Northern Ireland Affairs Committee
Oral evidence: The taxation of the hospitality and tourism sectors in Northern Ireland, HC 544
Wednesday 2 September 2026
Ordered by the House of Commons to be published on 2 September 2026.
Members present: Tonia Antoniazzi (Chair); Sorcha Eastwood; Claire Hanna; Simon Hoare; Mike Kane; Mr Paul Kohler; Katrina Murray; Gavin Robinson; Sir Alec Shelbrooke; David Smith.
Questions 1 - 64
Witnesses
I: Michael Cadden, Chair, Hospitality Ulster; Selina Horshi, Member, Hospitality Ulster; Adrian Cummins, CEO, Restaurants Association of Ireland.
II: Gareth Hetherington, Director of the Economic Policy Centre, Ulster University.
Witnesses: Michael Cadden, Selina Horshi and Adrian Cummins.
Q1 Chair: Welcome to the Northern Ireland Affairs Select Committee. This is our session on the taxation of the hospitality and tourism sectors in Northern Ireland. Welcome to Michael Cadden, chair of Hospitality Ulster; Selina Horshi, member of Hospitality Ulster; and Adrian Cummins, the chief exec of the Restaurants Association of Ireland. Welcome, everybody.
Michael and Selina, how would you assess the financial health of the hospitality sector in Northern Ireland?
Selina Horshi: Recently we have seen NISRA stats—you will see this in the evidence submitted by Hospitality Ulster—and that 900 jobs have been lost in the hospitality industry, which is the largest fall since those records started to be kept. That shows that we have an industry from the outside that can look busy, but the margins have been squeezed so much that it is now on very shaky foundations. We are operating in increasingly challenging times.
Q2 Chair: Selina, are hospitality businesses facing different pressures from those elsewhere in the UK? If so, what are they?
Selina Horshi: The biggest challenge that we have is quite simply our geography, which leads us to be a border region. We are competing against our sister hospitality organisations in the Republic of Ireland. We are marketed alongside them, and yet a customer is looking at a price in my hotel three and a half miles from the border and a price in Donegal and what they are seeing is that the price is lower in Donegal. Our costs are roughly equivalent, but our VAT, for example, is significantly different.
For every £100 that I take into my business on accommodation, the equivalent hotel in the Republic taking £100 would retain £4.78 more on the VAT alone. Per room that does not sound like a lot, but we are a high-volume, low-margin industry and that quickly adds up to hundreds of thousands of pounds within a business each year that we simply do not have.
The margins have been so squeezed on all sides of the border and in all parts of the UK by the cost of living and the cost of doing business, but that VAT differential is really putting pressure on our businesses at the moment.
Q3 Chair: Which policies are having the greatest impact on the cost of doing business? Is it just VAT?
Selina Horshi: It is not only VAT. You also have rates. In other parts of the UK there has been rates relief for hospitality. That has not been implemented in Northern Ireland. That is also a challenge, but the one that is the biggest lever is quite simply the VAT differential. You are looking at 9% on food in the Republic versus 20% in Northern Ireland. You are looking at accommodation at 20% in Northern Ireland versus 13% in the Republic.
There are instances where it goes the other way. For example, the cost of room hire VAT is higher in the Republic, but in the case studies that have been presented to you by Hospitality Ulster, you will see that, even taking into account where the tax regime is more punishing in the Republic, you are still looking at hotels working out at between £140,000 and £160,000 worse off purely due to location.
That is a like-for-like model. If you take a hotel in the north and look, from its ledgers, at exactly what it has made and exactly what it has been taxed and then you pretend that it was in the south, with the difference on the tax alone—this is with the same operating model and the same split across the different revenue streams—you are looking at a huge amount of difference in margin.
This is not about profitability. This is about the fact that margin supports jobs. It supports refurbishment. It supports jobs in rural areas. It supports jobs for young people. Ultimately, a hotel like mine is having to do things like postpone refurbishment work. That is stopping the business from circulating money around the economy. That is no quantity surveyors, no brickies and less money spent in the local taxi trade, going to the local laundrette. It has a big impact across the economy.
Q4 Chair: Michael, do you have anything to add to what Selina has said?
Michael Cadden: I do. We operate specifically a wedding venue just across the border, in a place called Lusty Beg Island. Traditionally, we would have attended the RDS wedding show in Dublin and we would have liked to achieve 15 to 20 wedding sales at that. That number rose post Covid to around 25 wedding sales over a two-day wedding show. Last year we attended and we sold two weddings. The difference has become price. We are no longer seen as a value proposition. We are no longer seen as a value proposition because we simply cannot afford to compete with the prices because our cost base and our tax base are so very different.
What we do know about the state of the industry is from our own survey, which has just been completed. Last quarter, 45% of all hospitality businesses in the north were not sure whether they would survive the next 12 months. We have reached a point where we believe it is now time to start pulling the levers that we are talking about or we will start to lose a significant portion of the industry. Beyond that, as Selina has mentioned, the ability to reinvest, train and do those things that we love to do is being squeezed out of the industry alongside our margins.
Q5 Chair: What specific levers do you want to be pulled, then?
Michael Cadden: We would argue that VAT is the only lever left in Northern Ireland—specifically, the VAT pilot that we have proposed—that would make a big enough difference across the industry at this stage. We understand that it is a big ask. However, we have modelled the total cost of VAT parity as a pilot to be between £200 million and £300 million per year.
Q6 Gavin Robinson: Good morning to you all. This is a question for Hospitality Ulster, given the application of the Great British Summer Savings scheme. Has Hospitality Ulster taken the opportunity to survey its members? Do you know how many participated or availed of it?
Michael Cadden: We have not specifically. The participation was high in terms of the people who were applying the 5% on children’s food. We do not have the specific numbers, but we can get those to you.
Q7 Gavin Robinson: It would be useful for the Committee just to have a sense of how many participated. One of the fundamental questions around a scheme such as this—it arose at the early stages, and one of your representatives was interviewed on it—was whether the benefits of any scheme would be passed on to consumers or form part of an increased profit margin. Selina, in fairness, in your answer, you were indicating the difference. You were talking about it being a high-scale, low-margin business and the opportunity to retain profits for investment and growth. All of that is part of business. I understand particularly that this scheme was time-bound, short and quite particular. It was only for two accompanying children and with a 5% limit.
Since those questions were raised at the start of the scheme, have the membership of Hospitality Ulster had a more in-depth conversation about, if there were to be a change in hospitality VAT, whether that would be to the benefit of consumers by encouraging more spend, to the benefit of business or a blend of both?
Michael Cadden: The ask at the moment is one of survival. It is not one that is necessarily about prices being passed through directly. In fact, Adrian here is leading the campaign for the reduction in the south. That was implicitly not designed to be passed directly through. What we are suggesting is that it is our margins that need support rather than our pricing. The industry does have footfall. We have people who still want to use our world-class facilities and attractions. The problem that we face is that we just do not have any margin anymore and we do not have the capacity to increase. This is about protecting those businesses and protecting those jobs.
The notion that this is straight to the bottom line and just more profit distorts that a little bit. This is more about the ability to reinvest, the ability to hire more and the ability to extend our opening hours, which are currently shrinking because of the cost of doing business. It is a blend, in answer to your question, but it is more nuanced than directly, “Will it go to the bottom line or to the customer?”
Q8 Gavin Robinson: I understand the need to protect margin and I understand that an element of what you are suggesting is about the survivability of business. How does this affect the consumer who has a choice, particularly for a high spend? I struggle to think that somebody in east Belfast, in my constituency, is going to travel across the border for lunch because it might have a lower VAT rate. When somebody is getting into the realms of a wedding in a border area and you are talking about tens of thousands of pounds, there may be a material difference.
