How cutting VAT helped Ireland's hospitality industry

30 September 2011
How cutting VAT helped Ireland's hospitality industry

On 1 July, the Irish government announced a slash in the VAT rate for hospitality and tourism businesses from 13.5% to 9% in an effort to give the struggling sector a much-needed boost. Two-and-a-half months on, hoteliers and restaurateurs are cautiously positive about the 4.5% reduction, as Elly Earls discovers

Since the 1 July announcement that the VAT rate across the hospitality and tourism sectors was to be slashed from 13.5% to 9%, occupancy has increased, hundreds of jobs have been created and a cautious feeling of positivity has gripped an industry that, until recently, had been struggling to recover from the effects of the global recession.

Combine the significant VAT reduction with the abolition of the Joint Labour Committee (JLC) Employment Regulation Orders, which forced restaurants and hotels to pay a premium over and above the national minimum wage, and it's little wonder that 2011 has been a bumper season for many hospitality businesses in Ireland.

passing on the reduction
Part of the reason for the good season is the speed at which both restaurants and hotels have passed the cost reduction on to their customers. A survey conducted by the Restaurants Association of Ireland (RAI) in mid-September shows that 94% of restaurants have passed on the reduction, while 44.8% have seen their business increase in turnover in the last eight months compared to 2010, figures that are thought to be echoed across the hotel sector.

Hotelier Peter Brennan, who project manages several hotels including Bellinter House in County Meath, has seen much-reduced prices across his portfolio. "People are getting more value for money and we can see our occupancy slowly rising. There has been no negative effect across all the hotels I'm involved in," he remarks.

Consumers are seeing the best value for money in the wedding market with hoteliers able to offer savings of up to €400 (£348) on a typical €10,000 (£8,700) event. But rather than simply deducting the €400, innovative operators are upgrading their customers, throwing extra cocktails or canapés in with the original price. "You've got to be creative, you've got to keep pushing the boundaries and coming up with new concepts," says Fergus O'Halloran, managing director of boutique hotel the Twelve in Galway, and chairman and director of the RAI. "The more people that are optimistic, the better - that's what it's about."

exceptional value
The overwhelming feeling across the industry is that Ireland is now able to offer exceptional value, something Paul Gallagher, general manager at Buswells hotel, Dublin, and president of the Irish Hotels Federation (IHF), is keen to emphasise. "Room prices are the cheapest in Western Europe and the food offering is now significantly cheaper as a result of the VAT reduction."

Indeed, the Irish Central Statistics Office has released pricing data for August showing that hotel prices are now 1.9% lower than they were this time last year while restaurant prices are down by 1.4%. For Aidan Pender, director of strategic development at the Irish Tourist Board, Failte Ireland, this suggests that the measure is really beginning to take hold.

"There has been a significant increase in occupancy over the summer in the domestic market particularly in urban areas," confirms Tim Fenn, CEO of the IHF, who's keen to add that this is largely because Irish nationals are making the most of the value of one-night stays and weekend breaks.

employment benefit
But not only has the VAT reduction resulted in increased restaurant covers and occupancy rates, employment across the hospitality sector is also set to benefit significantly. For O'Halloran, it's pretty simple: "The more footfall that's created, the more employment that's created". And Fenn agrees: "We would hope there would be a significant increase in employment over the next year. Every million euro that comes into Ireland results in around 30 sustainable jobs."

Brennan is now able to take on 5-6% more employees across his portfolio, something he feels is partly due to the VAT reduction and partly due to the abolition of the JLC orders, while the RAI figures speak for themselves: 61.5% of RAI members surveyed have taken on more staff in the last two months and 490 jobs have been created in total in July and August.

foreign tourism
It has also been a fantastic year for foreign tourism; indeed Pender goes to far as to suggest that the recovery in hotel occupancy is probably more down to international visitors- particularly those from North America, France and Germany - than domestic holidaymakers. He hopes this is a sign of things to come.

For Fenn, however, it won't be until next season that the benefits of the VAT cut really become apparent. "It'll roll out over time. It's happened mid-season this year so the inbound tour operators had already completed their sales. There were rebates to customers but next year they will be starting from a clear base," he explains.

Pender perhaps sums up the feeling across the Irish hospitality sector best: "It's only been two months; it's early signs yet," he concludes. "But what's happening is encouraging and we're cautiously positive."


Sandhouse, Donegal
Sandhouse, Donegal
Paul Diver, general manager At Donegal-based Sandhouse hotel & Marine Spa the cost reduction was passed on immediately, something the hotel highlighted with flyers.

The VAT cut brought the original price per person of €80 (£70) to €72 (£63), but general manager Paul Diver also tied in another reduction bringing the new price to €69 (£60). "It was a psychological thing, having it under €70, and this created a lot of good will," he says.

For Diver, the effect in the Republic of Ireland has been immediate, but it will take time for foreign visitors to catch on. "It will be the start of next season before we really see the benefit on the overseas market," he notes.

paying vat back in kind vaughan lodge hotel, county clare

Vaughan Lodge
Vaughan Lodge

Vaughan Lodge
Vaughan Lodge
Michael Vaughan, proprietor Vaughan Lodge hotel, County Clare, which is situated in a golf resort area, attracts 60% of its business from North America.

"Many guests have prepaid six months before travelling so we've been paying the VAT cut back in kind, for example, with a whisky in the bar," says proprietor Michael Vaughan. "There's been a feel good factor about it. Ireland has suffered from a perception of being uncompetitive internationally and this reduction is a step in the right direction."

Although Vaughan believes the effect is felt most in the mid-price market, his "well-heeled" guests have also been "delighted" with the initiative. "There was a misconception among many in the business that this would eat into profits, but if it's a properly constituted business, it shouldn't have had anything but a positive effect," he adds.

The case for a 5% VAT rate for hospitality >>

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