View from Dublin: rise in Vat rates raises the question of inequalities
From Tuesday, the price of a meal or a coffee in the Republic should be going up a little as the old 9% Vat rate, in place for several years, ends as the full 13.5% rate kicks in.
The Restaurants Association of Ireland has said the decision in last October’s budget was incorrect and will end up costing jobs this year.
It is hard not to have some sympathy for the plight of the sector. Yes, it is operating in a booming economy and feeding into a booming tourism sector.
But its Vat fate was tied up with that of the hotel industry, where operators have been hiking prices in the capital city for years while enjoying a subsidised Vat rate.
This made it more difficult for restaurant and coffee shop owners to differentiate themselves in the arguments about whether they should benefit from a lower rate.
Restaurants sometimes have to operate on pretty thin margins and a hit to revenue or a hike in costs can have an effect on smaller businesses.
With the Vat rate, this isn’t necessarily a higher cost, because the punter pays. But restaurant owners can argue that they face a lot of competition from the surge in new places to eat, as well as higher wage bills and most likely higher rents in recent years.
Then there is the Dublin versus the rest debate. Even if restaurants in Dublin (above) are packed to the rafters, as are hotels much of the time, it isn’t necessarily the case in hotels or in restaurants in other parts of the country.
In order for restaurateurs to make a solid argument for retaining the lower rate, they have to be able to show that a higher Vat rate will impact their revenues. In other words that they will end up with fewer customers, which in turn would lead to job losses.
As the Department of Finance pointed out, the higher Vat rate would mean an item costing €3 would increase in price to €3.12.
A €10 meal including a soft drink would end up €0.33 dearer, while a €50 dinner with a €10 bottle of wine would only go up to €51.65. Not the most earth-shattering price hikes.
The industry argues that any cost increases will make Ireland less competitive for tourism, at a time when Brexit — among other things — is approaching. But a recent Department of Finance statement said the 9% Vat rate had always been intended as temporary and its removal came because of a “decline in competitiveness”.
Tourism is hugely important to the economy and to over a quarter of a million jobs. Brexit is a genuine threat to the tourism sector but visitor numbers from Britain are not as important to the overall mix as in the past. Visitors from Britain account for just one third of the total, compared to nearly half a decade ago. And according to Failte Ireland, tourism numbers are set to grow in 2019 despite Brexit and the higher Vat rates. The state agency sees the number of tourists visiting Ireland growing to 9.6m, plus a further 9.8 million domestic trips. Failte Ireland is forecasting a 3% rise in visitor numbers but a 5% increase in revenues because of a larger proportion of higher spending visitors from North America and Europe. Despite all of these counter-ar- guments about tourism, the truth is there are lots of smaller restaurants and cafes in towns and villages around the country. They may not see the Vat issue alone as a make-or-break, but they are certainly more vulnerable to any revenue squeeze in their business from fewer customers.
Contrast the situation with the bookies. Punters placing a bet pay zero Vat but the bookie pays 1% betting tax. From Tuesday, that will have gone up to 2%. So the state collects 13.5% of what you spend on your coffee and buns but just 2% on what you spend betting on a third division Russian league soccer match.
Restaurants and cafes have added enormously to the social and economic life of many towns around the country. You don’t hear people complain there are too many restaurants or cafes in this town. Can the same be said about betting shops?
The betting industry was equally unhappy about the doubling of the betting tax. With betting the bookie pays it and not the punter. They say it will drive smaller bookies out of business. The industry has pushed for an alternative which would see them pay 10% of gross profits. Bookies say this would be a fairer method and would still bring in an extra €25m for the state as opposed to the 2% charge, which should bring in about €50m.
The industry has secured a review from the Department of Finance which will examine the impact of the 2% rate on jobs.
I am sure the restaurant sector would love something similar but there is no sign of Merrion St relenting, making any exceptions or caveats on the Vat issue. Besides, it might be difficult to prove which factors are affecting jobs in the sector.
Big bookie chains would benefit enormously from a switch to percentage of gross profits and they are not exactly financially vulnerable as many smaller operators might be.
Taxation policy by its very nature can be ruthless. But where valid economic exceptions based on size or on location are possible, surely they should be examined.