Donohoe boxes clever this time round on tourism’s special 9% VAT rate

Spread the love

The Government’s € 250 million decision to extend the tourism sector’s special 9 per cent VAT rate to next spring was skilfully handled this week by Paschal Donohoe, the Minister of Finance.

He has stolen a political march on Cabinet colleagues who would have used the issue to pressure him. He has taken the sting out of the tourism industry’s lobbying efforts for further State support in the run-up to the budget. He has also given the sector one full, unimpeded tourist season free from anti-virus restrictions to use the lower rate to repair some of the pandemic’s financial damage.

Yet Donohoe has managed to do this without hemming himself in to the commitment of a longer-term extension of the 9 per cent rate, which he is likely to abolish at the first opportunity.

The minister does not believe in giving tourism a special VAT break in perpetuity – he made that clear when he first abolished the lower rate in 2018 to raise cash for other priorities, before restoring it to avert crisis in the pandemic. He will need to raise revenue soon, and the special VAT rate may well be sacrificed.

The biggest mistake that tourism businesses could make now would be to plan for a long-term future with the 9 per cent VAT rate. The biggest mistake Donohoe could make would be to string the sector along as he and his predecessor, Michael Noonan, did for years until 2018.

Dose of reality

A dose of reality is required from one side, and a dose of clarity from the other. The truth is everybody’s friend.

Fraught discussions around the VAT rate have been central to the Irish tourism industry for more than a decade, since the Fine Gael-Labor coalition cut it from 13.5 per cent to 9 per cent as part of a stimulus program when it took power during the financial crisis in 2011.

It was a clever move, helping to repair the profit margins of battered tourism businesses that were struggling to compete with “zombie” hotels and other undead businesses that were being kept on life support by the banks.

Cutting the rate from 13.5 to 9 per cent effectively doubled, at the stroke of a pen, the overall profitability of every qualifying tourism business in the State. In 2011 and 2012, it prevented many of them from going bust.