It was the VAT increase that restaurants dreaded, a black cloud that they anticipated was coming down the line.

Still, when the official announcement came in Budget 2019, returning the hospitality VAT rate to 13.5%, it was a shock for many.

Traditionally, the VAT rate that restaurants and hotels had to pay was 13.5% but when the recession hit, the government at the time reduced it to 9%.

The hospitality sector enjoyed this tax rate for seven years but now the 50% increase has taken affect since 1 January, and a few weeks in it is hitting businesses badly as well as their customers.

Menu price increase

Kevin Nugent is owner of Ground & Co coffee shop, Saol Cafe and Mr Waffle, all of which are based in Galway and he says they are finding it very hard to manage.

He first started opening cafes in 2010 and says if the VAT benefit didn’t take effect when it did, his businesses wouldn’t have survived the recession.

Kevin Nugent and Dragos Toma of Ground Coffee, Galway.

“It helped us through [the recession], and then when business picked up, we were able to expand.

"Now we have three outlets and as much as I would like to absorb the cost and not pass it onto our customers, it just isn’t possible. In my opinion, no business can take that type of hit.”

So what price increases are we talking about?

“Our americano has increased from €2.50 to €2.70, our latte from €3 to €3.20. However, there were some items that we felt we just couldn’t charge anymore for. For example, we have a popular sandwich called ‘The Traditionalist’– ham, cheese and tomato on sourdough bread. That’s €6.90 and we just felt we couldn’t charge any more for that item as we couldn’t add more value. So other things on the menu such as our salads have increased by 70 cent.

“However, it’s a balancing act because some customers then look at the salad increase and think we have raised it above the VAT increase, percentage wise. We have had to explain that you have to look at the menu as a whole.

"Some items haven’t gone up but we have to compensate that with other things. Some customers have been very understanding but there are other regulars that we haven’t see in a week or two now. It’s definitely a worry.”

Added pressure

The change to filing tax returns for staff is also taking effect on top of the tax increase.

“I mean, it’s January, which is generally a quite time in the year, we are fearful that we could see a drop off in customers, we are dealing with the VAT increase and we are also dealing with the new P30 tax returns for staff.

"Up until now, as a business, we filed our returns for staff every quarter. Now it’s every week.

"Obviously, it’s the same amount but when it was done every three months, you could plan for it. It was especially handy for cashflow, that during a quiet January you had the cashflow from the busy season of Christmas to tide you over. Now that’s gone as well.”

Kevin says the consensus from other restaurant owners in the west is also negative.

“Our location is in Galway city so we are urban but those that are more rural are really feeling it and wondering if they will survive this increase.”

Tax break

Riccardo Cavaliere who runs Ristorante Rinuccini, a family business that has been serving the people of Kilkenny for 30 years, also says he can see small rural restaurants really struggling because of the VAT increase.

However, for him, he says he sees it as a VAT restoration rather than an increase.

We won’t be increasing our prices because our price model was always geared for a 13.5% tax rate

“I would have preferred the restoration to be staggered, perhaps 2% this year and 2.5% the next but to be honest, it hasn’t and isn’t going to make a huge difference to our business.

"We were operating with the 13.5% tax rate for over 30 years. So when it dropped, we were lucky to be in a position that we were able to save it and use it to do a refurbishment on our property. As a result, we are now in a position to offer a better dining experience to our customers and be more efficient as a business.

"We won’t be increasing our prices because our price model was always geared for a 13.5% tax rate. We will – as a business – of course be reassessing our costs though, paying more careful attention to energy bills for example.”

Planning for change

“I do sympathise with businesses that have been set up since 2011 and based their pricing model on the 9% tax rate and my heart really goes out to those that are struggling because of this increase.

“However, I think it was always going to go back up. It was an effective change that the Government did for the sector in 2011 but it was naïve to think it wouldn’t go back up and to not make provisions for it.”

Increase too harsh

However, Adrian Cummins, CEO of the Restaurants Association of Ireland (RAI) disagrees and says the restoration should never have happened.

“I believe the Government made the wrong decision here. They didn’t want to bite the bullet on the carbon tax and the hospitality sector is taking the hit instead.

"Essentially, when the Government reduced the tax rate to 9% in 2011, it didn’t just help restaurants through the recession, it put us on par with hospitality VAT rates across Europe. Many countries have a VAT rate of 9%.

"Now that we are back up to 13.5%, we now have the fourth-highest hospitality VAT rate in Europe. I always believed it was too high. We were willing to meet the Government halfway at 11%. It would have helped the Government and the effect wouldn’t have been as significant on restaurants and hotels but the current jump is too harsh, especially given the uncertainty around Brexit.”