THE DEPARTMENT OF Finance has pushed back hard against the hospitality sector’s calls for VAT on hotels, restaurants and cafes to be cut to support businesses. 

VAT for the tourism and hospitality sectors was reduced to 9% during the Covid-19 pandemic at a cost of €1.2bn to the exchequer. The previous 13.5% rate was reinstated last August, despite the sector’s opposition.

Restaurants and cafes are struggling with higher business costs and in some cases reduced demand exacerbated by the increased cost of living, with many in the industry perceiving the reinstated higher VAT rate as a significant pressure on their businesses. 

In advisory papers published yesterday in advance of the next Budget, Department of Finance officials said that there are a “number of reasons” why going back to 9% “remains unjustified”. 

It listed the cost to the state, the resilience of the domestic economy, and Ireland’s current position as being “not significantly out of line with other EU countries in relation to the application of VAT in this sector” as among the reasons.

“The cost is very significant. For instance the cost of a further temporary VAT reduction to 9% for a full year is estimated to be €764 million,” it said.

It said that even if measure were restricted to food and catering services, it would still have an estimated full year cost of €545 million.

This would constitute an enormous fiscal transfer of taxpayers’ money to the sector which the evidence available at present does not support.”

The “resilient” domestic economy was also listed, as the department said that disposable income of households will increase as inflation eases, allowing them to spend more money in areas such as tourism and hospitality. 

It added that 14 EU countries have a VAT rate of 12% or higher on food services. It also highlighted a VAT rate of 20% on food services in Northern Ireland and the UK. 

Separate VAT rates for hospitality and accommodation

While it is possible to change the VAT rate for hospitality or accommodation without reference to the other, the department said, Revenue has advised that there would be “significant practical operational concerns” in having different VAT rates applying to hotel accommodation and meals. 

It said that this is because of how the sector operates, with various packages ranging from bed and breakfast accommodation to all-inclusive board and lodging packages. This could result in the underpayment of VAT as the charges for accommodation and meals would have to be divided and shared. 

“This would give rise to administrative and operational complexity for both Revenue and taxpayers, as well as increased risk of avoidance and scope for manipulation of the VAT system.”

The department also highlighted that changes would have to apply to all accommodation including B&Bs and small hotels “because of the principle of fiscal neutrality”. 

It added that the cost to the exchequer would “still be very significant”. 

“Food makes up a far greater proportion of the overall tourism and hospitality VAT revenue than accommodation,” the department said.