‘Minimal public impact’ of end to 9% Vat rate
Finance Minister Paschal Donohoe was told that ending the special Vat rate for hotels and restaurants would have a minimal impact on the public.
Plans to try and charge higher rates of Vat in Dublin and other tourist hotspots were also shot down, according to an internal submission prepared for the minister by Department of Finance officials.
The new Vat rate of 13.5% applied from yesterday.
The 9% rate had been introduced as a temporary measure in 2011 and by the end of 2017 had cost the Exchequer an estimated €2.6bn.
However, moves to restore it to its original 13.5% rate met with opposition from the hotel and restaurant industries.
In a submission prepared for Mr Donohoe, officials said the special rate had been introduced to create jobs and “on condition that prices remain competitive”.
The sectors benefiting were no longer considered competitive and the department believed an increase in the rate would have little to no impact on employment.
It said it was particularly hard to defend for the tourism industry.
“The tourism sector is more responsive to income levels than price, there is less relevance and justification for applying a low Vat rate to these sectors,” said the department.
Suggestions had been made that the special rate could be kept in certain parts of the country, particularly in Dublin where hotels were charging high rates.
However, the submission said: “It was pointed out that the Vat directive did not allow for regional disparities in the operation of the Vat system, nor did it allow for different rates in respect of what is effectively the same service.”
Officials said an economic report raising questions over retention of the 9% Vat rate could be published to back up the department’s decision to abolish the rate.
Mr Donohoe wrote: “As this report makes clear, these are not my views or the views of the Government. Will be a helpful contribution to approaching debate.”
The impact of an increase in the rate, even if every cent was passed on to the customer, would have minimal impact, the submission also said.
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.
The minister was also given options around increasing or decreasing general Vat rates, with a 1% rise in all rates yielding over €800m annually.
No changes were made to the two main rates of 13.5% 23% that apply to most goods.
The submission explained: “Increasing Vat rates may negatively affect inflation.
The 13.5% rate applies to domestic fuels, construction, housing, labour intensive services, and general repairs and maintenance.
“Accordingly, an increase in this rate may affect employment and the less well off. An increase in the 23% rate may encourage cross-border shopping.”
Mr Donohoe was also advised that abolition of the special 9% rate could bring in extra revenue of €598m a year.
In a statement, the Department of Finance said the 9% Vat rate had always been intended as temporary and its removal came because of a “decline in competitiveness”.
They said it had limited benefit relative to its cost and that the IMF, OECD, and EU had all recommended either its abolition or a review of it.