If what you are indicating means that there would be no front-of-house change to the cost to the consumer, how do you incentivise someone through this change to stay in Northern Ireland rather than take their money into the Republic of Ireland?
Selina Horshi: I have exactly the situation you are talking about. My hotel is about three and a half miles from the border. Normally, around 40% of our occupancy at peak time would be coming from tour operators. They are marketed to the whole island of Ireland. They often fly into Dublin. They bring coach-loads of visitors and they fill up the hotels. My demand in July was significantly down, more than 25% down year on year.
When I spoke to the coach operators who have been regulars to ask why, I was expecting to hear answers such as ETAs, fuel costs and all those things. All those things were happening, but what I repeatedly got back was price. These guys are working on their own small margins. They are booking tens of thousands of bed nights. They are choosing, because it can be done £5 cheaper in the Republic, to keep the business in the Republic.
The downside of that, at the moment, of course, is that hospitality is essentially an export industry. These are people who are not bringing and spending fresh cash in the economy in Northern Ireland. If I had the ability to lower my prices to retain that, I could take a percentage of my business at that lower rate and I would be able to afford to do so without losing the margin and I would be bringing new money into Northern Ireland.
There has to be some pass-through, but it would be disingenuous of us to come in here and say a VAT cut would all be directly passed to the consumer because we would be asking you to fund a sale.
Gavin Robinson: It would give you the flexibility to do that.
Selina Horshi: It would give us that flexibility.
Q9 Gavin Robinson: As I said outside, I have been to your hotel. I have been to two of your facilities. There is the lovely Bridgerton tree that I mentioned and I like the roses out in the walkway through as well. That is an aside.
You have talked about decreased footfall, particularly from coach operators, Selina. Do you know whether this scheme more broadly, through Hospitality Ulster, encouraged additional footfall, or did it encourage footfall to move to places that were operating it from those that were not, or did it have a negligible impact?
Selina Horshi: Are you thinking specifically about the 5% on the children’s attractions?
Gavin Robinson: Yes.
Selina Horshi: I can speak only from personal experience. The scheme is so newly closed that we have not had time to aggregate or even collect the data from everybody. I would have a fair amount of children coming through the hotel. We lowered the prices for our kids’ meals to reflect the change in VAT. It did not change the volume, but, as a parent, I saw the lower VAT when I took my kids out to various attractions, and I appreciated it. I hope it was beneficial to the parents.
It did not, in my particular instance, encourage more people out, but I am a hotel with a very broad mix, not specifically family.
Q10 Gavin Robinson: Finally from me, I do not need an answer to this question because I suspect you do not have it. It has been so recent. This inquiry was proposed by Claire Hanna, I think. In doing this report and this inquiry, we are trying to see whether we can provide a better evidence base to push the argument for a reduction in hospitality VAT. An evidential base, even if it is from a small scheme over a two to three-month period, would be really helpful.
If you do not have the numbers at this stage on the impact on footfall and profitability, could I encourage you to canvass your members and, when you are in a position to do so, share that evidence with us so we can draw conclusions from it?
Selina Horshi: Yes, 100%
Chair: Just a correction: I suggested this.
Gavin Robinson: She is a great Chair.
Q11 Sorcha Eastwood: With that, I just want to thank the Chair for bringing this to the table. It is great to have people here today. I can see Colin and others in the audience who have been working really hard over the last number of years to try to bring this to the fore.
Michael and Selina, you have both already pre-empted my question, which is about the clear differential between the Republic of Ireland and the north of Ireland in terms of that VAT differential rate. Clearly, you have already outlined a number of scenarios there, Michael. You have referred to the fact that you went to a trade show, if I have picked you up correctly, and you found a noticeable drop in the number of people who were wanting to come forward.
Selina, you are clearly in a perfect position for this inquiry because you are so close to the border. Derry is one of those places where people are coming from right across the island of Ireland all the time. It is somewhere that is not just marketable within Northern Ireland; it is marketable right across the island of Ireland. With that being said, you have two areas there, Enniskillen and Derry, that are marketable within a domestic home market and in that wider sense. What are the other specific instances you have found this summer that may shed light on the fact that that rate in the Republic of Ireland is really hampering our businesses in the north?
Selina Horshi: If you look at the visitor numbers into Northern Ireland this year, they are up year on year, but we are seeing that an increased number of those are day trips. People are choosing to cross the border to visit but taking up what they see as a cheaper price. As a consumer, you do not see two different VAT regimes; you just see the price on the bedroom. They might choose to stay in the Republic; they are not choosing to stay here.
Of course, that impacts me as the hotel—that is the obvious one—but it also impacts the cafés that they might have stayed in, the pubs that they might have had a drink in and retail. If they had stayed, they would have spent more money and more time in the north. All those industries are being impacted. It includes taxi drivers.
It goes so much further. A hotel is very good at recycling the money that it brings in out to the local microeconomy, whether that is through wedding supply vendors or the people who clean the windows or build the extensions. It is a huge difference.
It seems like it is only affecting our industry, but it has a knock on effect, especially in smaller and more rural cities. Derry is very isolated in the very north-west. Tourism plays a huge part in supporting it. You can see a downturn in everything. We really need to get that fresh money into the economy.
Michael Cadden: I hope this is answering your question. There has always been a VAT differential. The change that has occurred and the reason that this is becoming more and more time-sensitive is our ability to deal with that differential has been eroded. It has been eroded through increases in the national living wage, increases in national insurance contributions and the thresholds and huge increases on our supply chains. Those things have happened in the interim. Now, in addition, we have the additional VAT cuts in the south. Now, for the first time, we are feeling that differential as the key pinch point. Before, we absorbed that into margin; now, we cannot afford to.
Q12 Sorcha Eastwood: I completely agree with you. I have highlighted that strongly over the last number of years. We have covered point two a little bit. We are talking clearly here about the contrast with the Republic of Ireland. You have mentioned tourism, Selina. In your opening remarks, you mentioned young people specifically. I am acutely aware of the Milburn report and what that says about the whole of the UK, including Northern Ireland.
We have a completely different ecosystem in the south of Ireland. Adrian, I am hoping that you can shed a wee bit of light on Skillnet, for example, and how that leads directly into people going into hospitality, not just as part-time or summer jobs, although they are very welcome.
Michael, you said that you are now at the stage where you feel that the VAT lever is the only one left to pull. Is there also a question around the ecosystem and whether we are supporting people into hospitality as a long-term career path with professionalism? Could that play a role for future success going forward?
Michael Cadden: Absolutely, yes. We are doing a significant amount of work around skills, training and the progression and career path to make hospitality a more viable option for young people to come into work.
You did mention that we are grateful for part-time and summer jobs. We are a great employer of casual and weekend staff and a provider of flexibility for people. We create that. The goal for us, obviously, is to have well-paid and secure jobs and career progression that people can see. We are working on that in the background. Again, the ability to do that and the ability to invest in that is being diminished simply by having shrinking and shrinking margins. That is the reality of what we are seeing and what we are hearing from our members.
Selina Horshi: We are at the point where—let us be honest—we have seen over 900 jobs lost. We have not laid off any staff, but we have allowed a certain amount of attrition. On one hand, we want to bring young people into the industry. On the other hand, we simply no longer have the funds to do it. We are stuck. We are in survival mode.
The reason that we keep coming back to that is the reality here is pretty stark. If there is not some action taken, we are all going to be watching an industry erode. It is a big industry. It is very important to Northern Ireland. It is the fourth-biggest employer. It spreads out wealth across rural and urban areas. It employs a lot of women. It employs a lot of young people. You can come into it whether you are skilled; you can upskill through it. It has high-paid jobs. It has short-term jobs. It is so hugely important to our area.
