Officials cautioned that reducing VAT for cafés, restaurants and fast-food outlets would impose an “extremely significant” burden on taxpayers and would generate substantial “deadweight” by assisting businesses that did not require support.
In a pre-budget submission, Department of Finance officials said the proposal would apply across the board to all firms, irrespective of their viability or profitability, reports Breaking News.
They advised Minister Paschal Donohoe that the move would be a “blunt measure” that lacked precision and would result in a “significant amount of deadweight.”
The submission stated that targeted supports for businesses under pressure would represent a far more efficient and effective use of Exchequer resources, reports Breaking News.
The document said: “A reduction in the VAT rate for the hospitality sector would represent an extremely significant, and potentially, ongoing cost to the Exchequer,” reports Breaking News.
It added that cutting the rate from 13.5 per cent to nine per cent would further narrow Ireland’s already limited tax base.
Officials said that if three proposed VAT reductions – including those relating to energy and apartment sales – were implemented, the overall tax loss would amount to €1.2 billion, reports Breaking News.
The submission indicated that the majority of hospitality businesses would retain the financial benefit of the tax cut rather than passing it on.
It said: “This is supported by evidence that previous [industry] VAT rate cuts were not passed on to the same extent that the VAT restorations were,” reports Breaking News.
The paper also noted that although challenges facing the hospitality sector were genuine, the reduction might still be insufficient to “alleviate the challenges” experienced by struggling operators.
It further outlined that the evidence underpinning arguments for a VAT cut was “mixed,” reports Breaking News.
At the time the discussions took place in the second quarter of the year, employment in the hospitality sector stood at 130,000, compared with 125,700 a year earlier.
Ahead of the budget, talks considered whether any tax reduction could be more narrowly applied to exclude highly profitable fast-food chains or hotel-based restaurants, reports Breaking News.
However, the submission said: “Under EU law, it is not possible to target any potential VAT change to organisations based on criteria such as size, turnover, number of employees, geography etc,” reports Breaking News.
The Revenue Commissioners also warned of major practical difficulties if different VAT rates were applied within hotels for accommodation and food services.
“This could lead to the underpayment of VAT because the charge for accommodation and meals would have to be apportioned,” the submission said, reports Breaking News.
It added that such an approach could result in serious “administrative and operational complexity” for both Revenue and taxpayers, or increase the “risk of avoidance and scope for manipulation.”
In comments attached to the submission, Minister Paschal Donohoe wrote: “I understand the policy observations around this … and I am making the necessary arguments within Government on [the] need for trade-offs, reports Breaking News.
“This budget will not repeat the very substantial increases in tax credits of recent years, in turn yielding a broadening of the personal tax base,” reports Breaking News.
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