VAT cuts won't lower prices for customers, say NI hospitality leaders

A VAT cut for hospitality businesses in Northern Ireland would not mean lower prices for consumers, MPs have heard.

The industry is asking the UK government for a VAT cut to compete with the lower rates charged in the Republic of Ireland.

Hospitality leaders say the cut is needed to help with squeezed profit margins and is a matter of survival, particularly for businesses in border areas.

The UK government has consistently rejected a call for a hospitality VAT cut saying it would be poorly targeted and too expensive.

The industry in Northern Ireland is making the argument that it has a special case due to direct competition with businesses in the Republic.

Michael Cadden, the chair of Hospitality Ulster, said: "We are currently victims of our geography."

In the Republic of Ireland, hospitality VAT on food is 9% and 13.5% on accommodation.

In Northern Ireland and the rest of the UK hospitality VAT is 20%.

Mr Cadden, who runs the Lusty Beg Island Resort in Fermanagh, said that while there had always been VAT differentials the ability of Northern Ireland businesses to deal with that has been "eroded" by other cost increases.

"That's been eroded through increases in the National Living Wage, increases in National Insurance contributions and huge increases in the supply chain," he told the NI Affairs Committee.

Selina Horshi, Managing Director at White Horse Hotel in Londonderry, said that for every £100 of sales she is paying almost £5 in additional VAT compared to a similar business across the border.

"That quickly adds up to thousands of pounds in a business each year that we simply don't have."

She said it would be "disingenuous" of the industry to suggest that a VAT cut would all be passed through to lower consumer prices.

She also said that would be "funding a sale" and instead gave the example of how it would allow her to offer more competitive rates to tour operators who bring in large numbers of guests.

Demand from that sector was down in July because she could not be competitive enough on price, she added.

"If I had the ability to lower my prices to retain that, I could do a percentage of my business at that lower rate without losing the margin."

The MPs also heard from Adrian Cummins, chief executive of the Restaurants Association of Ireland.

He said there was evidence that lower VAT rates in the Republic had helped protect businesses and jobs.

The Irish government introduced an emergency VAT cut from 13.5% to 9% in 2011 to help tourism after the financial crash.

It put it back to 13.5% in 2018, dropped it to 9% again during the pandemic and then pushed it back to 13.5% in September 2023.

It reinstated the 9% rate on food service and hot takeaways in July after an intensive industry lobbying campaign.

Cummins said the recent cut had been to help with business "viability" rather than a consumer measure.

That cut has been a matter of some political controversy as it was the biggest tax cutting measure in the last budget, worth an estimated €680m per year to the industry.

Critics say it is poorly targeted with limited evidence that it was necessary.

Gareth Hetherington, director of the Ulster University Economic Policy Centre, said there was a case for a VAT cut pilot scheme in NI.

He said the most important outcome to be assessed is whether that tax cut would lead to increased investment, and any pilot scheme would therefore have to run for at least four or five years.

He gave an approximate estimate that the VAT cut in Northern Ireland would initially cost the Treasury between £225m and £250m a year.