We are already seeing the decline in jobs and the closure of businesses. We cannot keep clinging on. Our reserves have been eaten away by Brexit, Covid, the cost of living and the cost of doing business crisis. It has just got to an unsustainable point.
Q13 Sorcha Eastwood: You have just covered the last point very effectively. In closing, we have had such a brilliant summer in Northern Ireland with the fleadh. That would not have been possible without hospitality. We are the land of cead míle fáilte, 100,000 welcomes. We could not do cead míle fáilte without our hospitality, our front of house and our tourism.
I just want to make this clear for the record. People talk about hospitality and they think it is someone serving a plate of food or pulling a pint. It is so much more than that. Having come from an initially customer service background, unless you have that good, strong welcome to Northern Ireland or the Republic of Ireland, as soon as you get off that tour bus, you are not going to come back. It is not about the VAT cut, then, necessarily. It is about, “Why are people not coming here?” Of course, we have so much to offer.
For one last restatement, why do you think the VAT lever is the most important one to pull? Adrian, if you would not mind, you have had that experience in the south. Is there anything that you can bring to the table in terms of making the argument for that VAT cut?
Adrian Cummins: Thank you very much. When we had the VAT increase from 9% to 13.5% post pandemic, we saw 16,000 jobs lost in our food service industry, our restaurants, cafés and pubs that serve food. That went on for about 18 months.
We went to Government and we pointed out that the only way we could make our businesses viable was a reduction in the VAT rate back to 9%. Since the announcement last October, we have seen a complete slowdown in the number of closures of businesses. Employment is up already since the VAT rate was reduced and businesses now have confidence and stability because they have that margin of 4.5% from the Government.
We have spoken already about the pass-through. Our Government made it very clear that there is no onus on each business to pass it on to the consumer. This was about viability, sustainability and survivability for businesses within the tourism industry, which is hugely beneficial for the island of Ireland from an employment perspective and for many regional and rural villages and towns across the island.
The 9% VAT rate was our go-to for the Government. It is for food service only. Accommodation is on 13.5% still, but all the hotels still get the 9% on food service within their properties. It has been a game-changer, in my view, for our tourism and hospitality economy.
Q14 Chair: I just wanted to ask Selina and Michael a question. The Department for Work and Pensions has an initiative called the youth jobs grant, which will give small and medium enterprises and businesses, maybe similar to yourselves, £3,000 for taking on a young person who has been unemployed for six months. Is that something that the tourism sector in Northern Ireland can avail itself of?
Selina Horshi: Not to the best of my knowledge, but I cannot give you a concrete answer on that. Many of the schemes here do not translate. A lot of the apprenticeship levies that are available here are not available in Northern Ireland. There are different challenges that we have to face. On that particular one, I am afraid I do not know as a concrete answer.
Michael Cadden: I am also unaware of that scheme, so I am not sure.
Chair: It is a shame it does not apply because it would be something—
Michael Cadden: Probably the closest thing is the apprentice levy, which Selina mentioned. Although we pay the apprentice levy, we do not have access to it because it disappears under the consequentials. It is potentially another example of that.
Chair: That is very interesting.
Q15 Gavin Robinson: Can I just take that a step further? Michael is absolutely right in what he said. I am more interested to understand whether Hospitality Ulster has approached the Department for the Economy. Have you said to the Economy Minister, “Economy Minister, the block grant gets a Barnett consequential from a scheme that works very well for businesses elsewhere in the United Kingdom. Are you advocating for that money? Do you have that money in your budget line? Why are you not utilising it in this positive way?” If so, what does she say?
Michael Cadden: We have not had any traction to date with any of the benefits that are deemed fit for the mainland UK that do not come over, which would be rates support, the levy or perhaps the levy that you are talking about in terms of employing young people. We do regularly bring that to the attention of the Minister.
Q16 Gavin Robinson: When you say you do not get any traction, what you mean is you ask the Minister and you get nothing in response.
Michael Cadden: Yes.
Q17 Mr Kohler: My question builds on your answer, Adrian. I own a bar in London. I know how tough hospitality is across the UK. In Ireland, they cut the rate by a third. How did hospitality win the argument in Ireland when it is seemingly failing to win the argument here in the UK?
Adrian Cummins: Thank you very much for the question. It was a ground-up campaign. We showed the Government the devastation in terms of the business closures right across the Republic. It predominantly hit smaller businesses as opposed to larger businesses. You saw a major number of coffee shops and small bars closing down because of the cost of business.
In 2024, we saw our business costs increase substantially. Food inflation was off the Richter scale. Wage inflation was in parallel to that. Everybody was being squeezed and margin was eroded. We are not in the charity business. We are in the business of making a small margin. A normal margin in a restaurant should be about 10%. Every student who goes to hospitality college knows that 10% is your margin. We were working off a 2% to 3% margin. If there was any increase in your variables—in terms of energy, we had the Ukraine crisis; food costs went up—that margin was gone.
The vast majority of businesses were not making any profits, dipping into reserves or closing their doors. When we saw 16,000 jobs being lost—that is 10% of our workforce—over a 12-month period, something had to give. While the Government were at full employment, we saw hospitality as being an outlier. We are labour-intensive. We are usually the first port of call for young people to get a job in the Republic. We give them their first experience of getting up early in the morning, going to work, earning a wage and being self-sufficient.
In tourism, our most important asset is our people. Our people are our most important asset. When we saw jobs being lost, something had to give. Fortunately enough, the Government saw that the 9% VAT rate was a catch-all approach as opposed to a rates reduction, which not everybody would get, or a grant, which not everybody would get. With a VAT reduction, everybody gets it. That improved the margin. It was survivability and sustainability for our industry.
Michael Cadden: You said that we are failing where the Republic managed. We are at the very beginning of this process. Sitting in this room, it is certainly more positive than we have ever been with this argument. You will be very aware of the #VATsTheProblem campaign currently being led by UKHospitality. We very much support that and we are co-signers of that argument. This is not in opposition to that. It is in support of that. We are saying is that allowing us to be the pilot will provide the evidence for the #VATsTheProblem campaign to be rolled out across the rest of the UK.
Q18 Mr Kohler: I have a couple of figures here of what the Irish Government estimate that it would cost them, but, given the increase in turnover, has any work been done on the actual fiscal cost?
Adrian Cummins: Our Department of Finance said it would cost the Exchequer €670 million. If you have a business that closes down, you are now going into unemployment benefit and liquidation. You are going to have lots of taxes, et cetera. The cost-benefit analysis that we have shows that bringing the VAT rate on food service to 9% will improve our Exchequer figures in terms of revenue coming in because businesses are staying open and it will be cost-neutral in the future.
When the VAT rate was reduced at the height of the banking crisis in 2011 from 13.5% to 9%, we had it in place for 16 out of 18 years. That showed that many Governments believed in the VAT rate, but, when it was brought up post the pandemic, that hit our businesses in terms of margin. We could see that it was the only show in town in terms of survivability for our industry.
Q19 Chair: How many and what proportion of hospitality businesses would benefit from such a VAT reduction in Northern Ireland?
Selina Horshi: It would be everyone that is over the VAT threshold. I touched on it briefly, but in the appendixes to the written report that we have submitted you have access to anonymised accounts from a number of our members. It would be anyone that has a food and accommodation benefit.
There are areas, as I said, where the VAT is slightly lower in the north than it is in the south. That is particularly on alcohol and room hire. There is a little bit more modelling work that would need to be done to work out exact costs. There are ballpark figures in here. That modelling work would need to be done by the experts. We need to work out exactly what the cost would be, but we believe, having seen how it is working—the latest VAT reduction is very new in the Republic of Ireland—that a cost-benefit analysis would demonstrate that it would be beneficial overall to the economy in Northern Ireland.
