Why 9% Is The Right Vat Rate For Tourism
Michael Lennon, President of the IHF tells us why the 9% VAT Rate is right for tourism.
"In 2011 when the live register reached almost 450,000, the Government had the foresight to introduce a tourism VAT rate to promote much-needed job creation. Since then the measure’s positive impact has exceeded expectations. Bringing the rate in line with other competing European countries has proven to be the correct decision. It has allowed Ireland to become more competitive as a destination and is helping to restore investment in product development, capacity and service levels – all of which are critical for visitor satisfaction and the long-term success of Irish tourism.
This year tourism will generate over €2 billion in taxes, up €500 million per annum on 2011 and equivalent to 23% of tourism revenues. On the employment front, the 9% VAT rate continues to be one of the most successful job-creation initiatives in modern times, supporting over 65,000 additional jobs across the length and breadth of the country. Today tourism employs 235,000 and is on track to deliver a further 40,000 positions over the next five years. The profile of these jobs is diverse and inclusive, ranging from highly skilled roles to entry-level employment that provides great opportunities for advancement.
With 70% per cent of tourism jobs based outside of Dublin, tourism’s wide geographic distribution is critical to sustaining regional and rural economies. In many cases, it is the only show in town. As the biggest investors in Irish tourism, not only do hotels provide local employment, they source locally produced food, buy local services and provide a vital infrastructure in support of local business and communities.
“Tourism growth is one of the most effective ways to create a more balanced economic model aimed at spreading employment opportunities and prosperity across the entire country.”
And yet much of the debate about tourism has been skewed by issues relating to the shortage of hotel stock in Dublin as a result of a collapse in investment following the financial crisis. Despite the lack of supply, Dublin hotel prices have remained highly competitive compared with other European cities. Last year Dublin had the highest room occupancy levels in Europe while the average daily room rate was lower than nine of our major competitors including Barcelona, Amsterdam, Copenhagen, Paris, London and Rome.
The supply of hotel bedrooms in Dublin is now set to increase significantly on foot of €1 billion in additional investment by the private sector. This is essential for the future growth of tourism given Dublin’s role as a key gateway into the country. About 85% of visitors either start or finish their trip with a stay in the capital. Sustaining competitiveness is therefore key not only for Dublin but for tourism in the regions.
Appropriate taxation policy is a vital element of this. Last year, we welcomed 10m visitors and tourism generated some €6.9 billion in foreign exchange earnings, representing 78% of tourism revenue. Tourism should therefore be viewed as an indigenous export industry and treated accordingly by the Government in terms of taxation. In this regard, it makes no sense to undermine the recovery by imposing hundreds of millions in additional costs on visitors through increased taxes on spending. Their decision to visit Ireland and spend money in our economy is discretionary and should not be taken for granted given the highly competitive nature of international tourism.
MORE BALANCED ECONOMIC POLICY
Instead, our focus should be on creating the right environment for tourism to prosper throughout the country. We must ensure that economic policy does not become detached from the realities facing businesses in the regions. Tourism remains very seasonal for most of the country and businesses are effectively loss-making for a significant portion of the year. Indeed, the much-heralded recovery has been very uneven with many parts continuing to lag behind following a severe loss of ground during the downturn. On top of this, high costs of doing business, lack of investment in infrastructure and over-dependence on the UK pose increasingly serious challenges.
What is often lost in discussions about the economy is that tourism growth is one of the most effective ways to create a more balanced economic model aimed at spreading employment opportunities and prosperity across the entire country. The need for a less urban and Dublin-centric approach is brought into sharp focus by recent analyses from two State agencies – the National Competitiveness Council and the National Treasury Management Agency. They highlight the ‘concentration risk’ in the economy due to a dependence on a small number of multi-national companies. We would be very exposed if any of these were to experience a shock or relocate elsewhere.
RISKS DUE TO BREXIT
The financial crisis showed just how vulnerable we are to external economic events beyond our control. Today we face enormous risks and uncertainty with Brexit. Some of the scenarios being forecast would have grave knock-on effects for our own economy, particularly at a regional level. The implications for tourism are stark given our heavy reliance on the UK – our largest market, accounting for over 45% of inbound visitors.
Since the 2016 referendum, the drop in value of Sterling has resulted in a marked reduction in the spending power of UK visitors and a significant drop in visitor numbers. This has been more pronounced for areas outside of Dublin. In particular, serious pressure is being felt by hotels reliant on tour operator business which has very tight margins and is exceptionally competitive. Added to the poor Sterling exchange rate, any increase in VAT could result in a tipping point that risks a significant loss of market share to other UK and European destinations. This would be detrimental for many businesses, including hotels and guesthouses.
“It is essential that economic policy does not become detached from the realities facing businesses in the regions – the engine behind Irish tourism.” At a time of increased uncertainty it makes no sense therefore to jeopardise Irish tourism further and hinder our capacity for growth. The 9% VAT is a key part of the overall competitiveness of our tourism product. In light of the serious challenges facing the industry, any increase in VAT would be short-sighted in the extreme."