The Results are in: A staggering 87% of respondents are in favour of extending the 9% VAT rate
The results of our recent LinkedIn poll shows that an overwhelming majority voted for maintaining the VAT rate at 9% for the hospitality sector. The government and representatives of the hospitality industry are currently in discussions about the future role of the VAT reduction, as a supportive tool for businesses who are still struggling to stay afloat. In this article we will explore the role of VAT reduction in the industry and how businesses can benefit from a further extension of the 9% VAT rate.
Changing VAT rates
VAT was first introduced in November 1972, when Ireland became members of the European Economic Community, now known as the European Union. VAT rates have remained relatively stable throughout the years and the VAT rate for the service industry is typically 13.5%.
On two occasions this rate was reduced to 9% temporarily. In 2008, the VAT rate was reduced to 9%. The purpose of this reduction was to support the financial recovery of businesses adversely affected by the economic crisis of that time.
The most recent rate change occurred in November 2020, when it was reverted to 9%. The reduced rate scope also broadened to include hospitality, tourism and catering. This was a direct response to the COVID 19 pandemic and the subsequent lockdowns. The hospitality industry faced unprecedented turmoil in the wake of COVID-19. Inevitably, continued closures, loss of trade and earnings and the cost of reopening had a major toll on the hospitality sector. The government pledged to provide additional support to minimize the challenges experienced within the sector The objective of these supports was to stimulate trading and cash flow and create employment. The introduction and extension of this reduced rate was greatly welcomed.
A state of uncertainty
Presently, we are again in a state of uncertainty as the extension date of the reduced rate is eminent. Leo Varadkar has openly assured the public that the economy is strong and well equipped to face economic challenges, as public finances are available. The president of the Irish Hotel Federation, Denyse Campbell, presents a more cautious and starker outlook. She claims that one in five businesses in the industry are at risk of closure if the VAT rate returns to 13.5%. The current rise in the cost of living is having a significant impact on both customers and businesses. Energy costs, increased prices of goods and services and a decrease in disposable income are major challenges which will not be easy to overcome. Many in the industry argue that the planned increasing of rates of tax back to 13 5% will have a significant negative impact moving forward.
The reduced VAT rate is of significant benefit to both businesses and the economy. Traditionally, one of the main objectives for reducing tax rates was to increase employment in the sector. Reduced rates could potentially increase opportunities for business to employ more staff and save jobs.
Small businesses in the hospitality industry were particularly vulnerable during the COVID- 19 pandemic. Such businesses may not have had sufficient resources or financial support to survive. The reduced rate of VAT could potentially allow them to continue trade and gain a stronger competitive advantage. The competitive stakes are high within this industry and any opportunity to remain competitive is advantageous to both the business and the customers. Maintaining the VAT rate at 9% provides an opportunity for business to avoid price rises, as continuous price increases can deter customers. Considering the increase in the cost of living and inflation rates, customers are now, more than ever, seeking value for their money.
The tourism industry also stands to benefit from the reduced tax rates, and this will have a knock-on effect for hospitality and other service industries. Lower VAT rates play a key role in tourism growth and international competitiveness. Overseas tourists visiting Ireland expect to receive high quality services at a reasonable price. Businesses will potentially be in a better financial position to meet their needs if the VAT rate stays at 9%.
The results of this poll provide us with valuable insight into the current state of the hospitality industry and the impacts and benefits of extending the reduced tax rate. The responders represent diverse sectors within the industry, such as management, marketing and advertising teams, food and beverage services and those in the tourism sector. The information which derives from this poll is of great significance, as knowledge and understanding is key to progress within the hospitality industry.