Should VAT on hospitality be reduced? A cafe owner and an economist debate

Irish Times

22-07-2025

Derek Bennett: I've run a cafe for more than 20 years - my business model is nearly broken
There has been much recent speculation recently about the planned decrease in
VAT
for
hospitality
. The
cost to the exchequer
would be €545 million, assuming the reduction is applied only to
food
and not to
accommodation
.
Many commentators have been asking where is the evidence that a decrease is needed.
Firstly, I firmly believe the reduced rate should not apply to accommodation, as hotels use a dynamic pricing model which allows them to increase prices when they are busy.
One argument against the reduction is that business systems could not cope with splitting accommodation from food to have two different rates, 9 per cent and 13.5 per cent. To me that is laughable: some hotels are already dealing with four rates: 0 per cent (for example, on takeaway coffee bags); 9 per cent; 13.5 per cent and 23 per cent (on alcohol and juices). Their powerful point of sale (POS) systems are well able to cope.
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I own and have run a cafe in Dún Laoghaire for the past 21 years. My business model is nearly broken. To underline this point, my books show the increases we have had to deal with in 2024 and 2025. When customers say the costs of rent, rates and energy must be an issue, I explain they're not really the problem.
My hourly employee costs annually are €220,000 for five to six staff on a day, including €25,000 of employers' Pay Related Social Insurance (PRSI). Materials costs are €125,000. VAT is €54,000. Rent is €33,000. Energy is €18,000. Rates are €6,000. Our sales prices are at the high end and we have over 1,000 customers each week, so it shouldn't be so onerous.
By the end of 2025, material inflation will have increased by 10 per cent (an increase of €12,000 over two years); living wage by 20 per cent (€40,000 over two years); VAT by 50 per cent (€44,000 or €22,000 in each of the two years) and sick pay is up €4,000. All of this amounts to a total of €100,000.
The last three items contributed €88,000 or 88 per cent of the increases, and were set by the Government. Now, while any increase in employee benefits is very laudable, there does need to be joined up thinking around whether this is sustainable, along with the other increases we face. Part of that thinking requires Government departments to work together to assess the implications.
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Does Ireland's hospitality sector really need a VAT cut?
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]
It appears that was not done, and as a consequence, the next planned increase in living wage is delayed, as is auto pension enrolment, which will add €5,000 annually. These delays have been welcomed in the industry. But there is an elephant in the room which no one involved in the process appears to have considered: Covid tax warehousing.
My business made a loss during Covid. The only reason we survived Covid was the Government's support programme, including tax warehousing, which left me with a sum of €58,000 to pay over five years, starting in May 2024. That arrangement in the two years for which I have broken down figures will amount to €18,000, and will be €12,000 for each of the following three years.
How are small, community-based hospitality businesses supposed to deal with that on top of the increases outlined above?
So now I am paying an overall extra of €118,000 – which has been partly offset by a price increase to my customers of €18,000. Therefore, in the two years of 2024 and 2025, my final extra costs amount to €100,000.
There are many small businesses across Ireland facing this situation. That, to me, is the justification for a return to a lower VAT rate on food.
We need innovative thinking – for example, exploring the possibility of focusing the VAT reduction on small hospitality businesses with net sales of up to €750,000, thereby excluding hotels, international chains, and large businesses. The €545 million cost to the exchequer would significantly reduce and, according to a Freedom of Information (FOI) request I submitted, over 3,000 businesses would benefit.
Derek Bennett is the owner of Harry's Cafe Bar in Dún Laoghaire, Co Dublin
Barra Roantree: Cutting VAT would be expensive and economically illiterate
The last few weeks have seen warnings about darkening skies on the economic horizon. We are told that deteriorating prospects and the possibility of a trade war instigated by the United States mean that the Government will deliver a '
much more cautious and restrained budget'
this year than previously planned.
Yet, an expensive and economically illiterate election pledge to reinstate a reduced 9 per cent rate of VAT on hospitality appears to remain on the table, recently elevated to a
'solemn commitment' by the Tánaiste Simon Harris.
VAT is already levied on guest accommodation, catering and restaurant services at a reduced rate of 13.5 per cent rather than the standard rate of 23 per cent that applies to most goods and services.
Figures from Revenue
suggest this amounts to a tax relief of almost €2 billion per year and that lowering the rate to 9 per cent – as was temporarily the case from 2011 to 2019, and then again during the pandemic – would cost an extra €810 million per year.
Excluding guest accommodation from the cut would slightly lower the cost (to less than €600 million), though it is not clear how feasible this would be. What rate would apply, for example, to a hotel package including dinner, bed and breakfast?
The Irish Hotels Federation has renewed calls on the Government for a 'permanent restoration' of the 9 per cent VAT rate on the hospitality food services sector. Photograph: Getty Images
Either cut would be expensive – costing more, for example, than lifting 55,000 children out of poverty; indexing tax credits and bands by forecast inflation; or extending the full-rate of Carer's Allowance to those currently receiving a partial payment or Domiciliary Care Allowance.
The economic case for prioritising a VAT cut over these other commitments in the Programme for Government is exceptionally weak.
This is reflected in the constantly shifting rationale provided by the sector for the cut: an evergreen response to whatever the issue of the day is.
Previously it was to stimulate demand by reducing prices. However, both
Irish
and international evidence suggests that such cuts were pocketed by business owners with subsequent increases passed onto consumers in the form of higher restaurant and hotel prices.
Now lobbyists for the sector claim a reduction in VAT is needed to preserve or increase profit margins, otherwise warning of 'another catastrophic year of shutdowns and job losses'. This is despite the fact the latest figures show there were 11 new companies incorporated for every liquidation in the sector, and that hospitality employment was 7 per cent higher in the first quarter of 2025 than a year earlier.
Even if the sector wasn't booming, cutting VAT is a terrible way of supporting any businesses that may be struggling.
That's because the largest share of the gains from a VAT cut go to businesses with the highest turnover: those selling at high volume and/or high prices. In other words, a VAT cut benefits owners of McDonald's and Michelin star restaurants more than a small cafe or restaurant.
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VAT rate cut for hospitality is back on the table - but will it be enough?
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]
If the Government and sector really believes that some smaller cafes and restaurants are struggling and deserve support, there are countless better ways to provide this.
For example, the Government has previously paid a grant aimed at smaller hospitality businesses based on the size of their commercial rates bills, while long-delayed reforms to reduce litigation costs would help reduce insurance premiums.
Given the availability of superior alternatives, competing priorities, and the worsening economic outlook, all that cutting VAT would achieve is to recklessly erode our already fragile tax base.
Doing so would be the final nail in the coffin of this Government's claim to be responsible stewards of the public finances.
Dr Barra Roantree is Assistant Professor in Economics and Programme Director of the MSc in Economic Policy at Trinity College Dublin