Seanad Éireann debate -
Wednesday, 19 Oct 2022

Vol. 289 No. 5

VAT Rate for Tourism and Hospitality Sectors: Statements (Resumed)

Senator Pat Casey

Over a long period of time, accommodation has been driven by supply and demand. That is the main driving factor in that regard. This principle is leading to the high cost of accommodation. A few other factors are driving demand. Given the way the hotel sector is at present, we have only 62,000 hotel bedrooms available in the country. More than 42% of them are in four- and five-star hotels and only 32% are in two star or lower. The viability of budget hotels is very challenging in Ireland because of their high capital and operational costs.

The second factor having a significant impact on that is the refugee crisis, where more than 8,500 hotel bedrooms are being used as accommodation. They are being taken out of the two- and three-star hotel markets. Some 42% of the lower budget market has been taken up as refugee accommodation. That is adding to demand and driving up the price.

The number of entire homes on short-term lettings is an issue. The latest Fáilte Ireland report states that 13,780 homes are being let short term. That amounts to almost 40,000 bedrooms and is nearly 50% of the total stock of hotel bedrooms. They are unregulated and uncontrolled, and something needs to be done.

We need an honest debate around alcohol and it needs to be held in the context of public health. A number of European countries have adopted a two-tier VAT regime on alcohol in respect of on-sales and off-sales. We all know it is much better for alcohol to be consumed in a controlled environment than an uncontrolled environment. I refer to the excise from alcohol sales in 2020. When most pubs and hotels were shut and no concerts or events were held, the drop in sales from 2019 to 2020 was only 2.5%. That is significant considering the hospitality sector was closed down.

I would have preferred a discussion about the VAT on food, accommodation and alcohol and a more intense discussion on where VAT is within the whole hospitality sector going forward. I appreciate the Minister for coming into the House and taking this debate. I thank him for giving of his time.

Senator Niall Ó Donnghaile

Cuirim fáilte roimh an Aire agus an díospóireacht. Táim sásta go bhfuil seal againn an t-ábhar seo a phlé. The Minister will be glad to hear I will not take the whole seven minutes, and I appreciate he may be about to make a changeover. Nevertheless, I will make some important points on this welcome discussion.

These statements are timely and very important, as Members have outlined. The reduced VAT rate of the hospitality and tourism sectors was introduced on 1 November 2020, which was an understandable response to the pandemic, and is due to expire by the end of February 2023. This support has cost more than €900 million. It was appropriate for the State to introduce this measure at a time when consumer demand collapsed during the pandemic. The Minister acknowledged at the time that this was a measure to support cash margins rather than to reduce prices.

We are now in a very different situation in which the biggest challenge facing businesses is their energy costs. A temporary VAT cut has the advantage that it is a shovel-ready measure that is easy to implement quickly. It has been argued that it can provide a short-term boost to the economy by giving people more money to spend and by incentivising consumers to bring purchases forward to take advantage of temporarily lower prices. A temporary VAT cut is most effective as a stimulus when firms that will be affected by the cut can accommodate additional demand and are likely to respond by passing a VAT cut onto prices.

The question is whether a VAT cut is for the purpose of encouraging businesses in the tourism and hospitality sectors or to improve their cash margins. If it is the latter, the question is whether this is the most effective way to support businesses with their energy costs at this time. Evidence in the report submitted to Fáilte Ireland by Indecon indicates that the previous VAT reduction for the tourism and hospitality sectors was not passed onto consumers. This is simply to state that it is likely this measure is intended to improve price margins rather than incentivise reduced prices. The question we have to ask, therefore, is whether this is the most effective way to support businesses with their energy costs, given it would incur an annual cost of around €470 million.

We in Sinn Féin believe the most effective way to use public money and support businesses with their energy costs is through a tailored support package that targets the energy costs of businesses. As part of our budget 2023 submission, we proposed a scheme for businesses similar to that which was introduced in Luxembourg whereby a portion of a qualifying business’ energy bill increase would be covered by the State, with appropriate limits in place. The Government is now implementing a similar scheme, the TBESS. What is important now is that it operates at speed and scale to support businesses struggling with massive energy bills.