Q20 Chair: Who are the experts who are going to do this work, Selina?
Selina Horshi: That is what we are here to ask you. We would love to know whether there is a way to fund looking into this properly, because that is not in our gift. We are happy to open the books anywhere that we can. The £200 million to £300 million that Michael has quoted is in here. It has been worked out in two different ways, but it is very rough.
We think the next step would be to ascertain exactly what the cost-benefit would be. We have gone to our Finance and Economy Ministers in Stormont about this and they have jointly written a letter to Treasury to look into that. We would appreciate support in trying to drive that forward.
Q21 Sir Alec Shelbrooke: Thank you for that answer, Selina. I want to build on what you have said because you have hinted at the answers. Tax Policy Associates estimates that the VAT cut would offset the cost of national insurance and minimum wage increases that have hit business. What is your response to that?
Selina Horshi: It probably would. I have not thought about my personal accounts in that sense. Our wage bills have gone up. I am absolutely happy to pay people well. We want to do that. Of course, the national insurance change at the same time was particularly challenging for the hospitality industry because so many of our casual workers had not met the hours to hit that threshold before. That was suddenly a new cost that we were not expecting and we had not planned for.
The biggest cost, certainly, to my business is our team. It rightly should be because hospitality is about the people, but the percentage of my overall turnover that that takes up has gone up massively in the past 10 years. It used to be that the cost of my wage bill was about 36% of my turnover. That is now pushing on 50%. That is hard, but I can do that if I get some slack somewhere else. That is still putting money back into local people’s pockets, again, to spend it in the local economy. There is a balancing act there.
Q22 Sir Alec Shelbrooke: Looking at the wider picture, the VAT cut would support all businesses regardless of their size and profitability, including multinational fast-food chains. Would a more targeted measure to businesses like yours be more appropriate in helping businesses that are struggling? What could that be in particular? Rather than benefiting the McDonalds of this world, what might be a better targeted approach to the sort of businesses that you guys run?
Selina Horshi: I would point out that in Northern Ireland the vast majority of our businesses are independents. We have an extremely high number of independents. You might know some of the figures better than I do. It would not be the same support for multinationals that you might be considering if you were operating in the mainland here.
If you start targeting it, it gets very complicated. Where are the grants going? Who qualifies? There is also a time pressure here. I am not saying that something can be done today, but, if something does not get done reasonably quickly, the outworkings are going to happen and we are going to end up in a very tight situation.
Michael Cadden: There may be more evidence from the reaction from the reduction in the Republic of Ireland. The multinationals—you mentioned McDonald’s—work very tightly on margins. The example of McDonald’s would be directly to pass-through. That would come through in lower prices. Because of the way their margins work, I do not think their margins would be affected.
Because such a large proportion of our businesses are smaller independents, we just do not have the same supply chain network. We do not have the same cost-reduction mechanisms that these large corporations have. It is an important distinction between our industries. In Northern Ireland very specifically, we do not have large chains. We do not have large breweries. The margins and the wage costs that we are talking about would not be countenanced anywhere else.
We deal with them because we have to deal with them and they are there. All of our costs are higher. Post Brexit, we certainly have a surcharge on food supply and beer supply. We are dealing with all those additional costs, which forms part of the reason why we are a unique case and why we are bringing this case to you as a separate pilot. We think that the need is slightly different.
Q23 Sir Alec Shelbrooke: My last question is about the evidence that the cut would support growth. Is it more that the cut would bring in sustainability for your businesses? Therefore, it is almost the flip side of the coin, in that by bringing in the cut to cover off the cost increases that there have been, the economy would grow because you are not going to go out of business. Does it relate to those supply chains or is it deeper than that? Would it grow the economy? Is that just too simplistic? Would that cut grow the economy, when you are talking about such fine margins?
Michael Cadden: I have two or three direct answers to that. First, we should remember that we are marketed on an all-island basis. While that has been successful, we are currently victims of our geography because the cut is directly impacting our ability to compete as a single island. I would deem bringing business in from the Republic of Ireland or through the Republic of Ireland to the north as an export. That export is currently being diminished because we cannot bring that business and sell that service and those goods to people coming into the province.
Secondary to that, it is certainly about survival. You intimated that. This is not necessarily about growth. There is a certain amount of protectionism here. We are attempting to avoid a fairly cataclysmic collapse of the industry in the area. We are coming to you with lived experience. I can tell you that I have been in the business for 25 years and it has never been more difficult. It is not an issue with footfall. It is not an issue with how hard we are working. It is not an issue with what we are providing to our customers.
The issue has become that the pressures from outside, those multiplying pressures, are leaving it unsustainable. To leave it simply as, “VAT is the only issue”, is overly simplistic. What we are trying to impress on you is that we have had an additional 1% or 2% in food costs as a result of Brexit and we have had the national insurance increase specifically on our industry because of the threshold change and the number of people that we employed as casuals. Those people are now being captured, which has had a proportionally larger impact on our wage bill. That is impacting on that side.
We also have reached and are reaching a ceiling of how much we can charge for our products going out again because we have a relatively low income level in the province. We are being squeezed from both sides and the VAT lever, we believe, is the one that will relieve that across the board.
Q24 Chair: Michael, I just wanted to ask about the impact of Brexit. Are you seeing any impact on the supply chain? Are you having issues around that? You have mentioned the 1% to 2% difference in cost. Are there practical problems?
Michael Cadden: I am taking that from our own food inflation and the prices that we are seeing in terms of prices that are available wholesale on the mainland versus ours. Our food supply chain is delivered primarily by five main suppliers. They are coming through the red channel when they are importing or bringing over from the mainland, so that they have the availability to send those goods into the south. Some of the warehousing is in the south. There are additional checks, additional costs and additional time, which is putting additional cost pressure on our supply chain.
Chair: It is another one of the cumulative issues that you are dealing with.
Michael Cadden: Yes.
Q25 David Smith: Good morning, everyone. It is good to have you with us. We are covering almost every angle, it seems, of this question. All of us around here, certainly from our own constituency work, wherever we are in the UK, recognise that it is very difficult for hospitality at the moment. There are a lot of cost pressures. It is harder than it has been for a long time to make a profit.
The question I have is whether reducing VAT is the best way to relieve the pressure on your industry. We heard from Alec’s question about some of the huge multinationals, for example. Selina, you were talking about the diversity within hospitality and the prevalence of independents in Northern Ireland. I wonder whether it is a bit of a sledgehammer to crack a nut. Feel free to disagree with that.
Michael, you were saying that there are lots of different cost pressures. One of the first things that the Prime Minister did in the rest of the UK when he took up office was to bring in an immediate 20% reduction in business rates for live music venues, pubs, et cetera. That is not all hospitality, but, first of all, there should be a flow through in the Barnett consequentials from that. There should be some additional funding at some point coming through to the Northern Ireland Executive.
Building to a question, have you considered or are you lobbying the Northern Ireland Executive on business rates, regional or local, which are determined in Northern Ireland and are significantly, as I understand it, larger comparative to in other parts of the UK? What are you saying, if anything, about the Barnett consequentials that could come through from decisions that are being made here? Is that whole sphere potentially a more sophisticated way to reduce pressure on the hospitality industry in Northern Ireland?
Selina Horshi: First, I would say we need a sledgehammer. The time for a nutcracker has come and gone. Secondly, absolutely we lobby in Stormont. In fact, a very successful lobbying campaign by Hospitality Ulster paused a rates revaluation in Northern Ireland that would have cost many of our members often a doubling and sometimes a tripling of their rates bill. That was paused.
