Jack Chambers (Dublin West, Fianna Fail) | Oireachtas source

I thank the Deputy. I know how important this issue is generally and in his constituency. I am taking this debate on behalf of the Minister, Deputy Michael McGrath.

At the outset, the Deputy should note that the VAT rating of goods and services is subject to the requirements of EU VAT law, with which Irish VAT law must comply. In general, the EU VAT directive provides that all goods and services are liable to VAT at the standard rate, which is 23% in Ireland, unless they fall within categories of goods and services specified in Annex III of the VAT directive, in respect of which member states may apply a lower rate of VAT. Tourism and hospitality fall within Annex III, thus explaining why they have been subject to these lower rates for a considerable period. The lower VAT rates that apply in this country are 13.5% and 9%.

As the Deputy will be aware, the 9% VAT rate applied on a temporary basis to the hospitality and tourism sectors until 31 August 2023, when it reverted to the 13.5% rate. The 9% rate was introduced on 1 November 2020 in recognition of the fact that the tourism and hospitality sectors were among those most impacted by the public health restrictions put in place throughout the pandemic. Through no fault of their own, bars, hotels and restaurants had to close on multiple occasions in response to the public health crisis.

The economic rationale for a VAT rate reduction at that time, as it was in 2011 when the rate was also reduced to 9%, was to lower consumer prices, thereby encouraging higher demand, more output and an increase in employment. However, it is important to remember that even temporary VAT reductions have a cost to the Exchequer. The estimated cost of the 9% rate for tourism and hospitality from 1 November 2020 to 31 August 2023 was €1.2 billion. This represented a very substantial support from the Government to the hospitality and tourism-related sectors.

As the 9% VAT reduction was considered temporary in nature from the outset, the Department of Finance carried out an economic assessment of it in 2023 to see if there was a case for its continuing application. This assessment considered the macroeconomic backdrop to any extension of the 9% rate, noting that the economy had rebounded strongly from the pandemic and that economic activity was above pre-pandemic levels. The briefing also noted that the reduced rate was both regressive and costly and that this cost represented a transfer from taxpayers to the sector. The Government accepted this economic assessment but, instead of ceasing the 9% rate on 1 March of last year, extended it to 31 August 2023 at an estimated cost of €300 million to strike what it considered an appropriate balance between the cost to public finances and the provision of support for these sectors.

I note the Deputy is specifically seeking that the reduction in the 9% VAT rate would only apply to food items in the hospitality sector. In this regard, Revenue has previously advised that such a separation from accommodation for VAT purposes is possible. However, it has also indicated that there are 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.

In addition, a significant concern the Minister for Finance has with this proposal is that the cost from an Exchequer perspective would still be very significant. Food makes up a far greater proportion of overall tourism and hospitality VAT revenue than accommodation. For instance, were the 9% rate to be applied to food for 2024, the estimated cost would be €570 million. Consequently, the Minister for Finance is not in a position to apply a 9% VAT rate to food items in the hospitality sector.

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