The discounted VAT rate for Ireland’s tourism and hospitality industries has expired, bringing it back in line with the normal reduced rate of 13.5%.
The government took action in November 2020 to reduce the rate of VAT to 9% for specified sectors to help offset the impact of COVID-19. A lower VAT rate was intended to help restaurants, bars, hotels, leisure operators and certain other service providers keep prices low while still controlling their own costs in order to stimulate business during the pandemic.
The scheme has been extended several times, including beyond the lifting of COVID restrictions in spring 2022, and then again in February this year.
The extension of the scheme has caused plenty of controversy and debate, not least over its cost to the Exchequer. The latest extension from February to the end of August alone is estimated to have cost €300m in tax revenue. The Commission on Taxation and Welfare recommended that the hospitality and tourism sectors should be brought back into line with the normal reduced rate last year, and furthermore recommended an incremental increase in the reduced rate of VAT over time.
However, industry bodies have lobbied hard for the 9% rate to be kept, warning that the €4bn industry, which employs 300,000 people in Ireland, is still experiencing significant cost pressures. There have been warnings that the 4.5% hike in VAT from 1st September will force more consumers, who are themselves already facing severe cost of living pressures, to cut down on the amount they spend on leisure and entertainment. Reduced footfall across the hospitality sector could put jobs at risk.
Indeed, the Department of Finance admitted that the extension to the end of August was to give businesses time to adjust their cost strategies in order to protect jobs, and in recognition of other inflationary pressures.
The goods and services affected by the increase include food and beverages bought in restaurants, takeaways, cafes, pubs and bars (excluding alcohol), accommodation, admissions to leisure attractions such as cinemas, museums and exhibitions, and certain other adjacent services such as hairdressing.
A small number of other sectors, including the print industry and commercial sporting facilities, will still retain the 9% VAT rate for the time being.
The first payment at the higher rate of tax for affected businesses will be due on 23rd November. Businesses are advised to take steps immediately to update their accounting, pricing, and POS systems to take account of the changes, and also take action to inform customers. As the changes mostly affect non-deductible consumer goods and services, customers will see an immediate increase in prices.
More complex transitions may occur in situations where goods and services are purchased via deposit, pre-payment or invoice, meaning there could be examples where supply and payment straddle the two different rate periods. The changes could also affect contracts, which would require renegotiation.