Cutting VAT for the hospitality sector in the wake of the closure of two high-profile Dublin restaurants could come at the cost of personal tax cuts in the budget, Minister for Public Expenditure and Reform Paschal Donohoe has warned.
Mr Donohoe was speaking after Michelin-starred celebrity chef Dylan McGrath announced the immediate closure of his Rustic Stone and Brasserie Sixty6 restaurants on Dublin’s South Great George’s Street.
He blamed “rising costs and economic pressures” for the decision, saying “we have decided it’s simply not sustainable any more”.
In a report last week, industry lobby group, Restaurants Association of Ireland said 577 restaurants had closed in the 11 months since September 2023 when VAT was restored to the standard 13.5 per cent rate. A discounted rate of 9 per cent had been in place since November 2020, a time when the sector was struggling through the Covid pandemic.
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It maintains that hiking the VAT rate is costing the State more money in business closures than the €545 million that cutting the tax to 9 per cent would cost the exchequer, citing Department of Finance figures.
But Mr Donohoe said the cost of returning to the lower rate of VAT would be “well in excess of €700 million”.
“I recognise how demanding it is to run a small business in the hospitality sector,” Mr Donohoe said. “But what the Government will have to do is look at the many competing pressures we have with regard to how we spend money and allocate resources on budget day and make the best decision overall.”
“If we do not make changes with regard to our personal tax code on budget day, we will see many people pay a higher rate of universal social charge and a higher rate of income tax just because their wages are going [to rise] due to their own work. And that is also an issue that needs very serious consideration and prioritisation.”
Calculations made by Department of Finance officials in papers published by the Tax Strategy Group show that increasing the standard rate income tax band cut off point by €2,000 to €44,000 – in line with last year’s budget increase – would cost the exchequer €500 million in a full year. Repeating last year’s half-point cut to the main USC band – bringing it down to 3.5 per cent from 4 per cent – would cost a further €230 million.
Adding €100 to basic personal tax credits would cost an additional €575 million in a full year.
The Minister’s comments suggest some or all of those changes could be jeopardised by a return to a 9 per cent VAT rate for hospitality.
However, Neil McDonnell, chief executive of small business group Isme, said his both the standard and reduced VAT rates in Ireland were too high and were “suppressing consumption”.
He said that, in his view, it was quite likely that the VAT yield would rise if the 13.5 per cent rate were cut “and it is almost certain that PAYE, PRSI and USC yield (in addition to higher commercial rates yield) would improve if the restaurants and cafes closing at the moment were able to continue to trade”.
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