Sinn Féin also proposed a €2 billion energy support loan scheme managed by the Strategic Banking Corporation of Ireland, SBCI, which would lend through the commercial banking sector. The Government is now implementing a similar scheme, the Ukraine enterprise crisis scheme. Again, its design and implementation will ultimately be key. Given the depth of uncertainty surrounding this energy crisis, all policies must be kept under constant review to ensure the State's response is both agile and dynamic, which includes keeping the proposal for the extension of the 9% VAT rate under review.

I again thank the Minister for coming to the Seanad. It was an important opportunity for Senators to raise matters and it is welcome that he was present with us.

An Leas-Chathaoirleach

I welcome the Minister of State, Deputy Fleming.

Senator Frances Black

I welcome the Minister of State to the House. The tourism and hospitality sectors are extremely important parts of the Irish economy. It is good to see that the Government has recognised this and assisted the sector by imposing a reduced VAT rate. That rate was further reduced during the pandemic to support these sectors which were some of the worst-impacted sectors during Covid-19. This was an important measure, however the future is in doubt. The problem is that there are bad actors charging outrageous prices who have alienated the public. The public are now asking why the sector that is not providing value to customers is enjoying such a reduced VAT rate. Extortionate prices do not just impact wealthy foreign tourists. They make life exceedingly difficult for people who travel around this country to see their families, to attend matches, concerts and important things such as medical appointments, as well as people who must travel for work.

I have spoken to Members who struggle to find places to stay despite the generous allowance that is provided. The sector is dysfunctional and makes the lives of ordinary people harder. It deprives many people, including Irish people, of the joy of having adventures and discovering for themselves the many wonderful places and people all over this country. Something needs to be done but I do not think that reverting the VAT rate is the correct course. Consumers are being buffeted by price increases in every area of their lives. Rent, insurance, energy, even staple goods in the supermarket are all increasing at rates that are totally unsustainable. This is not just a problem in the tourism sector.

I am particularly concerned about the increase in VAT during this cost-of-living crisis when people have so little disposable income to treat themselves and socialise. There was a massive degree of social deprivation during the pandemic. We all experienced it but we know it was necessary to save lives. It had a massive impact on our collective psyche. It is a joy to see people gathered with their friends in restaurants and cafés around Dublin. It makes me happy to know that the web of social life is repairing itself. These spaces are vital social infrastructure. I am alarmed by the number of such places that have recently closed in quick succession. Small businesses are struggling with increased food and energy costs and I fear that a crude reactive response will harm these businesses and already hard-pressed consumers rather than the intended targets.

While I find myself in agreement with the tourism and restaurant industry regarding the reduced VAT rate, I have to signal my concern about the language deployed by industry representatives about the jobs that the sector provides. Industry spokespeople claim that they should continue to benefit from the reduced rate of VAT and the generous Government supports introduced during the pandemic because they provide employment. This is a weak argument because jobs in the tourism and hospitality sector are often difficult, draining, rife with mistreatment and poorly compensated. The supposed justification for this is that the work is unskilled. I have to disagree with that. It requires a great deal of skill as well as stamina and resilience to work in this area. It saddens me that those in our economy who work the hardest are often the worst compensated.

I wish to outline a couple of statistics from recent Fáilte Ireland research. Some 68% of hospitality workers are paid less than the current living wage. Of those workers, 33% said their working hours were unacceptable while 62% do not get Sunday premium and 33% do not receive bank holiday pay. Trade unions also undertook research and WRC case reports show that abusive management practices, low pay and precarious work are rife within the sector. We need to ask whether the State should support an industry that does not have a good record on workers' rights. When workers are on low pay and cannot support themselves they need to have their income boosted by the State. Businesses receive an additional subsidy when their workers qualify for HAP and other benefits. The State should not facilitate this exploitation. It should end it. I echo the Irish Congress of Trade Unions' demand that employers who receive State subsidies and public moneys should be obliged to adhere to all employment legislation, engage in State collective bargaining structures and provide decent, sustainable employment terms and conditions or forfeit the support they receive.

