The second reduced 9% VAT rate was introduced on a temporary basis as part of the Jobs Initiative from July 2011 to December 2013 and was aimed at boosting tourism and the creation of additional jobs in that sector. The rate was designed to be temporary, but was maintained in subsequent Budgets. In 2016, the Programme for Partnership Government committed to maintaining the 9% VAT rate, dependent on prices remaining competitive in the sector. I decided in Budget 2018 not to make any change to the 9% VAT rate. However, I accepted that the rate must be subject to analysis. In this context, I asked my Department to undertake a comprehensive study of all aspects of the 9% VAT rate ahead of Budget 2019.
The “Review of the 9% VAT rate: Analysis of Economic and Sectoral Developments” was published by my Department in July 2018, in order to better inform any decision in relation to the 9% reduced rate going forward. In addition to assessing the relevance, cost, value-for-money, and impact to date of the 9% VAT rate, the Review also looked at the estimated impact on the relevant sectors were the rate to be increased.
The Review found that tourism expenditure was more sensitive to income growth and the economic cycle than price changes. The economy is currently performing well, with high levels of employment and strong demand in the tourism sector. This positive economic outlook means that the income channel of demand is likely to ensure that economic activity within the sector remains strong. The Review concluded that the VAT rating applied to the tourism sector should not greatly impact demand or employment in the sector. The Budget decision to increase the VAT rate was made following this analysis.
Furthermore, the Revenue Commissioners also published a report on the 9% VAT Rate in June 2018 which analyses the output and employment impact of the 9% VAT rate using Revenue data. The analysis found an estimated increase in employment of on average 1.8 employees for each firm benefitting from the reduced rate in the accommodation and food sector in the year following the introduction of the reduced rate. However, beyond the short term, they were unable to distinguish the impact of the rate on employment from the impact of other factors in the economy.
Given the impact of an increase in the VAT rate on the hospitality sector has only recently been reviewed by my Department and the Revenue Commissioners, there does not seem to currently be a case for reviewing the impact of the increase.
However, in noting that changes made in Budget 2019 may present a challenge to the tourism and hospitality sector, an extra €35 million was allocated to the Department of Transport, Tourism and Sport in order to provide more targeted supports. This allocation includes targeted supports of €4.5 million for regional initiatives such as Ireland’s Hidden Heartlands and the Wild Atlantic Way, and nearly €10 million for the development of greenways.