Michael Collins (Cork South West, Independent)
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227. To ask the Minister for Finance if he will examine a series of matters (details supplied) in relation to the 9% VAT rate for hotels and restaurants. [10990/23]

Peadar Tóibín (Meath West, Aontú)
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236. To ask the Minister for Finance if his Department has undertaken or intends to undertake a study to determine the impact that a return to a 13.5% VAT rate will have on the hospitality sector. [8411/23]

Michael McGrath (Cork South Central, Fianna Fail)
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I propose to take Questions Nos. 227 and 236 together.

In January of this year, officials from my Department compiled a ministerial briefing on a number of measures, including the temporary 9 per cent VAT rate. This briefing included an economic assessment of the measure.

The material outlined the macroeconomic backdrop to any extension of the 9 per cent rate, noting that the economy has rebounded strongly from the pandemic and that economic activity is now above pre-pandemic levels.

The briefing also contained an analysis of employment trends, reporting that employment in the sectors covered by the 9 per cent rate was near pre-pandemic levels last year. While job vacancies in the 9 per cent sectors were lower than the economy overall, they are still higher than the long-term average. Economy-wide employment could be classified as what economists term full-employment.

In addition, the briefing noted that the reduced rate is both regressive and very costly, and that this cost represents a transfer from taxpayers to the sectors which it covers.

The Government accepted the Department’s economic assessment, which found that there was no longer an economic case for the temporary 9 per cent rate, and, therefore, decided upon a reversion to the 13.5 per cent VAT rate. Specifically, the Government decided that the 9 per cent VAT rate for the tourism and hospitality sectors will only apply until 31 August 2023. This decision was made in recognition of the employment provided in the sectors to which the 9 per cent rate applies, as well as to give businesses a transition period to adapt to the changing economic and policy environment. Finally, the Government was cognisant of avoiding adding to upward pressure on prices while inflation remains so elevated.

This extension, therefore, strikes a balance between the estimated €300 million cost to the public finances and the provision of support for these sectors through the busy summer period, after which the reduced rate will cease.

In relation to the suggestion that a different VAT rate could apply to different regions I can confirm that this is not possible under the European VAT Directive with which Irish VAT law must comply. For reasons of fiscal neutrality a Member State must apply the same VAT rate to similar goods or services, regardless of their geographic location.

In relation to treating hospitality and accommodation differently I can confirm that it is possible to change the VAT rate for hospitality or accommodation without reference to the other. The respective costs of extending the 9% VAT rate to the end of August this year would be €212m for hospitality, €61m for accommodation, and €27m for the remaining sectors. However, if accommodation reverted to 13.5% while hospitality was kept at 9% this change would have to apply to all accommodation including B&Bs and small hotels because of the principle of fiscal neutrality which requires universal application to a sector.

I am advised by Revenue that there would be significant 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.

This could lead to the underpayment of VAT because the charge for accommodation and meals would have to be apportioned. In the views of Revenue, it would undoubtedly provide opportunities for tax planning, which would be difficult to police. This would give rise to administrative and operational complexity as well as increased risk of avoidance and scope for manipulation of the VAT system.