I will draw attention to a proposal that was outlined in the pre-budget submission of the Music and Entertainment Association of Ireland. Targeted VAT reductions can be a useful measure to support consumers and businesses. Bands and performers are currently subject to the standard rate of VAT. Under section 9, annexe 3 of VAT directive 2006, member states can apply a reduced rate of VAT to the supply of services for these professionals. Currently 19 member states do this with reduced rates ranging from 3% in Luxembourg to 15% in the Czech Republic at a time when musicians and performers are still recovering from the effects of the pandemic and are struggling to return to pre-pandemic levels of income. This would be an effective way of supporting professional performers, particularly as Covid-19 supports are withdrawn. Our VAT policy can be utilised to support consumers, workers and artists. We need to find ways to tackle bad industry practices. That is vital, while making sure that small businesses that animate communities are protected. That is a big challenge but it is essential that we rise to it.

An Leas-Chathaoirleach

Before I go further I should say that the slots are now all four minutes. We have finished the seven-minute slots as per the Order of the House.

Senator Shane Cassells

On 15 June this year at a meeting of the Joint Committee on Tourism, Culture, Arts, Sports and Media, the Irish Hotels Federation, IHF, attempted the magic trick of on one hand arguing for the extension of the 9% VAT rate and on the other hand defending escalating costs in the hotel sector for bedroom prices, a trick that Paul Daniels himself would have been proud of. However, in sawing that body in half the IHF was unable to fuse it back together. It left the legs dangling away from the torso when it was finished. Here we had a representative body for hotels which had been before the committee previously arguing for a reduced VAT rate of 9% in order to stimulate consumer activity and consumer sentiment in its sector, and rightly so. However, having obtained it, it did not pass it on in reduced costs to customers. It did the exact opposite.

On the day of the hearing I booked three flights to Santiago for less than the price of a room in a well-known hotel in the city where the previous week most Oireachtas Members had gathered for a night in support of Ukraine. At that committee hearing Fáilte Ireland's CEO, Paul Kelly, warned ahead of the summer trading season that price gouging would do the reputation of our hospitality sector severe damage abroad. He said we had a good reputation but early indications suggest that these scores of good value for money were likely to worsen over the summer. Ireland's reputation as a good value destination is something that this industry needs to be very conscious of. Mr. Kelly warned the IHF that if reputation is damaged it will take time to recover. However, the IHF did not listen because short-term gain trumped the long-term reputational value and image of the country.

In response to our questions that day on price extortion, the IHF said that it had no responsibility for what individual member hotels did in terms of price gouging. The IHF wants it both ways because equally it came in and made the case for all its members for maintaining a reduced VAT rate. On the one hand the IHF wanted to keep the VAT rate for its members. On the other hand, when we pointed out that its members are exploiting customers, it said that was nothing to do with it. It cannot have it both ways.

I want to put on record that the IHF circulated figures to us last week on average prices around the country during the summer trading season. It also indicated the occupancy rate to us and it stated that in the summer month of June, the Dublin occupancy rate was 91%, the highest in Europe. It said that in July the Dublin occupancy rate was 85.8%, the second highest in Europe. These figures are just ahead of Edinburgh. Those figures are not a justification for then using the marketplace to try to have those inflated figures in the city centre; it is the complete opposite but they were circulated to us in the committee last week as if they were some kind of justification for what the hotels should be doing.

Senator Casey spoke about a broader debate and he is 100% right because the sector is far wider than just the hotel beds; it is the restaurants as well. The Restaurants Association of Ireland has made the point and I have made the same point before to the Minister of State that the price of a hotel room might double or treble on the weekend of an All-Ireland final but the price of a steak does not. We should not be penalising restaurants and bars on this issue. The Minister of State might say it cannot be done but we have pointed out that Belgium, Finland, Portugal, Estonia, Latvia, Malta and Slovakia all have a split rate. I ask the Minister of State to come back and examine that and to have that discourse with us.

