Tourism sector keeps its low VAT rate – for now

It was always going to be hard for a minority, populist-leaning government to pull the plug on the 9 per cent special low tourism VAT rate in the budget. Rural Independent TDs whose support the Government needs wouldn't have stood for it. Nor would Fianna Fáil, which also props up the administration.

But while Minister for Finance Michael Noonan understandably didn't scrap it, he could have at least have admitted that the measure needs reforming. Instead, he only acknowledged that the "economic case" for the stimulus has changed but that he is keeping it to help the sector cope with Brexit.

If the VAT rate’s objective is to help struggling tourism SMEs to survive, then it is an extraordinarily blunt, ineffective and crude way to go about it.

The special rate was brought in as an emergency (and ostensibly temporary) measure five years ago, to prop up the then-ailing tourist sector. But patients can become addicted to their pain relief.

The 9 per cent VAT rate – which effectively adds 4.5 percentage points to the profits of qualifying tourism businesses – is now the methadone of the tourism sector. It won’t give it up easily, even though the sector is now booming.

The VAT rate really does assist small tourism SMEs that need it. This much is true. But most of the cash the exchequer forgoes due to the measure – which is estimated at more than €500 million annually – flows instead to businesses that simply do not need any State stimulus at all.

Dublin hotels whose prices are rising at more than 20 per cent annually cannot, no matter how hard they spin it, argue that the special rate helps keep them competitive. The rate also benefits corporate caterers, which are odd beneficiaries of a tourism stimulus, and newspapers, another undeserving recipient.

Yet boat hire companies, car hire companies and guided tours don’t qualify for the tourism stimulus.

The wider tourism sector should consider itself blessed to have retained the measure. When this minority Government falls, however, it should replace the special tax rate with a different suite of measures more targeted at the businesses, and areas, that need help.