Businesses in the hospitality sector are more likely to pass on VAT increases to consumers while keeping a higher proportion of VAT reductions, research from the State’s spending watchdog has found.
The study by the Irish Fiscal Advisory Council (Ifac) also found that reducing VAT on hospitality from 13.5 per cent to 9 per cent - at a cost €870 million per annum – was equivalent to the cost of increasing the standard rate income tax bands by €3,000, hiring 11,400 nurses or 7,800 teachers.
The Government has signalled that it will reduce VAT on restaurants and food-serving businesses from 13.5 per cent to 9 per cent in next week’s budget to help them fight costs - at a projected annual cost to the exchequer of €675 million.
On the basis of the Ifac figures, the cost of that budget proposal would be the equivalent of increasing the standard rate income tax bands by €2,328, hiring 8,846 nurses or 6,053 teachers.
RM Block
The council’s report examined the extent to which changes in VAT rates are passed through to consumer prices in the hospitality sector.
Looking at four VAT changes between 2011 and 2023, two increases and two decreases, it found that the so-called “pass-through” to consumers varied significantly depending on the direction of the VAT change.
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A 2011 VAT reduction led to a 50 per cent pass-through to consumer prices while a 2019 VAT increase resulted in an 88 per cent pass-through, it found.
More recent VAT changes in 2020 and 2023 showed lower levels of pass-through, “influenced by external factors such as the Covid-19 pandemic, economic uncertainty and inflation,” it said.
“The results suggest that, on average, pass-through rates are larger for VAT rate increases than for VAT rate cuts. This has important policy implications,” the study said.
It warned that temporarily cutting VAT rates on hospitality could lead to higher overall price levels.
“If the hospitality and tourism VAT rate is used as a temporary stimulus or cost of living measure (a cut followed by a reversal), it may ultimately result in a price level that is higher than would otherwise be the case, as the increase would be passed-through more than the original cut,” it said.
The fiscal council’s report noted that changes to the VAT rate on hospitality and tourism had “become a key demand management tool in recent years”.
It also noted that changing the VAT rate was “an expensive measure”.
Citing research from the Department of Finance’s tax strategy group, the council noted that the full-year cost of reducing the VAT rate on hospitality was €870 million per annum.
“As a result, it is important that policymakers are informed about the impacts that these policy changes have on the macroeconomy,” it said.
In Budget 2026, the Government is proposing to cut VAT solely for restaurants and food-serving businesses while excluding hotels which the Department of Finance has costed at €675 million per year.
“The findings highlight the importance of considering market conditions and external shocks when evaluating VAT policy effectiveness,” Ifac said.
“Policymakers should account for these factors when designing future tax changes to ensure their intended macroeconomic effects, including those on prices and consumer spending are achieved,” it said.
