Restaurants and other businesses benefiting from a VAT rate reduction taking effect on Tuesday are not expected to pass the cut on to customers, Tánaiste Simon Harris and Minister for Enterprise Peter Burke have said.
The Fine Gael politicians said the measure, which involved a permanent cut in the rate charged on food in restaurants, bars and hotels from 13.5 per cent to 9 per cent, was intended to bolster the viability of businesses by addressing what were in many cases unsustainable profit margins.
Burke said it was “very clear an affordability measure and a viability measure do not go hand in hand”.
“This is a viability measure to shore up businesses that have been experiencing extraordinary costs,” he said, saying that by creating more competition in the sector there was the potential for a positive impact on pricing in future.
Burke’s view appears to be at odds with that expressed by the Taoiseach last October. Before the reduction was confirmed, Micheál Martin said the Government expected any cut to the VAT rate would be reflected in the prices consumers pay.
“We would like to see anything we do, if something was to happen, that it should be reflected in the pricing,” he had said.
A report last year by the Irish Fiscal Advisory Council found VAT increases applied in 2019 and 2023 were, by a significant margin, more widely passed on to customers than VAT cuts that came into effect in 2011 and 2020.
The latest VAT change, which is expected to cost €681 million next year and has attracted a good deal of criticism from outside those sectors set to directly benefit, will also apply to hairdressing.
Both the need for the tax reduction and its likely effectiveness have been questioned by economists, trade unions and, in an assessment before it was introduced, officials at the Department of Finance .
Speaking to reporters on Tuesday, Harris, who is also the Minister for Finance, said he was satisfied that cutting the rate was “the right thing to do”.
“We recognise that there are thousands upon thousands, tens of thousands, of businesses in the hospitality, tourism and hairdressing sectors,” he said. “We recognise that they’re often busier than ever, but if you ask them they’ll tell you they’re busier than ever and still to the pin of their collar. And what we want to do is reduce the cost of business.”
He said that having previously reduced the rate on a temporary basis, the Government had “decided the appropriate rate of VAT for this sector on a permanent basis is around 9 per cent.”