Absolutely, we would love to see the Barnett consequentials coming through and being spent on hospitality. We certainly can ask for that, but it is in the hands of Stormont to assess their own priorities and cost pressures. We are not here to say, “Take the money from health and give it to hospitality”. We are here to say, “We need support for the economy”.
Hospitality is struggling everywhere—I am in complete agreement—and margins are squeezed everywhere, but there is a big difference. Not only are our margins squeezed, but our competitors’ margins just three miles away are not under the same pressure. That means competitiveness is gone, as well as viability.
Michael Cadden: I disagree with you as well about the sledgehammer. This would be very different if we were coming and we were asking for something that was completely out of the ordinary. Across the European Union, which is our direct tourism competitor, only one country has a higher tourism VAT. The need for support has been recognised in France, Germany and every other European country and now in our direct competitors in the Republic of Ireland. That is then multiplied by the fact that we are marketed as a single destination.
We are not asking for a handout in any way. We are asking for fairness and parity. We are asking to be able to compete with our nearest neighbours in a way that is fair. Rates reductions and other measures simply would not do that. That is not to say that we are not asking for the support at a local level and we are not asking for those consequentials to come through. History has shown us that that is not the case. History has shown us that we have financial pressure in our own Government and those priorities, unfortunately, take over at that point. We have not historically seen those benefits coming through.
We are working on both fronts. We are asking for both in different ways, but it is not an unreasonable question or an unreasonable ask.
Q26 David Smith: I suspect it is too early to say, given that the 9% in the Republic just came in, but—maybe this is a question for all of you, especially Adrian—what would be an indicator of success that there is a direct causal link between the hospitality sector flourishing or improving or the pressure coming off and the reduction in the Republic? What should we be looking for to say, “That is the cause of the turnaround”?
Adrian Cummins: Our indicators would be employment and taxation to the Exchequer in terms of increases in the sector itself. Since 2011, revenue to our Revenue Commissioners went up because of the benefit of a lower VAT rate. When businesses are more buoyant and their margins increase and you do not have as many closures, the total economy will benefit from it. We have the evidence of that from 2011 onwards, where it became cost-neutral.
You referenced other jurisdictions. The German Government immediately looked at a reduction from 18% down to 7% for food service. That was to kickstart their own domestic economy. They are not a huge tourism destination, but they saw that food service needed a helping hand in terms of survivability. Other jurisdictions across Europe were in the same boat.
I just wanted to pick up one point that was raised on multinationals. We had the same debate about multinationals benefiting from the reduction. McDonald’s has been referenced here. McDonald’s work off a franchise model, where a local businessman or businesswoman will buy a franchise, employ people locally in their own community and create jobs for that community using local staff. We do not see that as being a hindrance in terms of McDonald’s internationally taking the VAT rate. That is about a business staying open locally and creating jobs in a local area. That is our argument around the international perspective.
The number of multinationals in the Republic is quite small in terms of the overall number of businesses. It may be different here in the United Kingdom. In the Republic, the percentage of multinational businesses is quite small.
Q27 David Smith: I have a final question, if I may. I am an MP in Northumberland. We have about 10.5 million visitors per year. Tourism is worth about £1.3 billion just in the county. It is probably our major industry now on top of the normal day-to-day hospitality sector. We have some of the best pubs in the world, I would say—I have set some hares running, I think. I am happy to take you around and prove my point.
What would you say to the UK Government about the implications of a VAT reduction being made in Northern Ireland? You may just say, “This is not our problem”, but it is a legitimate question. Clearly, we can see that, if a VAT reduction were made UK-wide, you are talking tens of billions. Maybe there is a better way to phrase it. What should I say to my constituents, to the hospitality sector in Northumberland, about a VAT reduction, if it were done just in Northern Ireland?
Michael Cadden: Unfortunately, I will have to disagree with you for a second time about the best pubs in the world. The answer that we would give to that is that we are fully supportive of the #VATsTheProblem UK-wide campaign. We see the benefits of that and we see the need for that. The pressures exist whether you are in Northern Ireland or whether you are in the mainland UK.
We have a unique opportunity to do a pilot to prove the case, to prove that what we are saying is the case and that it is going to energise the industry and lead to the growth that we are showing. Our programme for Government is looking for a doubling in tourism spend in the north. Without support and growth, that simply will not happen.
We have a unique case. We have a unique land border. We have a unique jurisdiction in the way that we are marketed. Perhaps to be facetious, to use a direct comparison, it would be a little bit like you having a different tax rate for London and London doing your marketing for Northumberland. That is what we are currently dealing with. We have a totally different tax base, a totally different cost base and yet we are marketed as one.
Q28 Katrina Murray: I would like to focus on the hypotheticals of a VAT reduction. How much of the VAT reduction do you expect to be passed on to consumers through lower prices?
Selina Horshi: It would probably vary. The main reason that we are suggesting that we need the VAT reduction is for the margin. That margin is to allow us to support the continuation of jobs. It is about keeping doors open.
Some of it will be passed on. How businesses pass that on is going to be dependent on every individual business. As I said, we are made up of independents. It could be to secure volume; it could be to do special offers; it could be to do community-led events. That is going to vary. We do not have that percentage.
We have looked at modelling based on what is proving to be successful in the Republic of Ireland. In that case, it was not about passing on all the VAT. We are not coming here to say that this is about creating a sale for the consumer. This is about supporting the business. It is going to vary. We could not give you a final number.
Michael Cadden: I agree. Again, this is not to provide a seasonal sale. I believe the notion behind the 5% reduction in children’s experiences and food was to lower the cost of living pressure over the summer. This is a different argument. We are coming at it from a different argument. We want to see local businesses supported, thriving and growing, to the benefit of the larger tourism economy. That would not necessarily lead to a direct pass-through of the VAT reduction.
Q29 Katrina Murray: Adrian, looking at the evidence from the Republic, there is a much lower pass-through to consumers from VAT cuts compared with when VAT increases. Is there evidence that the recent reduction has been passed through?
Adrian Cummins: It was very clear from the Government in the Republic that there was no onus on businesses to pass through the VAT reduction. This was about survivability, as we made very clear in our negotiations with the Government at the time. We could not pass it on because that means that we would still be in the drop zone in terms of business closures due to margins being so low. The pass-through was not on the table at all for discussion.
Q30 Katrina Murray: Do we have evidence of what has worked and what has been the effect on profitability and survival?
Adrian Cummins: The VAT rate cut was announced in October 2025. It came into effect on 1 July 2026. Between those two points, we saw an increase in staffing in our industry by 6,000 staff. The year before there was a loss of 16,000. The VAT rate coming in gave confidence to the market. The men and women who owned a small business that was suffering from cost inflation and the rising costs of business could say, “Okay, I will hold on until I get the VAT rate. I know that is coming in”. The Irish Government also made it permanent. It was not a temporary VAT rate. It was a permanent VAT rate for the lifetime of the Government.
Q31 Mr Kohler: There is over 10 years of evidence in the south. Going back to your earlier answer, Selina, has no one done a proper cost-benefit analysis? Every policy person I meet explains why spending money on their sector will make money for the Treasury. Everyone does that. We have very close to 10 years of evidence. Has no one looked at the actual fiscal implications of that?
Selina Horshi: Not in full, no.
Michael Cadden: No, not in any detail. It is something that we would like to do. We have asked for support to do it. As a small organisation, we would not have the budget to run the level of Green Paper that would be required to bring that in front of you and provide that evidence. We have asked our local government to support the cost of—
Q32 Mr Kohler: What about UKHospitality? It has resources. It is such a perfect example that is sitting there right next to the UK.
Michael Cadden: Well, ask UKHospitality.
