Economist Anthony Foley wrote a report on impact of Covid-19 on the drinks industry and analyses the effect of a reduced VAT rate on on-trade alcohol sales.
As many as 22,500 jobs could be permanently lost in the Irish drink sector as the impact of Covid-19 continues to be felt across the Irish economy.
According to a report by DCU economist Anthony Foley, on-trade pub alcohol sales will decline by 50 per cent (pc) or more for the second half of 2020. Within this report, Mr Foley stated this figure is “our most optimistic market expectation”.
“Without doubt, Ireland’s drinks, hospitality and tourism sectors have been among the worst impacted”
As of today, more than one third of pubs across Dublin remain closed. However, outside of Dublin, over 60pc of pubs are closed, with these pubs being important local businesses that make up small towns and villages across Ireland.
For the pubs that have, or intend to reopen over the coming weeks, Government guidelines will mean a significant change in how they operate with reduced capacity and time-limits on customer visits.
A recent report by the Licensed Vintners Association (LVA) and the Vintners Federation of Ireland (VFI) report outlined the stark impact on capacity of operating under social distancing guidelines.
When applied in any 100 square metre area in an on-licensed premises, standing capacity will diminish to 12.5pc, while seating capacity is reduced to 34pc of pre-crisis levels. This will result in 66pc of capacity being completely wiped out.
“Due to restrictions, there is almost zero tourism and reduced demand in our hospitality sector”
There are 19,205 businesses in the hospitality sector (pubs, hotels, restaurants), with more than 50,000 people employed in the Irish drink sector. The majority of businesses in the hospitality sector (96pc) employ less than 50 staff, meaning the sector is dominated by small businesses – leaving the sector more exposed and at risk.
To support these small businesses who are under threat, the Licensed Vintners Association (LVA), the Vintners Federation of Ireland (VFI) and Ibec representative group Drinks Ireland have called for a temporary reduction in the hospitality VAT rate; and extending it to apply to alcohol sales in the on-trade (pubs and bars), until 31 December 2020 as part of the July stimulus package promised by Government.
The measure is being sought to support pubs – 7,000 businesses nationwide – who will struggle in the short term until they can resume operating and viably trade at increasing levels of capacity in 2021 and beyond.
According to detailed analysis contained in the report, the cost of reducing the likely second half 2020 on-licence alcohol sales to 9pc VAT from 23pc VAT is €143 million. An amended European Commission directive makes it possible to extend and apply a lower VAT rate on on-trade alcohol in Ireland – a fact unknown to many who believe it may be disallowed under EU VAT Directives.
“Trade organisations have expressed their concern about the lack of sector specific supports for some time”
This measure would follow the likes of Spain and Italy, with their government’s placing temporary reductions in VAT to provide immediate support to their drinks, hospitality, and tourism sectors during the Covid-19 crisis. In the UK, a lower VAT rate for the tourism sector – including pubs, restaurants and hotels – is an option that is currently being considered.
“We anticipate that economy-wide and hospitality-related levels of consumer demand will be lower after lockdown due to the higher level of unemployment and reduced earnings,” said Anthony Foley, author of the Reduce VAT on On-Trade Alcohol report.
“It will likely be 2023 before we reach pre-Covid labour market conditions. Without doubt, Ireland’s drinks, hospitality and tourism sectors have been among the worst impacted.
“Due to restrictions, there is almost zero tourism and reduced demand in our hospitality sector. This impacts our entire economy and so represents a sector that requires Government intervention,” he added.
Head of the hospitality sector at Bank of Ireland, Gerardo Larios Rizo, said; “The Irish hospitality sector has been hit hard by the pandemic as the measures imposed to control the spread are in contravention of what good hospitality is about. Trade organisations have expressed their concern about the lack of sector specific supports for some time.
“The reduction of the hospitality and alcohol rates of VAT as well as the extension of the wage subsidy scheme could play a pivotal role in the recovery of the sector. Without these measures, operators may struggle to make profits whilst social distancing regulations remain in place; the hospitality and tourism trade is based on large volume low value transactions which are hard to deliver under the prevalent government guidelines.
“The sector is the largest indigenous employer providing employment to almost 270,000 people in Ireland, so support could certainly be justified,” he concluded.
The report was commissioned by the LVA, the VFI and Drinks Ireland, as part of the ‘Protect our Pubs’ campaign.
By Stephen Larkin
Published: 6 July, 2020