AS NATIONS RISE and all as day turns to night and night to day, only one thing on this earth can be set in stone, certain to endure for eons.

The debate about the special VAT rate for Ireland’s hospitality sector will never die.

You see, it’s been reported as pretty much a done deal that the government plans to give the sector a major tax cut.

In the next budget, VAT for food-led businesses, including restaurants and cafes, is set to be dropped from 13.5% to 9%. It will mark the fourth time in slightly over a decade that the industry’s VAT rate has been changed.

When hotels were included in the VAT cut, it cost about €700ma year. With the measure now expected to only apply to food-led businesses, it will cost the state about €545m a year in foregone tax revenue. That’s still a pretty massive chunk of change.

The tax break will basically function as a direct subsidy for businesses, which are mostly in agreement that the extra cash will go directly towards their bottom line.

So what has convinced the government to forego such a huge source of public funds?

Well, many politicians – such as Enterprise Minister Peter Burke – seem to have been swayed by loud cries from lobbyists that the restaurant industry is on its knees, with the VAT break needed to avoid catastrophic closure rates in the sector.

But when we actually take a look through some figures, the case doesn’t seem as clear. And it looks like the government might be throwing €500m of taxpayer funds per year away based on relatively sparse evidence.

How we got here

But let’s go back a bit. Where did this whole debate over the hospitality VAT rate start?

We covered this in detail in another article. But as a brief summary – up through the 2000s, a VAT rate of 13.5% applied to hospitality businesses, such as hotels, restaurants and cafes.

But then the Irish economy did an oopsie during the financial crisis. With a collapse in consumer spending, the government decided to cut the hospitality’s VAT rate to 9% as a way to stimulate lower prices and get people spending again after the crash.

It works like this: say a meal in a restaurant costs €100 without VAT. With the rate at 13.5%, the final price the customer pays will be €100 + 13.5% = €113.5. Scenario one.

With the rate at 9%, the price could be €100 + 9% = so €109. Scenario two.

Or, businesses could keep the price at €113.5, and pocket the extra €4.50.

The government rowed back on the measure when they became worried that, while scenario one was the aim, scenario two was more common in practice.

So the rate went back to 13.5% in 2019.

But then the world did an oopsie with Covid, and back came the 9% rate. This time, scenario two was the aim, as the government explicitly wanted to give cash to an industry devastated by pandemic measures and closure orders. Most people would agree this made sense.

In Budget 2023 – announced in October 2022 – the rate was restored to 13.5%, as the economy was doing much better and the government wanted the foregone tax revenue back.

But now, the rate will go back to 9%, despite the economy being in a strong place and with record low unemployment.

So, what gives?

Basically, in the last year or so a narrative has taken hold that the hospitality sector – mostly restaurants – is in crisis.

Is there a crisis? 

A quick search for ‘Irish restaurant closures’ brings up a slew of stories, most based on data from the Restaurants Association of Ireland [RAI], which says approximately 600 hospitality firms have closed in the last year or so.

Rising costs are blamed. Some of these are mostly out of the government’s control, such as an increase in the price of fuel.

But some are up to the state, such as the rising minimum wage. There have also been other costs over the last year or so, like improved paid sick leave for workers.

The likes of the RAI and other groups have said these state-controlled cost increases have cut into their margins to the point where many otherwise viable businesses are now going under. So, as the state is pushing these firms to the brink, it should give them a break in the form of the reduced VAT rate.

It’s a compelling argument. The problem is – there isn’t much evidence for it.

Let’s look a bit closer at the RAI’s figure of 600 restaurant closures a year. Most articles based on the crisis in hospitality have this statistic front and centre.

But looking at closures only tells half the story. If you’re a minister being asked to effectively spend €500m a year because 600 restaurants are closing, your first question should be: ‘Well, how many are opening?’

Because if the number of openings is above closures, then the number of businesses shutting down could be viewed as the normal churn in any industry.