Q33 Claire Hanna: Colleagues have covered some of the issues around the funding, but did you have a specific figure for what you think the pilot would cost in Northern Ireland? HMRC has said it would cost £10 million for the UK, but have you costed out how much it would be? The corporation tax bid a few years ago, which I have to say I was always a bit sceptical about, floundered on Treasury’s insistence that it come out of the block grant. Have you given any thought to how that might be reconciled?
Michael Cadden: The cost at parity would be between £300 million and £400 million per year. That is a staggeringly large number, but in the grand scheme of things it is probably similar to the cost of the 5% child VAT summer scheme over the term. They are equatable numbers.
In terms of the block grant, it is not something that is in my wheelhouse and I would not be able to comment on it, but it is certainly going to be a future stumbling block.
Q34 Claire Hanna: Colleagues have talked about, for example, the issue of the multinationals in the Republic and their inclusion or otherwise. I take your point that a lot of them are franchised. Gavin referred to some businesses that would be less exposed to the border issue than others.
Could I just be clear that you are proposing it in a blanket way rather than picking or choosing? In the recesses, would it cover businesses where a hospitality component is part of what they do? Would it just be anybody who is retailing food, drink or accommodation to the public?
Michael Cadden: It would certainly be food and drink. In terms of the issue around those businesses that are less exposed to the border, all the modelling and all our thought process at the minute has been about the destination. It has been about Northern Ireland Incorporated, how we grow the tourism economy for the region, and the impact that the difference in price does have on tour operators’ business, large corporates and wedding businesses. That impact is felt beyond the border counties.
Q35 Claire Hanna: I suppose there is a supply chain impact. Given that we are making the case for this to apply in Northern Ireland as a pilot, clause 32 of the Windsor framework gives flexibility to the UK Government to vary VAT rates specifically for Northern Ireland. Have you explored that with the Treasury and the potential use of that provision?
Michael Cadden: Not directly with the Treasury, no. We do have a KC opinion, which we can share with you, that has looked at all the state aid rules and everything else. We can share that with you. It is possible, but we have not brought that directly to Treasury.
Q36 Claire Hanna: I have, by the way. I got the blanket, “This would be terribly expensive”, rather than the rationale for the application in Northern Ireland. I will share those responses with you. I suppose it is about that power existing.
I do not want to divert, but, Selina, you did mention the ETAs. That is just one part of the challenging environment for hospitality. Are you able to give a sense of how that is affecting businesses such as yours?
Selina Horshi: It definitely does have an impact. It is about £20 per person. If you are coming to the island of Ireland anyway, you are thinking, “Is an extra £20 worth it?” There is no physical border where anybody is asked to show anything, but ultimately businesses and people are concerned about the risk if they travel without one. If they are in a rental car, does their car insurance still apply? If they come in in a coach, does their travel insurance still apply?
We are seeing that certain tour operators—it is the easiest way to see this just because of their scale—are changing their routes and cutting out Northern Ireland. They can go into Dublin, spend time on the island of Ireland and never cross into Northern Ireland. It just avoids the problem. At £20 a person, on a bus that is £1,000. Multiply that up over all your buses across the year and think of how much that keeps out of our economy. It is frustrating. It is a challenge. It is hard to measure exactly how much of a challenge, but Northern Ireland Tourism Alliance and other bodies have also got some work coming on this.
Q37 Mike Kane: I just want to build on Claire Hanna’s point. Good morning, everybody. The UK Government’s actual official position is that any VAT cut pilot in Northern Ireland will cause divergence and impact competitiveness between businesses in Northern Ireland and Great Britain, therefore creating cost and complexity. I know that you are going to disagree with that, but it might be worth putting on the record exactly why you disagree with the UK Government’s position currently.
Selina Horshi: First, following the Good Friday agreement, it was agreed that the island of Ireland would be marketed as a whole. That means that Northern Ireland is mainly marketed for and headquartered out of Dublin. Therefore, we do operate in different circumstances. That is a challenge.
The other challenge that we have is that there already is disparity between the supports across the different devolved nations. We do not have the same support on rates, et cetera, that have been seen in Scotland, Wales and England. There is already disparity there.
We are a small place. We have 1.4 million people. We are not so big. We can be a test ground and we have a very strong case to be a test ground, given that we have the unique circumstances of having a border with a very different tax regime just beside us.
Michael Cadden: If I may, Chair, the importance of tourism to Northern Ireland also outweighs any potential negative impact, given the size of the industry as a whole and the employment it provides as a proportion of the total employment. Tourism and hospitality is an incredibly important industry as a whole for us. It is also a very different product.
Q38 Katrina Murray: Selina and Michael, I want to look at the review of the 2025 licensing laws that was carried out for the Department for Communities and the Assembly around the surrender principle, which concluded that it stifled competition and caused multiple barriers for entry for new venues, such as pubs. However, as an organisation, Hospitality Ulster welcomed the decision not to proceed with reform. Why is this a good thing for the Northern Ireland hospitality industry?
Michael Cadden: On the surrender principle specifically, it is an incredibly complex topic—one that probably could not be answered in its entirety here—but it provides the industry with support and with confidence in moving forward, ensuring that our product is world-class, as we have already discussed. It is about reducing those barriers to entry at that point without a proper understanding of what the implications are.
You have mentioned the Stirling report. If I may, the Stirling report did not provide any comfort around what those implications would be and the butterfly effect on the entire industry, on supporting, on banking and on financial support. What would that look like? It is an important part; those licences have traditionally been an important part of our bottom line. The core argument against it is that the report in and of itself did not give those answers, and it was very difficult to move forward without understanding what those implications are.
Q39 Katrina Murray: What evidence leads you to conclude that increased competition would not be beneficial for the industry?
Michael Cadden: I do not specifically have that evidence.
Q40 Chair: If you have anything, could you write to the Committee at a later stage?
Michael Cadden: Yes, of course.
Chair: Thank you very much for your time.
Examination of witness
Witness: Gareth Hetherington.
Q41 Chair: We are on panel 2. We are joined by Gareth Hetherington from the Ulster University Economic Policy Centre. Good morning, Gareth. How would you assess the financial health of the hospitality sector in Northern Ireland?
Gareth Hetherington: Good morning, everyone. Thank you, Chair, for giving me the opportunity to give evidence online today; that flexibility is very much appreciated. I had the benefit of being able to listen in to the previous evidence session, and quite a lot of it was consistent with my understanding of the sector as well.
When I look at the sector, there are two different stories that are telling a different tale. Overall, demand within the sector has held up. 2025 has been a reasonably strong year in terms of overnight trips and visitor spend. However, that has to be put against the context that 2024 was a poor year. What we have seen with the last complete year of data is that 2025 is more of a recovery to where we were in 2023, rather than a continuation of year-on-year growth. Overall, demand is reasonably strong.
The other part of the story, which is consistent with what you have previously heard, is on the cost side of the business. The sector has been under considerable pressure. We did some research last year for the Northern Ireland Executive, and it primarily looked at costs around the national insurance contribution increases and the national living wage increases. That had an outsized impact in Northern Ireland generally, and it had an outsized impact in the hospitality sector in particular.
What I mean by that is the cost of employing a full-time member of staff on the living wage increased by approximately 10%. The cost of employing a part-time member of staff—this will obviously vary, depending on their hours—would increase on average by 14%. Northern Ireland, in the first instance, has the lowest average wage in the UK, so any increase in wage policy will have an outsized impact on Northern Ireland, but when we look at the hospitality sector in particular, entry‑level, minimum-wage, part-time work is largely the staffing model. That put significant cost pressure on the sector last year.
The Utility Regulator in Northern Ireland gave evidence to this Committee highlighting higher energy costs in Northern Ireland relative to other parts of the UK, which is putting significant margin pressure on businesses.
