VAT rate cut for hospitality would cost €867.7m a year, Department of Finance confirms
The Department of Finance has confirmed the cost of reducing the 13.5% VAT rate to 9% for the hospitality sector would be €867.7m in a full year.
In documents published today it broke the cost down to €134.9m for accommodation, €674.6m for food and catering, €19.8m for entertainment and €38.4m for hairdressing.
The Tax Strategy Group documents say that the figures will be revised again following the publication of new Central Statistics Office data later this month.
On Tuesday the Government said the Budget would have scope for tax cuts of €1.5bn.
But the documents warn of “practical operational concerns in having different VAT rates applying to hotel accommodation and meals given how the sector operates, with various packages ranging from bed and breakfast accommodation through to all-inclusive board and lodging packages.”
It added: “Having separate VAT rates would increase the risk of VAT underpayment because the charge for accommodation and meals would have to be apportioned.”
It said: “This is likely to give rise to administrative and operational complexity as well as increased risk of avoidance and scope for manipulation of the VAT system.”
The documents said that the hospitality industry said economic uncertainty created the need for additional supports for the sector due to changes in sick pay, high inflation and pension auto enrollment.
The papers said there is no requirement for a business to pass on any VAT reduction to the final consumer in the form of a reduced price.
The Department of Finance also said that the cost of continuing the reduced rate of VAT for electricity and gas for consumers will be €198.3m in a full year.
The Government originally cut the rate from 13.5% to 9% for gas and electricity in late 2022 during a surge in energy prices.
It has rolled over the reduction each year since then.
The reduced rate is due to expire again on October 2025 and the Cabinet will have to decide whether to roll over the reduction for a further 12 months.
On housing, it says there is a provision to allow the Government lower the VAT rate on residential construction for “social policy” from 13.5% to 9%.
It said this measure would cost €805m.
But it added: “This would arise in a situation where all new residential construction was classified as housing for social policy purposes.”
The papers show the Department of Finance has also received representations regarding reducing the VAT on bicycles and e-bikes from 23% to 13.5%.
It says the cost of the reduction would be €8m.
It would only apply to e-bikes with power output under 250watts and said there is no provision to apply a lower rate to scooters or electric scooters.
Department officials say there is “no guarantee that the reduced rate would be passed on to consumers. This is because there is no obligation for a retailer to do so.”
The Tax Strategy Papers say that increasing tax bands to keep track of growth in wages would cost over €1bn if the measure is introduced in the Budget.
It says that the Department of Finance forecast wage growth of 4% next year.
In the Programme for Government the Coalition committed to “indexing credits and bands to prevent an increase in the real burden of Income Tax”
Indexation is usually introduced in the Budget as a mechanism to adjust tax brackets and credits to take account of rising wages.