WHY DOES THE STATE TRY TO CRUSH SUCCESS?
A struggling industry gets a break to save it from the brink: but as soon as it’s back on its feet – employing more people now than agriculture – civil servants want to strangle it with punitive new taxes. Instead of crushing successful industries, we sho
AN Irish fishing boat pulls up to the quay with its day’s catch of lobsters in open crates on the deck. Alongside, fishermen in a Spanish trawler look on. The Spaniards ask why the Irishman doesn’t put something over the boxes to stop his lobsters climbing out, as they do in Spain.
‘Sure, there’s no need,’ he replies. ‘They’re Irish lobsters. When one tries to climb up, the others will be sure to pull him back down again where he belongs.’
This week’s debate over VAT charges on the hospitality industry reminds me of that old joke. The sector has done wonders to nearly climb out of the box it found itself in during the financial crisis when many hotels were destined for the boiling pot. But, now, no sooner does it near the top than we’re talking about pulling it back down again.
A €500million boost to revenue is the anticipated outcome from hiking VAT on hotels and restaurants. Within that context, Finance Minister Paschal Donohoe received a briefing document this week that proposes reverting the 9% VAT rate on tourism-related activities back to the 13.5% rate that applied in 2011.
Back then, the sector was on its knees. Room revenue had fallen by 30% and profits were down 44%. Hotels creaked under debts of almost €7billion – with more than half classed as troubled loans. They were ‘checking into’ NAMA like it was a Dublin 4 hostelry at the height of rugby season. The debt agency controlled 136 hotels outright and held the debts of over one in every seven.
Cutting VAT helped the industry not only to survive but to thrive, creating up to 33,600 extra direct jobs and 15,456 indirect ones since then, according to one report this week. Tourism now out €7.8billion in revenue for the economy and supports 220,000 jobs – that’s more than agriculture.
So is now the time to pull the plug on the tax break that helped to make all this possible?
Hoteliers are begging the minister to hold fire – and they have a point. While tourism numbers hit record levels in May, Brexit looms over the industry as it does with everything else. Lurking among the recent largely buoyant figures was a massive fall-off in visitors from our most accessible market – Britain.
AGAINST this background of intense uncertainty for the Irish economy in general and the accommodation and food services sector in particular, it does not make sense to increase the VAT rate, given the extra vulnerability that has arisen from the Brexit vote,’ says Adrian Cummins, chief executive of the Restaurants Association of Ireland.
He argues that ‘17 out of 19 eurozone countries have a VAT rate of below 10%. A 9% VAT rate in Ireland is not only the correct rate for our country, but it is also in line with the rest of Europe. We need this VAT rate particularly now as Brexit negotiations begin, to remain competitive’.
So, shouldn’t we be supporting – not penalising – an industry that employs so many people and contributes so much to the Irish economy? Instead of reversing this highly successful ploy of targeted VAT cuts, shouldn’t we be looking at the bigger picture and thinking of using it elsewhere, to the benefit of other businesses?
We’ve been incredibly successful in attracting multinationals to our shores. But we generally fail to build on that by enabling local businesses to match that success at home. Strong indigenous industry is needed to build on our national success story.
These are the firms that won’t send their profits across the ocean and will stick around when the going gets tough. Hotels and restaurants not only provide lots of jobs, they often do so in rural communities where they are at a premium – and are vital for maintaining the social fabric that is so often torn apart by emigration.
Just 35% of tourism jobs are in Dublin – compared to 55% of IT and communications positions, for example. That’s a lifeline to many outlying communities – both economically and socially.
There are also many entrylevel jobs in the sector, giving young people a chance to train for a long-term career, or to earn priceless part-time income to help see them through college.
‘Tourist accommodation, and especially hotels, plays an important role as a community hub in a local area,’ says Failte Ireland’s most recent Survey of Overseas Travellers. This report shows that tourists spend liberally, providing a rare source of revenue and downstream jobs in many areas.
For each €1 earned in the hospitality sector, another €1.26 is generated elsewhere. Meanwhile, of the €530 per person spent by tourists in Ireland, 30% is for accommodation. The rest is distributed as €180 on food and drink and with another €190 going on entertainment, sight-seeing, transport, shopping and other activities.
Providing rural jobs is the challenging and often-unfulfilled aim of many government initiatives, highlighting just how hard it would be to replace any hotel or restaurant jobs lost in these areas.
What worked well for the hospitality sector is well-proven tax strategy globally: wellaimed tax cuts can work wonchurns
ders, often recouping most of the taxes foregone.
So where else can we make this work?
Most of us are barely aware of VAT. Yet it is like a giant tornado above our heads, whirling ‘red tape’ and tens of billions of euros around. This isn’t just a stealth tax, it’s a stealth bomber of a tax with a nuclear payload. From the State’s point of view it is the ‘king of taxes’ – a double tax that applies to our after-tax income without a peep of protest.
It’s largely how the Government manages to claw back much of the money it spends. And even though it is spelled out on our receipts, most people are unaware of its existence, never mind taking to the streets to protest about it as they did with water charges.
Just look at your receipt the next time you pay for something. I had a look at mine after a weekly shop at Aldi.
The bottom of the receipt shows three categories of VAT –C, D and E.
