanent.

But it would also be a lot more expensive – again, between about €550 million and €675 million a year, every year. And help companies which don’t need it – again, not something which is disputed.

A targeted support could be also introduced until we have better evidence of whether the closure ‘crisis’ is real or not.

Right now, all we have is closure stats from a lobbying group, without the corresponding data on openings. Figures from the CSO, which are out of date, but don’t indicate major issues. And employment figures, which again are somewhat mixed.

The point of all of this is not to say that restaurants are lying when they say they’re under pressure. Many are, there’s no question.

But closures are very normal in the sector. The questions politicians should be asking is: ‘Are there more than normal?’

And: ‘If there is a problem here, will a VAT reduction fix it?’

Right now, we simply don’t have enough evidence to answer either question.

Until we do, politicians would be incredibly irresponsible to throw over half a billion euro a year solving a problem we’re not even sure exists.