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

Northern Ireland's hospitality sector leaders have informed MPs that a reduction in VAT would not translate to lower prices for customers. The industry is advocating for a VAT cut from the current 20% in Northern Ireland and the rest of the UK, aiming to better compete with the Republic of Ireland's 9% VAT on food and 13.5% on accommodation.

Hospitality leaders emphasize that this VAT reduction is crucial for their survival, particularly for businesses located near the border, as they grapple with shrinking profit margins. The UK government has consistently rejected such calls, deeming a hospitality VAT cut to be poorly targeted and excessively costly. However, the Northern Ireland industry argues for a special consideration due to its direct competition with businesses in the Republic.

Michael Cadden, chair of Hospitality Ulster, lamented, "We are currently victims of our geography." He highlighted that while VAT differentials have always existed, the ability of Northern Ireland businesses to manage them has been "eroded" by other rising costs. Cadden, who operates the Lusty Beg Island Resort in Fermanagh, told the NI Affairs Committee that this erosion stems from increases in the National Living Wage, National Insurance contributions, and significant hikes in the supply chain.

Selina Horshi, Managing Director at the White Horse Hotel in Londonderry, illustrated the disparity, stating that for every £100 in sales, she pays nearly £5 more in VAT compared to a similar business across the border. She noted, "That quickly adds up to thousands of pounds in a business each year that we simply don't have." Horshi admitted it would be "disingenuous" for the industry to claim that a VAT cut would entirely result in lower consumer prices. Instead, she explained it would enable her to offer more competitive rates to tour operators, who bring in a substantial number of guests. She added that demand from this sector was down in July because her prices were not competitive enough. "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," she explained.

Adrian Cummins, chief executive of the Restaurants Association of Ireland, also addressed the MPs, presenting evidence that lower VAT rates in the Republic have helped safeguard businesses and jobs. The Irish government initially introduced an emergency VAT cut from 13.5% to 9% in 2011 to support tourism after the financial crisis. This rate was reverted to 13.5% in 2018, then reduced to 9% again during the pandemic, before being raised back to 13.5% in September 2023. Following an intensive lobbying campaign by the industry, the 9% rate on food service and hot takeaways was reinstated in July. Cummins clarified that this recent cut was aimed at ensuring business "viability" rather than directly benefiting consumers.

This particular cut has sparked some political debate, as it represented the largest tax-cutting measure in the last budget, estimated to be worth €680 million annually to the industry. Critics argue it is poorly targeted and lacks sufficient evidence of its necessity.

Gareth Hetherington, director of the Ulster University Economic Policy Centre, suggested a case for a VAT cut pilot scheme in Northern Ireland. He emphasized that the primary outcome to assess would be whether such a tax cut leads to increased investment, necessitating a pilot scheme to run for at least four or five years. Hetherington estimated that a VAT cut in Northern Ireland would initially cost the Treasury between £225 million and £250 million per year.