Hiking VAT on tourism would raise Brexit stakes
Eoghan O’Mara Walsh defends the low rate
EACH year, at about this time, there is a lot of speculation about the 9pc tourism VAT rate and whether it will be retained in October’s Budget to be delivered by Finance Minister Paschal Donohoe.
So will the 9pc rate be kept this year? Or will it return to the rate of 13.5pc, which was last in effect in 2011? The truth is that no one knows for sure and in reality it will probably be a late decision made by Cabinet running up to Budget day.
Referring to the 9pc rate as a “preferential” rate or a VAT “subsidy”, as some commentators do, is an inaccurate analysis. Often this is followed by a spurious reference to the “cost” of the measure whereas in fact the tourism VAT rate has been massively beneficial to the Exchequer. According to the Revenue’s own figures, in the first full year of the 9pc VAT rate (2012) income to the Exchequer was €630m; in 2018 the income is anticipated to be €1.04bn as a result of the increased activity in the sector. So rather than being a cost, the 9pc tourism VAT rate is extraordinarily good for the national coffers.
The fact is that Ireland’s tourism VAT rate is finally in line with the rest of Europe – 16 of 19 eurozone countries have tourism VAT rates of 10pc or less so Ireland, in this rare case, is fully competitive with other destinations. To increase the rate would make us less competitive at a period of uncertainty with Brexit around the corner. It would add cost to the system at the very time when we need to keep a close eye on our value for money ratings.
The latest wheeze being considered, supposedly in response to Dublin hotel rates which have risen as tourist demand outstrips the supply of new hotels, is some sort of a two-tier VAT where bigger hotels pay a higher rate than smaller ones.
How this might work, or even how many bedrooms defines a “bigger” hotel, is difficult to see and crucially there is a real danger that an increased VAT rate will have damaging knockon consequences for the pipeline of new hotels that are finally being delivered; 5,000 new bedrooms in Dublin alone over the next three years according to CBRE. These hotels are vital in order to add capacity and accommodate growth and crucially will mean demand and supply are in sync, moderating any future consumer price increases.
Any further increase in costs is likely to depress demand and damage Ireland’s largest indigenous sector. The tourism industry – hotels, attractions, restaurants, B&Bs, caravan and camping sites, activity providers and many others – can rightly point to the fact that, since its introduction seven years ago, the 9pc VAT rate has helped tourism and hospitality businesses create thousands of jobs. Recent analysis by the Irish Tourism Industry Confederation (ITIC) shows a remarkable 79,100 jobs have been created in the tourism and hospitality sector since 2011.
The good news is 68pc of those new jobs are outside of Dublin and in the regions. No other industry can come close to this sort of performance and if tourism is the great regional jobs producer then surely it should be supported and nurtured with appropriate taxation and investment policies.
EARLIER this year, ITIC produced an eight-year roadmap for the sector entitled ‘Tourism: An Industry Strategy for Growth to 2025’, within which tourism is set ambitious goals to grow overseas earnings by 65pc. However, that is only possible with a number of enabling factors in place and one of those is the retention of the competitive 9pc VAT rate. Now is not the time to meddle with a successful formula that has worked so well and has so much more to offer.
And back to Brexit, that great external shock that risks knocking Ireland’s wider economy off kilter. ITIC’s analysis identifies that a hard Brexit will cost Irish tourism €260m in its immediate aftermath. That is some knock, and tourism is uniquely exposed to Brexit with 40pc of all international visitors coming from Britain.
Soft, hard or mediumboiled, Brexit won’t be good for Irish tourism and Mr Donohoe must be mindful of this when he delivers the Budget. The 9pc VAT policy has been unambiguously positive on a variety of fronts – jobs, regional balance, Exchequer receipts, industry growth. Leave well enough alone, minister.
The fact is that Ireland’s tourism VAT rate is finally in line with the rest of Europe