VAT cuts won’t lower prices, say Northern Ireland hospitality leaders

The core of this geographical disadvantage lies in a stark VAT differential. In the Republic of Ireland, the hospitality sector benefits from a significantly lower VAT rate: 9% on food services and 13.5% on accommodation. In stark contrast, Northern Ireland and the entirety of the United Kingdom apply a substantially higher hospitality VAT rate of 20%. This 11-point difference on food and 6.5-point difference on accommodation creates an immediate and formidable competitive barrier for Northern Irish establishments. For every £100 a business earns, nearly £17 of that goes to VAT in NI, compared to £8.26 on food or £11.90 on accommodation in the Republic. This substantial disparity is not merely a minor accounting difference; it translates directly into higher operating costs, narrower profit margins, and ultimately, less competitive pricing for consumers and tour operators in Northern Ireland.

Mr. Cadden, who personally oversees the operations of the Lusty Beg Island Resort in Fermanagh, elaborated on how this long-standing VAT differential has become increasingly unsustainable. While he acknowledges that VAT disparities have always existed to some degree, the ability of Northern Ireland businesses to absorb or mitigate these differences has been severely eroded in recent years. This erosion, he explained to the NI Affairs Committee, is a direct consequence of a confluence of rapidly escalating operational costs. These include substantial increases in the National Living Wage, which, while beneficial for employees, significantly raises the labour costs for an inherently labour-intensive industry like hospitality. Furthermore, rising National Insurance contributions add another layer of employer burden. Perhaps most critically, the sector has been hit by "huge increases in the supply chain," encompassing everything from soaring energy prices to inflated food ingredient costs, and increased logistics expenses. These cumulative pressures have squeezed margins to breaking point, leaving businesses with virtually no capacity to absorb the additional 20% VAT without passing it on, thereby making them even less competitive against their southern counterparts.

Selina Horshi, the Managing Director at the White Horse Hotel in Londonderry, provided a tangible illustration of this financial strain. She explained that for every £100 of sales, her business effectively pays almost £5 more in additional VAT compared to a similar hotel located just across the border. While this might seem modest on a single transaction, Ms. Horshi stressed, "That quickly adds up to thousands of pounds in a business each year that we simply don’t have." This sum, she articulated, represents not discretionary spending, but a critical shortfall that impacts everything from staff retention to investment in facilities. Crucially, Ms. Horshi made it clear that it would be "disingenuous" for the industry to suggest that any VAT cut would be entirely passed through to lower consumer prices. This is a vital distinction, moving the argument beyond simple price reduction to one of business viability and strategic investment. She explained that such a move would effectively be "funding a sale," implying that the primary benefit would be to shore up businesses’ financial health and allow them to offer more competitive rates where it matters most for growth.

Ms. Horshi offered a compelling example of how a VAT reduction would be strategically deployed: enabling more competitive rates for tour operators. These operators are instrumental in bringing large numbers of guests, often international tourists, to Northern Ireland. She revealed that demand from this crucial sector was noticeably down in July because her hotel could not offer prices competitive enough to secure bookings. "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. This illustrates that the aim is not necessarily to lower prices for individual walk-in customers, but to unlock opportunities for bulk bookings, conferences, and tour groups, which provide consistent revenue streams and higher occupancy rates. By being more competitive in this segment, Northern Irish hotels could attract significant volumes of business that are currently being diverted to the Republic of Ireland or other destinations, thereby stabilising and growing the sector.

The NI Affairs Committee also heard from Adrian Cummins, chief executive of the Restaurants Association of Ireland, who provided valuable context from the Republic’s experience. He presented evidence suggesting that lower VAT rates in the Republic had been instrumental in protecting businesses and safeguarding jobs within its hospitality sector. Cummins outlined a fluctuating history of VAT policy in the Republic, demonstrating a responsive government approach to economic challenges. An emergency VAT cut from 13.5% to 9% was introduced in 2011 to bolster tourism following the financial crash. This rate was then reinstated to 13.5% in 2018, only to be dropped back to 9% during the acute economic pressures of the pandemic. While it was pushed back to 13.5% in September 2023, an intensive industry lobbying campaign successfully persuaded the Irish government to reinstate the 9% rate specifically for food service and hot takeaways in July.

Cummins underscored that this recent cut in the Republic was primarily intended to address business "viability" rather than to serve as a direct consumer price measure. This aligns perfectly with the arguments being made by Northern Ireland’s hospitality leaders. The Irish government’s decision to reintroduce the 9% rate, despite its significant cost, demonstrates a clear recognition of the strategic importance of the hospitality sector and its need for fiscal support. The recent cut in the Republic has not been without its critics, however. It was the biggest tax-cutting measure in the last budget, estimated to cost the Irish Treasury around €680 million per year. Critics argue that it is poorly targeted, lacks sufficient evidence of necessity, and disproportionately benefits larger businesses. Nevertheless, its implementation highlights a government’s willingness to make substantial financial commitments to support its hospitality industry during challenging times, a commitment Northern Irish leaders are now seeking from the UK Treasury.

In light of these unique challenges and the precedent set by the Republic of Ireland, Gareth Hetherington, director of the Ulster University Economic Policy Centre, put forward a compelling case for a VAT cut pilot scheme in Northern Ireland. He suggested that such a scheme would be an effective way to gather robust evidence on the impact of a reduced VAT rate. Hetherington emphasised that the most critical outcome to be assessed from such a tax cut is whether it leads to increased investment within the sector. This investment could manifest in various forms: modernisation of facilities, expansion of services, enhanced staff training, or improved marketing efforts. To adequately evaluate these long-term investment impacts, he stressed that any pilot scheme would need to run for a substantial period, ideally at least four or five years. This extended timeframe would allow businesses to plan, commit to significant capital expenditures, and for the economic effects to fully materialise and be measured accurately.

Hetherington provided an approximate estimate that the initial cost of such a VAT cut in Northern Ireland would range between £225 million and £250 million a year to the Treasury. While this is a significant sum, he implied that the potential long-term benefits – including increased economic activity, job creation, enhanced tourism revenue, and ultimately, a more vibrant and self-sustaining hospitality sector – could offset this initial outlay through increased tax receipts from a growing economy and reduced welfare spending. The proposal for a pilot scheme offers a pragmatic path forward, allowing for a data-driven assessment of a policy that could fundamentally transform the competitiveness and long-term viability of Northern Ireland’s crucial hospitality industry. It acknowledges the unique cross-border dynamics and seeks a tailored solution to ensure that businesses like those run by Mr. Cadden and Ms. Horshi can thrive rather than merely survive, thereby contributing significantly to Northern Ireland’s overall economic prosperity.