Q42 Chair: Gareth, just to pick up on one of the points you were making about the kind of people going into hospitality, working part-time, do you have the age demographics of that? The point I want to make is that national insurance contributions only kick in when somebody is 21. I wonder if you have dived into that data level as well, where you would say, “X amount of the sector are under 21; therefore that cost is not there”.
Gareth Hetherington: We did not look at the specific age demographics of the sector, but you have highlighted another important aspect, which is that for many people a job in the hospitality sector is their first job. Some will stay in that sector for the rest of their career, but it is incredibly important in terms of developing and delivering the skills—customer service skills, financial acumen, commercial skills, et cetera—that are of benefit to the much wider economy as those people stay in education, graduate, et cetera.
As I said, we did not look at the age demographics, but I do know that there is quite a bit of work that the sector is doing. Indeed the Government have set out strategies to develop the skills of people working in the hospitality sector, and also, very importantly, to create career pathways within the sector, to make it a more attractive long-term career option for people.
Q43 Chair: The Executive is developing those programmes?
Gareth Hetherington: That is correct.
Q44 Chair: It seems a shame that the youth jobs grant does not exist in Northern Ireland, because it is devolved. That is £3,000 that hospitality could avail itself of per young person who it takes on who has been unemployed for six months. Do you feel that the sector is also being impacted because of that kind of scenario?
Gareth Hetherington: The short answer is yes. There are a number of aspects in terms of Westminster policy that give benefits to the hospitality sector that allow the Barnett consequentials to feed through to the Executive. The Executive make different spending decisions in that regard, in terms of what to do with that money.
Q45 Chair: Do you think that is another reason why this campaign to reduce VAT down to 10% is a stronger case for Northern Ireland?
Gareth Hetherington: I am in favour of this as a pilot measure. There are a number of comments I would make in terms of this being considered as a pilot measure. I heard a lot of reasonable challenges from GB MPs on the Committee, and they are fair challenges. Northern Ireland is a unique part of the UK. There is a geographic separation from other parts of the UK that provides the basis where pilots in general could be applied.
Now, we are talking about taxation here today, but we could be talking about other public policy measures such as waiting lists, dealing with the long tail of under-attainment in our schools, or reducing economic inactivity. Pick a problem. Northern Ireland presents a good test bed for many of those measures to be considered. Obviously, it needs to be agreed between the UK Government and the Executive. That would be the first point that I would make.
In terms of a pilot, it would need to be for a reasonable period of time—a minimum of four to five years. There is a reason I say that. If it was shorter—let us take a step back. What is the objective of a lower VAT rate? From my perspective as an economist, it would be to encourage greater levels of investment from the sector. In the first instance, yes, it supports margin, but that enhanced margin is then used to develop increased investment and develop the quality of the tourism product.
If there is a pilot for a shorter period of time, individual business owners could reasonably draw the conclusion, “By the time my investment comes on stream 18 months or two years down the line, there is a high risk that the VAT is going to go back up again”, so they would just absorb and take the additional margin. We need a longer period of time to allow businesses to make those longer-term decisions.
Q46 Chair: You have outlined that the cost of doing business has changed for the hospitality sector over the past few years in Northern Ireland. You have done that really well. It has increased national insurance contributions, energy costs and minimum wage. Your analysis found that the hospitality sector was likely to be one of the most affected. Why is that sector the most affected?
Gareth Hetherington: It is certainly one of the most affected because it has a higher proportion of low-paid staff. Social care, for example, would be another sector that is very significantly impacted. What we have seen when we look at wage growth over the last four or five years is that, particularly when the living wage was introduced, that bottom decile or bottom quartile of the earnings distribution has increased at a faster pace than median wages. Therefore, if you have a sector that is weighted towards staff on lower earnings, then that increase is clearly good for staff, but that has a cost bearing on the businesses that employ them.
Q47 Gavin Robinson: Good morning, Gareth. It is good to see you again. You mentioned supporting margins and the aspiration that that leads to increased investment. You are an economist, so you are coming at it from a facts and figures point of view. Do you think the campaign itself is clear enough in the asks and the outworking if there were to be a policy change?
Gareth Hetherington: One thing that I would argue is missing from the debate are clear objectives about what the sector wants to achieve from this. The evidence is not fantastic around what will happen if VAT is reduced to 10%. In the recent examples during the pandemic, that that did not feed through to lower prices, although I do not think there was ever an expectation, particularly during the pandemic and the emergency circumstances that all businesses faced then, that that would happen. Listening to the previous panel, it is not clear that an outworking of this would be lower prices for consumers. Therefore, what would it be? What I would want to see is an enhanced tourism product, and greater levels of investment with that additional funding.
Q48 Gavin Robinson: You were right to highlight that there was a discussion earlier about some of the reflections that you might get from elsewhere in Great Britain around this. These questions are now about comparing and contrasting the economic situation that a hospitality business faces in Northern Ireland compared with that in England, Scotland or Wales. Are the rates levels that they face comparable?
Gareth Hetherington: GB hospitality businesses benefit from different levels or different forms of rates relief that are not available in Northern Ireland. The Executive have not found funding for those in Northern Ireland.
Q49 Gavin Robinson: I am going to ask you about that in a second. With those reliefs applied, does that bring English pubs, restaurants and bars to a level that is comparable with Northern Ireland businesses, or does that bring them to a level that is less than what comparable businesses in Northern Ireland pay?
Gareth Hetherington: Any of the analysis that we carried out did not look specifically at what that RHL grant or relief would bring from a comparative point of view, such as equivalent hotels. It probably varies across different parts of England and different parts of the UK. There is a member from Northumberland on the Committee. I suspect rates for a Northumberland hotel are probably lower than rates for a London city centre hotel, but we did not look at that analysis.
Q50 Gavin Robinson: If you listened to the earlier session, you will have picked up the frustration from Hospitality Ulster that they have engaged with the Minister and they have indicated to the Minister. They were talking of skills on this occasion. They were asking for comparable support in the skills sphere. Of course, this rate applies to the Department of Finance. John O’Dowd is the Minister there. Do you know what the value of the rates relief applied in England would be in Northern Ireland terms?
Gareth Hetherington: Again, we have not calculated that in detail. When I was listening to the previous session—I have to stress this is a very back-of-the-envelope estimate and you should apply margin for error accordingly—UK-wide, Treasury have costed it at approximately a £1 billion per percentage point reduction. A 10% reduction would be £10 billion. If we apply a simple population share to Northern Ireland, that £10 billion is about £300 million.
However, the Northern Ireland tourism sector is proportionately smaller as part of the overall economy than it would be in GB, so that would probably bring the cost down to around—this is very approximate—£225 million to £250 million. That is my estimate, but further work would be required from Treasury to be more precise.
Q51 Gavin Robinson: That is on VAT, but in terms of the current rates relief applied, was there a cost to Treasury for that? Was that funded additionally outside of the budget process? Was there a Barnett consequential for Northern Ireland?
Gareth Hetherington: That funding should have been made available through the Barnett consequentials, yes.
Q52 Gavin Robinson: But you do not know how much.
Gareth Hetherington: I do not know the number. I do not know that.
Q53 Claire Hanna: Gareth, would you be able to give us some analysis of the impact of the VAT differential in the north and south? Is it changing consumer behaviour in a meaningful way?
Gareth Hetherington: Some of the analysis that we did last year from an individual business perspective showed that, for a hotel of 100 to 125 rooms, obviously making reasonable assumptions around occupancy and charges, et cetera, on both sides of the border, the VAT liability in Northern Ireland would be approximately £500,000 a year more. That is obviously a very significant additional cost that those businesses would be having to face.