E is for zero VAT and it is mainly essential food. C is things like fuel (barbecue coal) and flowers and comes in at 13.5%. D is for most other items on which VAT is levied at a hefty 23%. As this was food shopping, you’d think I’d get off lightly. Not a bit of it. There are lots of things besides food on any weekly shopping list – cleaning products, kitchen towels, cling film, light bulbs, dog food, etc – all taxed at the top rate.
Even ice cream and mineral water rack up 23% VAT, presumably because they are considered ‘luxury items’, something which might prove contentious in certain parts of Offaly where ‘boil notices’ were issued this week!
Total VAT on that weekly shopping bill came to €25 – admittedly including a tenner for an unwisely bought chimenea. That’s only the start. Head out to a restaurant and even the lower 9% VAT rate adds nearly a tenth to our bill.
Meanwhile, a quick glance through my other receipts shows that of the €56 that I paid recently for a new tyre, €13 was 23% VAT. Electricity and fuel has a ‘lower’ rate of VAT – but that’s still 13.5%.
In fact, the average family coughs up nearly €8,000 in VAT every year.
Over a quarter of the State’s tax revenue is VAT – more than €12.4billion last year.
There’s no way our Government can or will give up that particular money-spinner, or even a substantial part of it. But it could certainly tweak it in certain areas as it did with tourism, and to great effect.
That €12.4billion is sucked up at the base of the tornado. It’s the net take from VAT that goes into State coffers. Further up the spiral, businesses charge VAT to each other. They just add it on to their bills and pass on the money to the State. But they also reclaim paidout VAT from the State. So, vastly more money than the €12billion actually collected swirls around and around in circles in a whirlwind of red tape that is crying out to be cut.
IT seems crazy, for example, that small traders have to pay VAT if they earn €37,500 a year or more from providing a service. That’s a level of income so low it could rightly qualify a family for social housing. Yet they are sucked into the vortex of VAT bureaucracy that doesn’t even generate much income for the State. In 2015 the Department of Finance’s Tax Strategy Group suggested increasing those levels in line with inflation to €40k to spare over 3,000 businesses from VAT. It also mooted changing the way in which smaller businesses pay VAT.
‘Businesses with an annual turnover of €2million or less can opt to account for VAT on a cash receipts basis, where VAT is not required to be paid until payment for the supply is received,’ it said.
Upping the threshold to €2.5million as the Irish Small and Medium Enterprises group pleaded in its 2017 pre-Budget submission, would cost no more than €34million yet this would spare 533 businesses from VAT.
So little was done on VAT or anything else for small firms in ‘last year’s fiver Budget’ that this year’s Isme submission, currently being finalised, will likely remain pretty much the same, says chief executive Neil McDonnell.
‘We need to unravel the unreasonable cost of compliance so small businesses can prosper,’ he says.
It’s not like we’re loath to tinker with VAT rates. We have actually done so much more than most countries – but for odd reasons and with few economic benefits.
Farmers, for example, also get a favourable 4.8% VAT rate on livestock for fear of Merrion Street being blocked by bullocks.
Yet we ignored the pleas of thousands of businesses with tens of thousands of jobs – and potential jobs – on the line!
Noting that the 9% VAT rate for hotels and restaurants had been ‘hugely successful in stimulating demand, creating jobs and attracting tourism’, the Small Firms Association also called for a reduction in the main VAT rate.
Its latest pre-Budget submission wants the 23% VAT rate to revert to 21% (it was raised in 2012) to reboot a domestic economy that has been sluggish despite booming exports.
‘The top rate of VAT is a disincentive to spend, stifling consumer demand’, it stated.
Thus, obviously, hitting businesses and costing jobs.
The initial loss of revenue – at €296million for every 1% drop – would be huge. But the SFA called for a Department of Finance analysis on the extent to which that would be offset by the benefits of such a massive shot in the arm to the domestic economy.
THE SFA submission also targets yet another bizarre anomaly in our byzantine VAT regime. When then-finance minister John Bruton tried to put VAT on children’s shoes in 1982, his Budget failed and the Government fell. Yet the current Government charges the top rate of VAT on larger school uniforms, while slightly smaller ones benefit from a 0% rate. This disadvantages parents of bigger children just because the tax law has not kept up to date with the increase in the size of our kids over the past 43 years!
Another area worth looking at is housing. Nobody wants to give builders a little-deserved tax break. But the unpalatable truth is that if we want to solve the housing crisis, we need to build more homes. And builders are not doing so because the cost of construction makes this unfeasible for homes at the lower end of the market – ie, for first-time buyers.
It emerged this week that the cost of putting up a three-bed semi in Dublin has risen to €350,000, which in most areas makes building them unfeasible. So builders confine themselves to in-fill developments comprising handfuls of very pricey homes in well-to-do areas. Yet €39,000 of that building cost is VAT, paid by the buyer directly to the Government.
Foregoing some of that would not only create jobs but boost the supply of the most badly needed commodity of all – houses.
So, will Paschal Donohoe send the tourism industry back to square one by upping its VAT rate to 13.5%? Or will he use VAT changes to restore fairness and revitalise key sections of our economy? Over to you, Minister.