The impact of the changing VAT rate on the Irish hospitality industry Protecting margins and managing credit exposure beyond tax rate changes

Ireland quietly reversed one of its most contentious business tax decisions in July 2026. The VAT rate for food and catering services, and hairdressing, fell from 13.5% back to 9%. The move, announced in Budget 2026, is permanent. It has no sunset clause.

For the 150,000 people employed in those sectors, according to Government figures, the measure was presented as a means of providing stabilisation. For those in debt recovery who have tracked hospitality business failures over the past three years, it raised an obvious question: what happened when the rate was reduced?

The 9% rate story

The 9% VAT rate for hospitality has a long history. It was first introduced in July 2011 in the depths of the financial crisis to stimulate tourism. It was widely credited with supporting job creation in hotels, restaurants and pubs.

During the COVID-19 pandemic, it was reintroduced on 1 November 2020 for hospitality and tourism, including hotel accommodation. Despite being billed as temporary, it was extended three times as energy costs and cost-of-living pressures mounted.

The rate reverted to 13.5% in September 2023. The Government argued the economy had recovered and the measure was costing the State too much. However, 10 months later, the closure data became hard to ignore.

Formal insolvencies - The Limited Company failures

PwC's Insolvency Barometer is widely regarded as one of the clearest measures of formal business failures. In the nine months to the end of September 2026, it recorded 86 hospitality insolvencies. This represented 23% fewer than in the same period in 2025.

As creditors will be aware, earlier in the cycle the picture was worse. Q1 2024 saw 46 hospitality insolvencies, a 142% year-on-year increase, with 35 of those being restaurants and cafés. PwC noted at the time that Dublin accounted for nearly half of all failures. Creditors supplying goods and services into the hospitality industry have needed to be alive to these issues. They have also had to exercise their rights and credit limits, accordingly. However, legal remedies like Retention of Title have limited use in the perishable goods sectors.

Even so, these figures would be regarded as modest. So where is the problem?

Wider market exits - the real pain?

Formal liquidations are only a fraction of closures. Most businesses in the hospitality industry are sole traders or close via voluntary strike-off rather than liquidation.

Industry body data shows the scale:

• H2 2023: 283 food-led businesses closed permanently in the four months after the VAT increase to 13.5%. 50 businesses closed in November 2023 alone, forgoing the December trade that is crucial to businesses in the sector.
• H1 2024: A further 212 restaurants, cafés and gastropubs ceased trading.
• Pubs: According to a report published by the Drinks Industry Group, 117 pubs closed in 2023 and 86 closed in 2024. Since 2005, some 2,205 pubs have closed. This represents one in four of all pubs in the country, at an average of 110 per year.

Was the VAT rate a scapegoat for closures?

The Department of Finance has consistently argued that a VAT rate cut is a blunt instrument. Its Tax Strategy Group papers highlight two main points:

• Most of the benefit of the VAT rate is retained by businesses rather than passed on to consumers in lower prices, and
• The cost to the State of a VAT rate reduction is significant.

The restoration to 9% in July 2026 will cost the Exchequer:

• €232 million for the remainder of 2026, and
• €681 million in 2027.

This represents a combined total of €913 million over 18 months. Whether fairly or not, the Irish Fiscal Advisory Council noted that same sum would fund 8,846 nurses.

PwC itself observed that hospitality insolvencies were already easing in the six months to June 2026, before the 9% rate took effect. Other cost pressures have been more acute: the national minimum wage rose over 40% between 2021 and 2025, while insurance, energy costs and warehoused Revenue debt have all mounted.

It can be argued that VAT alone did not cause closures, but for businesses operating on net margins of 5-8%, a 4.5 percentage point increase in VAT on turnover is material. On a restaurant with €1 million turnover, that equates to €45,000 of additional VAT that must be absorbed or passed on in a market where consumers are already tightening discretionary spending.

A two-tier recovery?

The July 2026 measure is fundamentally different from previous iterations. It applies to food and catering, and hairdressing. It does not apply to hotel accommodation. A hotel restaurant meal is taxed at 9% while the night’s room stay is taxed at 13.5%. A pub that does not serve food sees no benefit from the reduction. This strain is shared equally by nightclubs and hotels primarily reliant on room revenue.

This scenario creates a divergence. Food-led businesses and hairdressers may see greater stability, as the early data Q3 2026 appears to suggest.

From a legal insolvency perspective, the nature of the exit also matters. Most distressed hospitality businesses are not entering formal liquidation. They are simply ceasing to trade and applying for voluntary strike-off, or sole traders are retiring. Formal insolvency processes allow creditor claims to be fully settled. Outside this framework, parties like landlords or suppliers find it hard to enforce remedies like personal guarantees or Retention of Title. Careful monitoring of credit limits alongside shifts in customer payment habits is vital for creditors.

Conclusion

The recent return to a 9% VAT rate is not a silver bullet for the hospitality industry. However, the data from September 2023 to mid-2025 shows a higher-than-normal volume of exits after the increase to 13.5%. While profitability challenges go well beyond VAT, the rate change acted as an accelerant for businesses already on thin margins.

Despite this, creditors in the hospitality sector can take practical steps to protect cash flow:

1. Before extending credit to a new or returning customer, require a detailed credit application, verify the customer’s status, conduct credit checks and obtain references.
2. Obtain written acceptance of terms tailored to the specific requirements of the hospitality sector.
3. Maintain a considered credit policy suited to the sector and ensure that sales staff understand and follow it.
4. Seek legal or collections advice promptly if a customer defaults or faces possible insolvency.

For expert debt recovery assistance, contact our Debt Recovery team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.