Friday 18 October 2019

Richard Curran: 'Impact of controversial Vat rate hike provides plenty of food for thought'

 

Counting the cost: The Department of Finance has pointed out a €50 bill for a meal with a €10 bottle of wine would only increase by €1.65, but many restaurants are operating on thin margins. Stock image
Counting the cost: The Department of Finance has pointed out a €50 bill for a meal with a €10 bottle of wine would only increase by €1.65, but many restaurants are operating on thin margins. Stock image
Richard Curran

Richard Curran

Restaurateurs and cafe owners are worried about 2019 before it has really got going. The price of a meal or a coffee is likely going up a little as the 9pc Vat rate, in place for several years, ends and the full 13.5pc rate kicks in. The Restaurants Association of Ireland has said the decision in last October's budget was incorrect and will end up costing jobs this year.

It is hard not to have some sympathy for the plight of the sector. Yes, it is operating in a booming economy and feeding into a booming tourism sector. But its Vat rate was tied up with that of the hotel industry, where operators have been hiking up prices in the capital city for years while enjoying a subsidised Vat rate.

This made it more difficult for restaurant and coffee shop owners to differentiate themselves in the arguments about whether they should benefit from a lower rate.

Restaurants sometimes have to operate on pretty thin margins and a hit to revenue or a hike in costs can have an effect on smaller businesses.

The Vat rate isn't a higher cost, because the punter pays. But restaurant owners can argue that they face a lot of competition from new places to eat, as well as higher wage bills and most likely higher rents in recent years. Then there is the Dublin-versus-the-rest debate. Even if restaurants in Dublin are packed to the rafters, as are hotels much of the time, it isn't necessarily the case in hotels or in restaurants in other parts of the country.

In order for restaurateurs to make a solid argument for retaining the lower rate they have to be able to show that a higher Vat rate will hit revenues. In other words they will end up with fewer customers, which in turn would lead to job losses.

As the Department of Finance pointed out, the higher Vat rate would mean an item costing €3 would increase in price to €3.12. A €10 meal including a soft drink would end up 33c dearer, while a €50 dinner with a €10 bottle of wine would only go up to €51.65. Not the most earth-shattering of price hikes.

The industry argues that any cost increases will make Ireland less competitive for tourism, at a time when Brexit, is approaching. But a recent Department of Finance statement said the 9pc Vat rate had always been intended as temporary and its removal came because of a "decline in competitiveness". Tourism is hugely important to the economy and to over a quarter of a million jobs. Brexit is a genuine threat, but visitor numbers from Britain are not as important to the overall mix as they were in the past and account for just one third of the total compared to nearly half a decade ago.

And according to Fáilte Ireland, tourism numbers are set to grow in 2019 despite Brexit and the higher Vat rates. It sees the number of visitors growing to 9.6 million, plus a further 9.8 million domestic trips.

Fáilte Ireland is forecasting a 3pc rise in visitor numbers but a 5pc increase in revenues because of more higher-spending visitors from North America and Europe. Despite all of these counter-arguments about tourism, the truth is there are lots of smaller restaurants and cafes in towns and villages around the country. They may not see the Vat issue alone as make or break but they are certainly more vulnerable to any revenue squeeze from fewer customers.

Contrast that with the bookies. Punters placing a bet pay zero Vat but the bookie pays 1pc betting tax. From Tuesday, that will have gone up to 2pc. So the State collects 13.5pc of what you spend on your coffee and buns but just 2pc on what you spend betting on a Russian soccer match.

Restaurants and cafes have added enormously to the social and economic life of many towns. You don't often hear people complain there are too many of them. Can the same be said about betting shops?

The betting industry was equally unhappy about the doubling of the betting tax. With betting, the bookie pays it and not the punter. They say it will drive smaller bookies out of business. The industry has pushed for an alternative which would see them pay 10pc of gross profits. Bookies say this would be a fairer method and would still bring in an extra €25m for the state as opposed to the 2pc charge which should bring in about €50m.

It has secured a review which will examine the impact on jobs.

I am sure the restaurant sector would love something similar but there is no sign of Merrion St relenting and making any exceptions or caveats on the Vat issue. Besides it might be difficult to prove which factors are affecting jobs in the sector.

Big bookie chains would benefit enormously from a switch to tax based on a percentage of gross profits and they are not exactly as financially vulnerable as many smaller operators might be.

Taxation policy by its very nature can be ruthless. But where valid economic exceptions based on size or on location are possible, surely they should be examined.

Irish Independent

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