In terms of the behavioural impacts, I have not seen and I am not able to present any evidence to show how that is changing across the border or in the border region. The VAT rate was only reduced in July, so we are still at the very early stages of making an assessment on the impact of any VAT reductions. The lower VAT rate creates a more competitive tax environment in the south than is faced in the north. That will have a greater impact, obviously, in border regions.
Another important point that I would make in this regard is that we have to remember that most international visitors into Northern Ireland arrive on the island in the south, primarily in Dublin airport. You have visitors arriving on the island in a competitor jurisdiction with a more advantageous tax environment, so the gatekeeper for a lot of Northern Ireland tourists of an international nature is also the more tax‑advantageous region. That is an important aspect that perhaps has not come out in the debate thus far. The individual tourists will not necessarily be thinking about VAT differentials, but the tour operators will be, and those prices and costs are a factor.
It is certainly consistent with anything that I have read, but certainly with the evidence that came through before, that the VAT reduction in the south and the level of pass-through in terms of prices will be limited. What is then going to happen to the money? To go back to the previous point I made, what we could see in the medium to longer term is an enhanced tourism offering in the south, because they have greater funds to invest with greater margin.
Q54 Claire Hanna: Among those many factors is the ETA issue that Selina raised. I have two other quick questions. I asked Hospitality Ulster about whether they would propose a blanket application across their sector. Do you think there is any case for calibrating it, or targeting certain parts of the hospitality industry, either sectors or regions?
Gareth Hetherington: There is always an argument to try to target the relief or support where it is needed most. That has to be weighed against administrative efficiency. That would be probably the best way of describing it. Whenever you are starting to target particular parts of a sector, drawing and scoping that becomes quite a complex task.
I am not suggesting you are saying this, Ms Hanna, but there is a general sense that small is good and big is bad. I would step back from that. As the Restaurants Association of Ireland representative made clear, large international businesses employ local people. In Northern Ireland and more generally, we want to encourage greater levels of inward investment. What we do not want is to be creating an environment that is more disadvantageous for what would be larger international investors. If there is a way to target the support or reliefs within the sector, it should certainly be explored, but there is also a cost associated with that that needs to be considered.
Q55 Claire Hanna: My understanding is most of our multinationals are franchises anyway. It does not all go directly to Ronald McDonald, but he probably makes a fair few quid as well. I also asked them about a mechanism in the Windsor framework that allows the UK Government to vary VAT rates for Northern Ireland for competitivity reasons. Is that something you have explored? That is a political and a legal judgment, rather than necessarily an economic one, but is that something you are aware of and have any thoughts on?
Gareth Hetherington: Yes, my understanding is that the EU VAT rules apply in Northern Ireland in respect of goods, but hospitality is a service, so therefore VAT is a reserved Westminster policy lever. That is my understanding.
Q56 Claire Hanna: This was clearly not the intended purpose of that provision, but is it your understanding that it could apply and would therefore be a mechanism for the UK Government to apply a holiday here?
Gareth Hetherington: Yes, that is certainly my understanding. I would test that with HMRC, but that is my understanding, yes.
Q57 Mr Kohler: As you know, Hospitality Ulster is part of a wider UK campaign to cut VAT by half for hospitality businesses. As you have said, according to the Treasury, that comes to a cost of about £1 billion per percentage point, so £10.5 billion for halving VAT. Have you done any analysis as to how robust those figures are? Is it just simply working out how much VAT they are going to lose, or is it a more sophisticated calculation?
Gareth Hetherington: That is a Treasury number that it has identified. I am not in the business of querying Treasury estimates.
Q58 Mr Kohler: The rest of us are.
Gareth Hetherington: Treasury and HMRC would have access to all the data, and much more data than is publicly available or available to someone like me. That is an estimate that I would not be in a position to query.
Q59 Mr Kohler: As an economist, when a Government comes out with a figure like that, are the details of its analysis available, or are they kept within the Treasury rooms’ safes?
Gareth Hetherington: It varies. On some occasions an extensive level of data will be provided. In other instances only the high-level analysis or the result of the analysis is produced. Like anything—and this is the difficult part, whether you work in Treasury or outside Treasury—the difficult part is making an estimate of the behavioural change that will be associated. Relatively speaking, you can quite easily determine, “ere is the VAT raised from the hospitality sector. Let us call it £20 billion. Therefore, if we cut it in half, it will be £10 billion”, but then if we cut VAT in half, what changes? What do businesses do differently and what do consumers do differently? It is understanding that behavioural change that is the difficult piece in all of this analysis, which goes to, “Let us do a pilot in a relatively small part of the UK”—let us call it Northern Ireland—“and understand the impact there”.
Q60 Mr Kohler: You would have heard my questioning earlier. I am surprised, given that there is over a decade of data in the south, that a sophisticated analysis of exactly that has not happened already. Is that true? Has there been no sophisticated analysis?
Gareth Hetherington: No, not that I am aware of. That is not to say it has not happened. That is not to say that there is not information available within the Exchequer in Treasury and in Dublin, but I am not aware of it.
Q61 Mr Kohler: Is that not the Treasury’s answer to, “We do not need a pilot. It has been done in the south?” Should somebody actually be doing that work?
Gareth Hetherington: The UK operates as a single tax regime. There are a wide range of different fiscal policies in place in the Republic of Ireland, corporation tax probably being one of the most high-profile ones. The impact in the Republic of Ireland, while informative and instructive, would not necessarily point to exactly the same changes elsewhere in the UK, including Northern Ireland.
Q62 Mr Kohler: It would inform the debate, though, wouldn’t it?
Gareth Hetherington: Yes, it would.
Q63 Mr Kohler: As a London MP, I am asking the GB question: as an economist, what is your view on the call of UKHospitality to cut the VAT rate by half? Do you agree with the criticisms of Tax Policy Associates, for example?
Gareth Hetherington: I am generally supportive of tax reductions for business where we can reasonably conclude that there will be an overall economic benefit as a result of that. That goes back to my point previously about whether we would see prices fall as a result of that. Would there be fairly limited pass-through, or are we going to see increased levels of investment? In either of those two circumstances, there is an economic benefit associated with that, so therefore I would certainly be supportive of further analysis to be able to make that determination.
As you are finding out as a Committee, the level of detailed analysis and evidence is limited. It is not for me to pre-judge an outcome of this Committee inquiry, but a call for that analysis is certainly one thing that I would recommend.
Q64 Mr Kohler: As a non-economist, I was very impressed by Michael’s answer when he was asked about whether the reduction would go through to consumers. He made a point I would never have thought about: that with the big suppliers and the big organisations who work on fixed margins, they certainly will. They have the power. They have the market potential to maintain those fixed margins, and therefore they might well put the reduction through, while smaller employers with very different economic models would not. Is that a fair analysis of the difference between the big and the small?
Gareth Hetherington: I am not familiar with that analysis, so I would not want to comment. I would not want to either agree or disagree. In general, businesses tend to want to operate and make decisions for the long-term sustainability and profitability of their businesses. In some instances, passing lower tax costs on in the form of lower prices is the appropriate thing to do to retain market share. Large hoteliers operating in very competitive geographical markets, for example, will possibly be looking to provide a price-competitive offering. That will be very important. In those specific environments you are likely to see greater levels of price reductions.
You are probably going to see that at the budget end of any market, whether that is in hotels or restaurants, but as you move into the premium end of any part of the hospitality market, additional savings through lower tax liabilities would likely feed through to an enhanced service provision, rather than lower prices. They are not selling themselves on, “We are cheap”; they are selling themselves on, “We are good”.
Mr Kohler: That is really helpful. Thank you, Gareth.
Chair: Thank you very much, Gareth. That has been a very interesting session.