It’s worth pointing out that the RAI doesn’t track restaurant openings at all.

Asked by The Journal why not, CEO Adrian Cummins said: “It’s a fair point.”

“The Department of Enterprise did that exercise and it showed there were potentially more openings, but it was a paper exercise and we would take issue with it. [But] I would acknowledge we don’t have all the data.”

The closest insight we have on openings comes from the Central Statistics Office, which found that in 2022, the most recent year that figures are available, 1,425 new businesses were started in the ‘Accommodation & Food’ sector. This was the third-most of any industry.

Now, there are some issues with these figures as well. One, the figures are over two years old. Two, there were still Covid supports knocking around in early 2022. Three, ‘Accommodation & Food’ covers hotels as well as restaurants.

But still, it is an indication that there could be a decent number of new food businesses starting up to replace others shutting down.

Sticking with the subject of closures, there’s also conflicting data around how many restaurants and cafes are really going out of business.

For example, while the RAI said about 600 food businesses shut over the last year, figures published by accountancy firm PwC found that there were 110 hospitality insolvencies in the nine months to September 2024.

Related Reads

When did we forget that Ireland’s special hospitality VAT rate was meant to reduce prices?

'In crisis': Hospitality sector 'gravely concerned' at decision to keep VAT at 13.5%

Cutting VAT on hospitality 'unjustified' and too expensive, says Department of Finance

Although some of the businesses counted by the RAI are likely sole traders who wouldn’t have created a corporate entity – and therefore wouldn’t show up in insolvency stats – it’s still a pretty big gap which clashes with the narrative of catastrophic numbers of restaurants shutting.

Figures which also don’t line up with the mass closures narrative are the employment stats published by the CSO, which show employment in the ‘Accommodation & Food Service’ sector is up by 9% over the year to September 2024.

This also isn’t just growth coming from a low base. There are currently 200,000 people employed in the ‘Accommodation & Food’ sector. This is compared to 178,800 as of September 2019 – that’s pre-Covid, when the industry was widely considered to be in decent shape.

Compare with Covid

To see what a crisis looks like, Covid saw an actual drop in employment. That 178,800 employed in ‘Accommodation & Food’ in 2019 plunged 139,000 as of September 2020. Clearly a crisis.

By comparison, the 200,000 currently employed in the sector is up from 183,000 in September 2023.

While it’s again worth recognising that other businesses such as hotels are also counted in the ‘Accommodation & Food’ category, the numbers don’t quite point towards an apocalyptic business landscape for restaurants and cafes.

This is a view which is also supported by the Department of Finance, which is staunchly opposed to the hospitality VAT cut, saying “the evidence does not support” the case for the reduction.

Now, all this isn’t to say that the restaurant sector isn’t facing issues.

It’s an industry which operates on thin margins at the best of times, and recent cost increases such as the minimum wage will of course have had an impact.

But the evidence that these are causing widespread closures seems murky at best.

If the government is minded to drop €545m with the explicit purpose of boosting the profits of private businesses, it could probably do with making sure in advance that it’s really needed.

We need more information

Especially – and this really can’t be stated enough – this €545m in foregone revenue is an annual commitment, not a one-off.

Half a billion less every year for the foreseeable future, when Ireland has a narrow tax base and is relying heavily on corporate tax windalls to avoid running deficits – money which could go as quickly as it came.

While no one likes lining the pockets of consultants, it would perhaps be worth spending some money on a proper report investigating Irish restaurant profitability and closures. To see if there is a crisis, and more importantly, to see if cutting the VAT rate will actually fix it.

Better to spend €500,000 on some consultants’ reports now, than €545m on the lowered VAT rate, only to find out later that it was never needed.

Because as things stand, we’re not really sure the restaurant sector has a problem in the first place.

And even if there is one, we can’t be sure if a VAT cut would be a panacea.

But hey, it’s only €545m of taxpayer’s money. Who needs fancy things like ‘evidence’ when it comes to spending it.