The expected hike in VAT rates for hotels, restaurants and tourism outlets was confirmed today by Finance Minister Paschal Donohoe in his Budget speech.

Rates will rise from the existing 9pc to 13.5pc from January next.

Despite vociferous warnings from the hospitality sector, the minister said he had consistently flagged his intentions to end the low rate of VAT introduced in 2011 to boost the recession-hit sector.

He said the 13.5pc rate will raise €466m next year which will help the Government find more money for the "reprioritisation" of funds for housing, education, and childcare and to help balance the books at "a moment of national risk."

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Whatsapp Finance Minister Paschal Donohoe arrives to work on Budget Day 2019(Photo: Gerry Mooney)

But he sought to sugar the pill with a €35m give-back to the sector.

"I'm conscious these changes may present a challenge to the tourism and hospitality sector. This is why I'm allocating €35m to the Department of Transport, Tourism, and Sport in order to provide more targeted supports for the sector, including €4.5m for regional initiatives such as Ireland's Hidden Heartlands and the Wild Atlantic Way," he said.

He said nearly €10m will now be available to further develop greenways routes throughout the country.

He acknowledged the tourism and hospitality sector plays a key role in the Irish economy, providing balanced regional growth and supports nearly 240,000 jobs.

Tens of thousands of new jobs had been created in the sector in recent years. The stimulus of the reduced VAT rate over the past seven years had succeeded, he said.

Raising the tax income from the sector also helps reduce reliance of Corporation Tax, he said.

Tourism Minister Shane Ross is now expected to face calls to resign as the Restaurants Association of Ireland claims up to 27,000 jobs will be put at risk.

Independent.ie understands The Restaurant Association of Ireland will officially call on Mr Ross to step down at a press conference due to take place beside Leinster House today if VAT increases.

The Association is expected to say Mr Ross should "consider his role, particularly for tourism in light of his failure to protect the 9pc VAT rate".

A draft version of the statement also says the minister has "consistently failed to protect tourism and hospitality at the Cabinet table".

Fianna Fail's Finance Spokesman Michael McGrath said his party would abstain on the vote on the increase in VAT for the tourism sector and it had been "a difficult call" for the Government.

In 2011, the decision to reduce the rate to 9pc was needed, he said.

"While the 9pc rate was successful, it was always designed as a temporary crutch until the sector repaired itself," said Deputy McGrath.

"There is little doubt many businesses – particularly in the food sector – will not be able to absorb the increase and will have no option but to pass it on to consumers," he said.

"The tourism and hospitality sector has had the benefit of the reduced rate for seven years.

"In line with the obligations on us under the Confidence and Supply Agreement, Fianna Fáil will be abstaining on the vote," he said.

"As the 9pc rate comes to an end, it is worth remembering today how it was funded in the early years. A staggering €2.5bn was taken from the private pension savings of hundreds of thousands of workers and pensioners by the last government. This raid has had a lasting effect," he said.

"It has resulted in the pensions of many thousands of current pensioners and employees being reduced forever. This point needs to be borne in mind when this issue is debated," he said.

The Irish Hotels Federation called the VAT increase another blow for rural Ireland.

Michael Lennon, President of the IHF, said: "Have no doubt, this increase will hurt tourism across the country but businesses outside of Dublin will be hit the hardest. Regional businesses will bear the brunt, as about €300m of the €466m in additional taxes will be taken from the rural economy, which has been slower to recover from the economic crisis.

"This is a devastating blow for the many tourism businesses that struggle to break even or stay open outside the peak season."

Mr Lennon continued to state that he feels now is the time for investment in the sector.

"We understand that Government needs to raise taxes to pay for many social demands on the exchequer.

"However, we have argued that the best way to generate the additional funds needed for public services is to support growth in those business sectors, such as tourism, which are contributing.

"Time and again, tourism has shown itself to be one of the most effective ways to spread economic prosperity throughout the country and its successful recovery demonstrated its potential.

"Today’s short-term budget fix will have long-term implications for an important indigenous export industry and rural Ireland in particular," Mr Lennon said.

He continued to say that he fears that the VAT increase will cost people their jobs.

Mr Lennon explained: "Today the tourism industry supports over 235,000 jobs in every county and town, over 70pc of which are outside Dublin, generating over €2 billion in taxes for the exchequer each year.

"It is deeply disappointing and frustrating that despite the strong response of the tourism industry to the 9pc activation measure, it’s economic contribution and potential is no longer of importance to Government policy."

Jarlath O’Keefe, Head of Indirect Taxes, Grant Thornton, said the new measure will put increased pressure on our hospitality sector, particularly in the wake of Brexit.

He said in a statement this afternoon: "While no business sector would ever welcome a tax increase it is reasonable to assume that the hotel sector particularly in Dublin could sustain the increased VAT rate and continue to grow.

"There are some real concerns for the hotel sector generally – particularly around the impact of Brexit with a potential reduction in UK visitors and fluctuations in exchange rates. These could be very serious challenges for tourism businesses, most notably in the border regions.

"It should be noted that there is a real possibility that the UK authorities could, post Brexit, impose a lower rate of VAT on its tourism sector which clearly would put pressure on an already competitive market.

"One consideration that has not received much attention was that the Minister could have revisited the idea of a city tax to be applied to Dublin hotels rather than a general increase in the VAT rate. This may have allowed him to have taken a targeted approach to Revenue collection."

The Vintners’ Federation of Ireland echoed these concerns about how it could potentially leave our hospitality sector vulbnerable.

Padraig Cribben, Chief Executive, VFI, said in a statement: "Removing the 9pc VAT rate in today’s Budget is a kick in the teeth for the hospitality sector. It will introduce uncertainty and undermine confidence in many pubs selling food who are already worried about their exposure to the effects of Brexit.

"Publicans in areas of the country where the recovery is weak will be disproportionately affected...

"Today’s news is a hammer blow to our members who employ over 40,000 people and will have long term consequences. Removing this support to food operators at the stroke of a pen is a betrayal of all those who give everything in a high-risk sector."

The move will cause serious tensions between the Independent Alliance minister and his government colleagues in Fine Gael.

Mr Ross has been under intense pressure from tourism lobby groups over Finance Minister Paschal Donohoe’s plan to increase VAT from 9pc to 13.5pc on the hotel and restaurant industry.

Mr Ross and the Independent Alliance insisted rural hotels and restaurants should not be targeted as part of Mr Donohoe’s Budget revenue raising measures.

Independent Alliance sources have said Mr Ross is "furious" with Mr Donohoe’s refusal compromise on the Vat rate.

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