The more the special 9% tourism VAT rate costs, the better

The Government is coming under intense pressure from the tourism industry to further extend in next week’s budget the sector’s preferential 9 per cent rate of VAT, which was cut from 13.5 per cent a year ago to help tourism operators keep their heads above the stormy waters of the pandemic.

Tourism VAT is due to go back to the higher rate on September 1st, 2022, after the Government agreed in the summer to push out the reversion by a further eight months. The blanket measure is known to be loathed by mandarins in the Department of Finance, and also by trade unionists who resent any special help for a sector that has low wages and even lower levels of union representation and member fees.

But the Government may find it hard to resist the pressure to extend the special rate, after the hammering that the industry took when travel was effectively banned as part of the public health response to coronavirus. The last time the rate was hiked, in Budget 2019, it caused fury in the sector.

When the 9 per cent rate was brought in a year ago, it was estimated that it would cost about €401 million in tax foregone by the end of 2021, or about €336 million in a full year. The true cost, however, will be far lower as most of the sector was effectively shut for the first six months of the year under the restrictions. As there was little trade, there was little tax uplift for operators.

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Philip Nolan, VAT partner at financial advisory firm BDO Ireland, estimates that the extension to next September will cost about €250 million in tax foregone. The Government has little room to move on tax cuts and it would dearly love to get away with capping the cost.

There is another way of looking at it, however: the higher the cost of the VAT break, the better. The more tax that is foregone, the more buoyant the tourism sector must be to bring this about, and the more embedded the recovery will have become.