Senator Aisling Dolan

The Minister, Deputy Donohoe was here earlier and the Minister of State, Deputy Fleming is with us now. I want to talk about the benefits we have seen from the budget and about the supports we need to put in place for business. It is crucial that we see that this budget is backing business and that is why there has been a review of the 9% VAT rate for hospitality. It is crucial that we look at how we support businesses, not just in urban centres but in regional areas of Ireland. We know that in our city centre locations, like Dublin, there is a huge demand, particularly with the number of events that happen in our city centres but we need to look at it on a regional basis and make sure we are supporting Ireland and incentivising people to travel. All during the lockdown there was a big promotion of staycations and the importance of shopping locally, spending locally and visiting sites around the country. The budget we are putting forward is to support those groups in the time ahead. They are dealing with increased costs and we have seen and heard about the increased energy costs. We also know about the temporary business energy support scheme that is coming to support businesses in the time ahead but it is so difficult. I want to highlight that the budget has to serve the regions as well as the city centre areas. That is what we are about. If we have to support our hotels and restaurants in areas outside of city centre locations then we need to do that. We cannot penalise them because of the increased access and supports we get for Dublin or Cork city centres.

An Leas-Chathaoirleach

I thank Senator Dolan. She has the intellectual dexterity to say her piece in two minutes.

Senator Micheál Carrigy

I welcome the Minister of State. It is important to acknowledge that the Fine Gael tourism spokesperson met the industry and it is thankful for the significant Covid supports that have been given to it. The Minister of State knows the figures; 230,000 livelihoods depend on the industry and the reality is there is an extremely grim outlook for the sector in the time ahead. You only have to look at the increases in bills with an average of a 300% increase in energy costs. We have a lot of economic uncertainty and we need to look across the water at the economic uncertainty among our nearest neighbours in the UK. We need to look at the tourism figures and the number of tourists who come into Ireland from the UK. The industry gets a significant income from that economic activity. As I said, over 70% of our overall tourism revenue comes from the US, the UK and Europe, with a significant portion of that coming from the UK. If we have economic uncertainty ahead, as the UK does, that will affect the number of UK tourists coming into this country and spending money. The international tourism market is a competitive one so every euro we get in is hard won and it is important that we get tourists to spend that money in Ireland and not in mainland Europe or their own countries. I know there has been a significant amount of talk about the 9% VAT rate. We need to extend it until the end of 2023. We have a tough year ahead for the industry and we need to support it.

Senator Eugene Murphy

I welcome the Minister of State. The tourism and hospitality sector is one of those that was most affected by the public health restrictions put in place throughout the Covid pandemic. Through no fault of their own hotels, bars and restaurants had to shut many times in order to help the country get through the worst of that public health crisis. On the other side of that, Government served up everything that was needed to keep the industry going, which was very important. The Government put in place unparalleled and unprecedented support for the economy with the wage subsidy scheme supporting the incomes of citizens across the country. I have been listening in from my office to the debate, which has been a great one. We need to nurture tourism carefully as 230,000 livelihoods are supported by it. Before the pandemic and before 2019 it generated over €7.5 billion in revenue for the economy, with over €2 billion in taxes generated annually for the Exchequer. There is no doubt but that hotels, bars and restaurants have not recovered to the extent that we would like.

Going forward with the crisis we have and with the crisis in England, we need to be careful about how we handle the VAT rate. I acknowledge that is costing a lot of money and, like Senator Carrigy, I would like to see it extended. The sector has two massive challenges. We have the warehousing of the debt, which is in excess of €400 million. That has been kicked down the road for another period but it still has to be paid. There is also the challenge of the energy crisis and again I acknowledge that the Government is bringing forward a considerable amount of money to help businesses with it. However, the cost is so horrendous and we have to all acknowledge that the hotel sector would use a lot of electricity. The costs are so horrendous and this sector will face continual challenges. I hope that some way will be found as we go forward to try to further extend that VAT rate. It is not easy but we do not want to destroy the sector either. I want to acknowledge again that there has been a lot of support from Government for the sector. The Government is well aware of the challenges the sector faces.

Senator Jerry Buttimer

I welcome the Minister of State and I concur with a lot of the sentiment expressed in the debate. This is an important sector of our economy and it is one in which we must look at the protection and retention of jobs in what, as Senator Murphy rightly said, is an energy crisis in which the costs have escalated. I will give the example of the Celtic Ross Hotel in Rosscarbery, where the chief executive, Neil Grant, has been widely reported as saying that their energy bill went to €24,699, from €8,333 in 2021, in the calendar month of July. Acknowledging the huge Covid supports Government gave in the pandemic and recognising the temporary business energy support scheme being put in place, which is worth €1.25 billion, I ask that we look at how we could backdate that to the summer months, especially given that it was an issue for the sector.

