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Government Plans VAT Cut for Restaurants to Boost Hospitality

The VAT cut could initially benefit consumers, but there's a risk of higher prices in the future due to increased pass-through of subsequent VAT increases.

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1 min read
This picture is clicked inside the hotel and in front, we see a table on which white color cloth is...
This picture is clicked inside the hotel and in front, we see a table on which white color cloth is placed. On table, we see plates, fork, spoon, glass, branches of tree. Around the table, we see chairs and behind that we see the other table which is like green in color and behind that, we see a man wearing black blazer. Next to him, we see the girl standing and behind them, we see door on which exit is written on it and behind that door, we see two men standing.

Government Plans VAT Cut for Restaurants to Boost Hospitality

The Government plans an epic pass for restaurants and food-serving businesses, from 13.5% to 9%, in the next budget. This move, projected to cost €675 million annually, is part of a broader trend of using VAT changes as a demand management tool. However, businesses in the hospitality sector are more likely to pass on VAT increases to consumers than reductions, as seen in recent changes.

Historically, the pass-through of VAT changes to consumer prices has varied significantly depending on the direction of the change. A 2011 VAT reduction led to a 50% pass-through, while a 2019 VAT increase resulted in an 88% pass-through. More recent changes, influenced by external factors like the Covid-19 pandemic and inflation, showed lower levels of pass-through.

The proposed VAT cut in Budget 2026 excludes hotels and costs €675 million per year. For context, a full-year VAT reduction from 13.5% to 9% on hospitality would cost €870 million, equivalent to increasing standard rate income tax bands by €3,000, hiring 11,400 nurses, or 7,800 teachers. The concern is that temporarily cutting VAT rates on hospitality could lead to higher overall price levels due to increased pass-through of subsequent VAT increases.

The Government's VAT cut aims to boost the hospitality sector, but the long-term effects remain uncertain. While it may initially benefit consumers, the potential for higher prices in the future due to increased pass-through of subsequent VAT increases is a risk. As VAT changes have become a key demand management tool, it's crucial to monitor the impact of this policy shift.

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