Influential lobby groups in Ireland are opposing the expected increase in the hospitality VAT rate from 9% to 13.5%, arguing that it will burden consumers. However, this argument is losing credibility as some service businesses are charging exorbitant prices. Pop-sensation Taylor Swift has drawn attention to the toxic relationship between the tourism industry and customers, suggesting that the VAT issue is not about protecting consumers’ interests. Swift is scheduled to perform three gigs in Dublin next June, and the cheapest accommodation option listed on Booking.com for one night is €178 for a hostel.
Accommodation providers in Dublin have been accused of price gouging during major events, and this practice appears to be becoming more common. Even on a random weekday night in September, the price for a hostel for two adults was €70. These high prices may be a result of inflation and businesses taking advantage of the volatile economic environment. However, if the VAT rate is increased to 13.5% in September, these prices may be forced to come down.
The lower VAT rate of 9% was introduced as a tax break to incentivize spending. But with the higher rate and the current high prices, consumers may pull back on recreational spending, leading to a decrease in prices. The hospitality industry has been grappling with the contentious issue of VAT for over a decade. The rate was reduced to 9% after the financial crash in 2008, then increased to 13.5% pre-pandemic. During the pandemic, the rate was lowered again to help businesses cope with mandatory closures.
Economist Jim Power warns that reverting to a 13.5% VAT rate could result in thousands of job losses and threaten the viability of businesses still recovering from the impact of COVID-19. The cost of the VAT reduction measures implemented by the government has exceeded €1 billion. However, if the VAT rate is increased to 13.5%, the exchequer could collect an extra €563 million annually.
While there are arguments for maintaining the 9% VAT rate, service businesses charging excessive prices are not helping the case for the industry as a whole. The priority for lobby groups should be to address these pricing issues before seeking further support from the government. The Restaurants Association of Ireland warns that one in five restaurants are at risk of closing if the VAT rate increases. Additionally, the 13.5% VAT rate in Ireland is higher than the rate charged in the UK, where the hospitality VAT rate is 12.5% and was reduced to 5% during the pandemic.
It is important to remember that the 9% VAT rate was introduced as a measure to assist businesses during the COVID-19 fallout. With the pandemic under control, hospitality operators are now benefiting from pent-up demand. Leading hotel group Dalata, for example, reported record revenues of €500 million last year, largely driven by price increases. Most pubs outside Dublin have also made a full recovery, with sales matching or exceeding pre-pandemic levels.
Despite these positive signs, hospitality businesses are facing new challenges, such as soaring costs, including electricity bills, which have risen significantly due to global energy market pressures. Businesses across the service industry are navigating these challenges while operating on historically tight margins. Increasing the VAT rate would further exacerbate these pressures.
The service industry is inherently exposed to risk due to its reliance on recreational spending and an open economy. Prolonging a measure introduced to address a separate problem may not be the most effective solution. It is crucial for lobby groups to address pricing issues within the industry and ensure fair and reasonable prices for consumers.