I appreciate that there are issues around the costs associated with hotel rooms in Dublin in some cases and with the way in which, to many of us, there is a reality that there was a gargantuan increase in prices in the capital city as opposed to outside the capital. We need to look at the VAT retention rate from a number of sources. We gave the media a 0% VAT rate on newspaper sales.

I do not believe this will save the newspaper industry or physical newspapers but that is a different matter. I ask that as a Government we look at the totality of the hospitality sector in the round, as the Ministers, Deputies Michael McGrath and Donohoe, are fond of saying. I ask that we look at decoupling food from rooms. Senator Cassells is correct. The price of a steak should not go through the roof as it has done. We need to look at this as an example.

I do not share the dystopian view that Senator Black has of the sector. The Government has made huge changes in pay and conditions, the minimum wage, tips and the whole context of pay, remuneration and conditions. We should accept and acknowledge this. Part of the difficulty, as Senator Keogan said, is that people do not want to work antisocial hours any more. People are migrating from hospitality to 9 a.m. to 5 p.m. Monday to Friday where they do not have to be discommoded from their family and friends, they have their weekends for themselves or they do not have to work on an all-Ireland final day or a concert day or an evening when their friends are out enjoying themselves. This is an issue on which we must have a debate. I have asked for this debate in the House as a member of the labour panel. I have called for a debate on work and the nature of work in a new modern Ireland and how work has evolved. We are at near full employment but if we walk around our capital, Cork city or any part of Ireland there are signs in multiple places looking for staff. This is something we need to address as a Government and as a society.

I welcome the Government's commitment to the hospitality sector. I ask that prior to February there is extensive consultation and that we look at the totality of the hospitality sector. It is about the protection of jobs. It is about the ancillary and auxiliary jobs around it. It is about the creation of a céad míle fáilte.

An Leas-Chathaoirleach

I thank the Minister of State very much for his willingness to allow less time for himself to accommodate everybody. As it turns out the problem has not arisen and it is only a matter of a minute.

Minister of State at the Department of Finance (Deputy Sean Fleming)

I thank Senators for their contributions on this important issue. I acknowledge the importance of the tourism and hospitality sectors as significant employers throughout the country. There is a great range of opportunities in the sector with part-time and full-time roles. The tourism and hospitality sectors provide many people with their first jobs. For other people the sectors provide flexible working patterns allowing for other commitments, be they childcare or third level study. For a large number of people these sectors provide well-paid full-time employment. This is a fair representation of the employees in the sector. It is varied, with some working weekends, some working part-time, some working evenings, some working full-time and some working a number of days at various times of the year.

The issue of recruitment to the sector has been mentioned as has the fact the country is at full employment, with more than 2.5 million people in employment. Hiring and retaining staff is a key important issue. It is one that is very much live in the sector. Everyone I meet raises it as a particular issue. The businesses in these sectors are part of the fabric of Irish society where we welcome guests to the country and where we take our families. There are many milestones celebrated in function areas, from first communions to birthdays to graduations to receptions after many family bereavements and funerals. The personal nature of the business and the way it impacts on all of our lives means the Government is very aware of the challenges facing the tourism and hospitality sectors at present. Unfortunately, these challenges are being faced by all in our society and economy. This means there are limits to what the Government can do to assist the tourism and hospitality sector as a specific sector.

The Minister, Deputy Donohoe, outlined the costs associated with the measures when he opened the debate earlier this afternoon. It is important to repeat one or two key points. The cost to the Exchequer, which is the taxpayers and people of Ireland, of the reduced to 9% VAT rate for tourism and hospitality from 1 November 2020 to the scheduled end point on 28 February 2023 is just over €900 million. If we were to seek to extend the measures to the end of 2023 it would be at a further cost of €427 million. This is a significant amount of tax for the Government to choose not to collect. When the Minister, Deputy Donohoe, introduced a reduction in the VAT rate in November 2020 it was at a time when public health measures routinely closed hotels and restaurants or significantly limited their capacity. Many businesses made a choice not to pass on the savings. They decided to retain them for the benefit of the businesses at a time they needed substantial additional support.

