Finance Minister Michael Noonan set to end lower tourism VAT rate in Budget?

By Business Editor David Murphy

It is almost certain that Finance Minister Michael Noonan will increase VAT on restaurants and hotels in next week’s Budget.

His original plan was to temporarily reduce the tax from 13.5% to 9% from July 2011 until December 2013 as a stimulus measure for the tourism industry.

The money for the tax cut came from the controversial 1.6% levy on pensions, which expires next September. As a result VAT is due to return to 13.5% in January 2014.

With many hotels and restaurants still struggling after five tough years there has been intensive lobbying by the tourism industry on the Minister to think again and limit the increase to 10% or 11%.

To gauge the fall and limited recovery in Ireland’s tourism figures it is worth looking at the CSO’s number of visitors from overseas to Ireland from 2004 to 2012.

It shows signs of a return to health but the figures have a long way to go to return to their peak of 8 million visitors per annum which they reached in 2007.

Figures published last month by the CSO show trips to Ireland rose by 6.7% in the first eight months of the year compared to the same period last year.

Interestingly, visitors from the US shot up by 20%.

Taxes such as VAT are not the only reason why travelling to Ireland looked pricey compared to alternatives. Much of the hospitality sector is over borrowed.

Last year NUI economist Alan Ahearne calculated Irish hotels carried €6.7 billion of debt and €2.5 billion of this needed to be restructured to lower the burden to sustainable levels.

Restructuring is happening very slowly. There is new investment reaching the sector, but it is mainly going to trophy hotels in urban areas.

Some banks are working hard to address debts of companies in the sector. Industry sources single out AIB as one lender which is making progress. But many businesses are facing difficulties because the bank they dealt with is either in liquidation or exiting Ireland.

As the economy begins to recover, fixing the jobs crisis is crucial. CSO figuresshow the accommodation and food services sectors have added 15,000 jobs over the past two years.

The Irish Hotels Federation’s CEO Tim Fenn says putting up the VAT rate sends “the wrong signal at the wrong time.” He argues that increasing it could cost the industry 10,000 jobs.

Keeping VAT at 9% would cost €350m a year.

It cannot be argued that the only reason there has been a recovery in tourism numbers is as a result of the reduced tax. However, it certainly seems to have helped.