A Vital Boost for Key Sectors
It has been announced that the newly elected Irish coalition government intends to cut the VAT rate to 9% for food-based hospitality, entertainment, and hairdressing in the next budget. In the UK, the government will from next month increase the rate of employer’s national insurance contributions to 15%. The highest equivalent rate in Ireland being 11.5% on weekly earnings over €527.
Ireland’s VAT Reduction: What’s Changing?
The current VAT rate for the hospitality sector In Ireland is 13.5% but as part of a Budget outline agreed between the coalition parties a 9% VAT rate will likely take effect from 1st July 2025.
The rate of VAT for the tourism & hospitality sector was previously lowered to 9% to aid the industry’s recovery from Covid and only returned to 13.5% on 1st September 2023.
Those services which will benefit from the new reduction in VAT rate include restaurants, cafes, and general catering services, as well as hairdressing services.
The UK’s Tax Policy: A Cautionary Comparison
By comparison, the hospitality sector in the UK has historically been subject to the Standard rate, which is currently 20%. However, this rate was reduced to 5% for the period between 15th July 2020 & 30th September 2021 and then an increased reduced rate of 12.5% from 1st October 2021 to 31st March 2022. These reduced rates of VAT were introduced in response to the economic crisis caused by Covid and to encourage increased customer demand in industries which were devastated by the pandemic during which hundreds of thousands of workers lost their jobs. These rate changes affected the hospitality & tourism sectors and targeted businesses such as restaurants, takeaways, holiday accommodation, and admissions to certain attractions. As of 1st April 2022, the rate of VAT reverted to 20% for both sectors with no further rate reductions on the cards, despite calls from many to bring these sectors in line with their overseas counterparts which often benefit from a reduced rate of VAT, as can be seen in Ireland.
Protecting Business and Jobs
In 2023, more than 500 pubs in the UK closed, equating to more than 6,000 jobs lost, and more than 400 more closing in 2024. Whilst in Ireland, almost 300 food-led businesses closed in the latter half of 2023, with a further 212 between January & August 2024. But whilst more pubs and restaurants are calling it a day in the UK, other countries such as Ireland are proactively looking to protect the hospitality sector with VAT rate reductions to cut the amount of tax businesses in the sector must account for on their regular trading activity. It could also be said that the VAT rate cut intended to be implemented in Ireland is in response to the expectation that between October 2024 & October 2025 over 1,000 more restaurants are intended to close their doors, although an expected July 2025 implementation date may not materially reduce this number.
Economic Implications: Can VAT Cuts Revitalise the Sector?
The role of taxation in supporting key sectors is becoming increasingly evident. The hospitality sector is crumbling and decisive action, as planned by the new coalition government in Ireland, is needed to reverse the trend outlined above. In the UK, the economic growth the Chancellor talks about can only be delivered through targeted, sector-focused taxation that increase spending, protect jobs and revitalise communities.
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