In 2018 the Department of Finance evaluated the impact of the 9% VAT rate. It found expenditure on tourism and hospitality was more sensitive to income growth and the economic cycle than price changes. This is a very important factor. If the economy is good and there is good employment and people have reasonable incomes they will spend money in the hospitality sector and on accommodation when going to events or going away for a night or a weekend. The level of activity is more determined by how much money people feel they have in their pockets rather than the price for a particular menu on a particular night. This is what research has shown. From this perspective I would not be surprised if the changes introduced on income tax end up having a more direct and positive impact on the hospitality and tourism sectors in Ireland than the extension of the VAT rate changes.

The Minister, Deputy Donohoe, spoke about the wide range of supports available in the pandemic, including more than €10 billion through the temporary wage subsidy scheme, the employment wage subsidy scheme and other supports the tourism and hospitality sectors availed of, including the Covid restriction support scheme. This was a targeted support for businesses significantly impacted by the restrictions. The support was available to companies where business premises were located in a region subject to Covid restrictions. More than 25,000 unique premises claimed payments under the scheme, amounting to €724 million.

Practical supports were also put in place through measures such as the tax debt warehousing scheme. This allows tax liability to be warehoused for all taxpayers eligible for Covid-19 supports. More than €3 billion of taxes was warehoused in the pandemic in respect of more than 100,000 businesses. In this regard people may be aware that on Monday this week the Revenue Commissioners announced an important and significant extension of the debt warehousing scheme in light of the current challenges and economic situation facing businesses. Under the scheme businesses with warehoused debt were due to enter an arrangement with Revenue to deal with the debt by the end of the year, or by 1 May for those subject to the extended deadline. Given the current economic uncertainty, Revenue has extended the timeline to 1 May 2024. This means businesses will not face the challenge of clearing the debt in the warehousing or entering a phased payment arrangement to clear the debt until 1 May 2024. Importantly, businesses will still be able to avail of the reduced 3% interest rate from 1 January 2023 as opposed to the general interest rate of 10% when they come to pay the debt. These are potential cash flow benefits for many of the businesses warehousing their debt. The fact this must not be dealt with now or that an arrangement must not be entered in the immediate future is a serious cash flow benefit for businesses throughout the country.

As Senators are aware, what is driving costs for sectors in the economy is the energy crisis. The wholesale price of natural gas is now approximately eight times its average level in the year preceding the war in Ukraine. Prices in global energy markets are driving costs for people and businesses. The Ministers, Deputies Donohoe and McGrath, announced an €11 billion budget day package in the Dáil a few weeks ago. The budget was all about the cost of living and putting money back into people's pockets, supporting families and older people and helping businesses facing the challenges of rising costs. Senators should note the Government will continue to monitor and respond to the energy crisis. It is important for all of us to remember this is something affecting businesses in every sector and there are limits to what the Government can do in respect of any of these issues.

A number of points have been raised during the debate. One is whether it is possible to decouple tourism and accommodation from the hospitality sector for VAT purposes. The answer is that it is possible and it can be done. This is not a commitment that it is being done. It can be done legally but it is important to note the following point.

The hospitality sector, which has high levels of employment in the sector, accounts for 70% of the total cost of such a measure, as opposed to the tourism accommodation side. It would have-----

Senator Shane Cassells

Is that 17% or 70%?

Deputy Sean Fleming

Income from the hospitality sector comprises 70% and accommodation 30%. It would be a significant cost. Technically, it is possible to do it. Another suggestion was made about different VAT rates in different zones around the country. I want to be clear on this. This is not permitted under EU VAT rules. People referred to costs in the capital city versus costs in other parts of the country, but we are one State and we cannot have different VAT rates in different counties. On the first question on decoupling, the answer is that it is possible. However, it is not possible to have different VAT rates in different places. I wanted to clarify that and to thank Senators for raising the issue and sharing their views with the Minister and me.

An Leas-Chathaoirleach

I thank the Minister of State, Deputy Fleming, for his input, co-operation and willingness to accommodate all Members. I also thank the Minister, Deputy Donohoe, in his absence, and all contributors to the debate.