Time to end debate over tourism’s special 9% VAT rate

The former minister for finance, Paschal Donohoe, did plenty of last-minute tidying up before he handed over his department’s keys to his successor, Michael McGrath.

For example, Donohoe finally dealt with the issue of bankers’ bonuses before he left, by agreeing to allow payments of up to €20,000 in banks where the State still owns a stake. That’s one dirty, thankless job that McGrath won’t have sitting in his in-tray.

Donohoe also left McGrath a few extra bob in the tin, in the form of even higher than expected corporate tax revenues. That was much better than leaving him a bottle of screwtop Beaujolais on the sideboard.

Donohoe, however, left behind one task that the new occupant could well have done without. Like a smelly old sock left under a bed, he failed to once and for all deal with the tourism industry’s interminable campaign for a long-term or permanent extension of its special 9 per cent VAT rate. With the rate due to revert to 13.5 per cent at the end of February, after yet another temporary extension, McGrath will have to face up to it within weeks.

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What should he do?

Tourism’s low VAT measure is the stray dog of Irish fiscal politics. It has simply refused to go away for close to 12 years now. It doesn’t seem to matter whether the minister for finance of the day tries to chase it away down the road screaming “Get out of here”, or if the minister tries to coax it into going alone with encouragement and a gentle nudge of its behind. It keeps returning, whimpering to the minister’s feet, in its eye the doleful look of a flea-bitten mongrel pleading for its forever home.

The issue plagued Donohoe throughout 2022. The former minister and the officials at his department detest the lower VAT rate, which was first brought in as a stimulus measure and a back-door bailout for the tourism sector in the dark days of 2011. They want it gone and the old 13.5 per cent rate brought back. That would give them an extra €450 million or so annually to spend on other priorities.

Donohoe first axed the 9 per cent rate and put it back up to 13.5 per cent in 2019, after the tourism industry peaked. But he was forced to restore the 9 per cent rate in November 2020, as the ruinous impact of the pandemic on the hospitality sector left him with no choice. He has reluctantly extended it several times since, in the face of ferocious lobbying from the sector. But his negative instincts towards the measure remain intact.

At the start of 2022, the lower rate was due to run out in August. Donohoe must have believed at that point that the end of the supposedly temporary 9 per cent would come with the impending end of the pandemic, as the Omicron wave failed to prevent economic reopening.

But then Russia invaded Ukraine at the end of February, exacerbating an already-worrying inflation problem and turning it into a full-blown cost-of-living and cost-of-business crisis. The industry heaped more pressure on Donohoe to extend it further. He resisted for a while, claiming it would cost more than €500 million to extend the lower rate to the end of the following year.

But in early May he relented, and once again he agreed to extend it to the end of February 2023. The annual budget had been brought forward to September 27th and Donohoe’s intervention killed off the lobbying campaign over the summer. Instead, talk turned to how the hotel sector was apparently “gouging” customers with elevated room rates. That gave Donohoe the political cover he needed to hold fast on his insistence that the lower rate had to end.

He refused to extend it further in the budget, even when the Taoiseach Leo Varadkar, then the tánaiste and minister for enterprise, suggested hours after Donohoe’s budget speech that the issue could come under review again.

Several members of the Cabinet now appear to be split on what to do about the lower rate. Donohoe is implacably opposed to extending it further and wants it back up to 13.5 per cent. But as he is now the Minister for Public Expenditure it is no longer his call to make. The Green Party’s Catherine Martin, who took over as Minister for Tourism in 2020, is a strong supporter of the lower rate and wants it kept. Why wouldn’t she? The cost of the lower rate doesn’t come out of her department’s budget.

Michael McGrath could simply end the lower rate and put his fingers in his ears, but that wouldn’t go down too well in the southwest, near his Cork heartland

Varadkar was the minister for tourism when the 9 per cent rate was first introduced in 2011, and he is believed to have a more benign view towards it than Donohoe. In a recent interview with The Irish Times, he highlighted that a series of other economic assistance measures, such as business energy support schemes and lower duty on diesel and petrol, are all due to run out on the same day – February 28th.

He said the Government cannot afford to extend them all. But can the Government afford to take the risk of eliminating the business energy subsidy scheme and jacking up tourism’s VAT rate on the same day, potentially setting off a wave of insolvencies in businesses that have “warehoused” large amounts of taxes owed since the height of the pandemic?

The decision must be made, of course, by McGrath, who has to balance the State’s books. He could simply end the lower rate and put his fingers in his ears, but that wouldn’t go down too well in the southwest, near his Cork heartland. He could kick it out temporarily again, but that would be simply delaying the problem.

McGrath could try to carve out a bespoke rate for hotels, which are being subsidised by taxpayers this winter through the back door anyway, in the form of the block booking of about a quarter of the sector’s capacity to house refugees. The rest of the tourism sector would then be left at 9 per cent. Varadkar hinted that the Government could “look at” this option.

Or McGrath could try to kill off the debate forever by coming up with an entirely new VAT rate on middle ground. Perhaps 11 per cent?

Either way, the sense is beginning to emerge that in 2023, the long-running debate over the tourism’s sectors VAT rate may enter some sort of denouement. It cannot come soon enough.