Swift retribution: Eye-watering prices do hospitality businesses no favours
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Some of the most influential lobby groups in the country have vehemently argued the expected hike in hospitality Vat rate from 9% back up to 13.5% is going to hit consumers’ pockets and all they want is to prevent this from happening.
However, this narrative is becoming harder to swallow when you look at the eye-watering prices some service businesses are charging.
Pop-sensation Taylor Swift has highlighted the toxic relationship between the tourism industry and customers and how the Vat issue has never really been about protecting their best interests.
Ms Swift is set to come to Dublin next June to perform three gigs. On the first night, a Friday, the cheapest accommodation option listed on comparison website Booking.com for two adults looking to stay one-night costs €178. And that’s for a hostel.
There have been several reports of price gouging by accommodation providers in Dublin when big events like concerts are on, but it seems to be becoming the norm. A random weekday night in the coming September for two adults was €70 on the site. And again, this was for a hostel.
As inflation fuelled surging prices for goods and services over the last year, it looks like some businesses have been cashing in, as customers would not think twice about why rates are so high during a volatile economic environment.
However, these prices could be forced to come down with the anticipated re-introduction of a 13.5% Vat rate at the start of September.
The lower Vat rate is essentially a tax break to incentivise people to go out, but the higher rate, coupled with the current prices that some places are charging, could be the final straw for consumers, which could lead to many pulling back on recreational spending and prices subsequently falling.
The contentious tax on services has been an issue for hospitality businesses for more than a decade. Before 2008, the rate was 13.5% but the Government reduced it to 9% to help businesses survive after the financial crash and returned to 13.5% pre-pandemic.
Then covid-19 landed in Ireland and all hospitality businesses took a battering. Mandatory closures led to led to months of lost business and subsequently the Vat rate was lowered again to help firms cope.
This has been an expensive move by Government though, and the overall cost is estimated to have exceeded €1bn.
The cost of the measure when it was first introduced, from November 1, 2020, to December 31, 2021, was €401m. The cost of the first extension to August 31, 2022, was €251m. The cost of the second extension until the end of February was €250m. Finally, the cost of another six-month extension until the start of September this year cost about €300m.
On the other hand, if the Vat rate returned to13.5%, the exchequer could collect an extra €563m a year.
There is justification for keeping the 9% Vat, but service businesses charging these ludicrous prices are not helping the case for the wider industry and maybe the priority for these lobby groups should be getting these operations in line before they look for further support from the State.
Economist Jim Power said in a report published earlier this year that returning to a 13.5% Vat rate could lead to thousands of job losses.
“It would threaten the viability of businesses still struggling to recover from the impact of covid-19. Many more businesses could be forced to shut down and thousands of jobs could be lost,” said Mr Power.
The Restaurants Association of Ireland (RAI) also warned one in five restaurants are at risk of closing if the Vat rate increases.
In addition, the 13.5% Vat rate is among the highest in Europe and is higher than the rate charged in the UK. Next door, the hospitality Vat rate is 12.5% and it was reduced to 5% during the pandemic to help businesses.
However, it is important to remember the 9% Vat rate was a measure to help firms battle the fallout of covid. Covid is now under control and hospitality operators are benefitting from post-pandemic pent-up demand.
For example, leading hotel group Dalata, which operates the Maldron and Clayton hotels, posted record revenues of €500m last year. This growth was largely driven by price increases, according to the company.
Also, most pubs outside the Dublin region have made a full recovery, with their sales matching or exceeding levels before the onset of the pandemic, the Vintners’ Federation of Ireland (VFI) said earlier this year. The VFI is among many groups who have said the 9% rate is needed to reach full recovery.
Meanwhile, Vat receipts in the first half of the year reached €10.3bn, ahead of last year by €1.2bn.
“This was broadly in line with profile and reflects the underlying strength of the Irish economy,” said Finance Minister Michael McGrath, and Public Expenditure Minister Paschal Donohoe at the launch of the Summer Economic Statement 2023.
However, new challenges have hit hospitality businesses though, including soaring costs including electricity bills, which jumped massively since Russia put pressure on the energy market following its invasion of Ukraine.
Hospitality businesses from pubs to hair salons have been navigating these headwinds while also operating on historically tight margins.
“The real issue is that the global economic difficulties are coming on top of many business pressures emanating from dramatically higher input costs: cost-of-living pressures, labour shortages and rising interest rates. An increase in the VAT rate would exacerbate those pressures,” Mr Power said earlier this year in his Economic Rational for Extending the 9% VAT rate.
The service industry will always be exposed to risk as it depends on recreational spending and an open economy, but prolonging a measure introduced to help with a separate problem may not be the answer.
A review on the 9% Vat rate by the Department of Finance published in 2018 found the lower rate was “regressive” as it “disproportionately benefits better-off households as it primarily covers discretionary expenditure such as meals at restaurants or stays in hotels”.
It is looking increasingly likely that lobby groups will achieve another extension though, according to source within the tourism industry.
At a meeting this week between representatives of the pub and restaurant sector, Fianna Fáil members were apparently strongly supported the decoupling of the 9% Vat rate between accommodation and food, said the source, who did not want to be quoted.
At the meeting, there was an acknowledgement that food businesses were more “vulnerable” to a potential Vat rate hike back up to 13.5%.
In a separate report by tourism body Itic, results of a Red C survey of over 1,000 people in late June showed 60% of respondents are against the idea of an increase in the 9% Vat rate for restaurants, pubs and tourism accommodation providers.
The sector was fully closed or partially closed for nearly two years during the pandemic and is at a very vulnerable stage. Full recovery is not expected until 2026 & this will be pushed out even further if Vat is increased,” said Itic CEO Eoghan O’Mara Walsh.
No one would argue that the tourism industry has suffered a rough three years as lockdowns and inflation hit the industry but securing another 9% Vat rate extension while charging customers, who aided the industry’s recovery during this period while also being hit with price pressures, seems like having their cake and eating it too.