Can you really pass on the Vat increase?
A change in the vat rate from 9% to 13.5% was announced in the recent budget. We have assessed the impact this will have on our food dominated customers.
In the scenario below I have given an example of a food business with a €1.2m turnover.
This illustrates a reasonable business model where the owner/directors would expect a 10% operating profit.
We would expect that after paying bank loan/rent and capital spend the business would generate €24,000 spare cash or additional profits for the owners of the business. After tax this would be a €12,000 net payment to the owner/directors.
As a comparative, I also illustrate what this same model would look like with a 13.5% vat rate where the price increases have not been passed on to the customers. As the vat rate goes straight of the bottom line this will lead to a cash loss of €15,648 – see below.
This highlights that most food businesses will have no choice but to pass on the vat increase to balance their books. The risk of customers not accepting the vat increase is a huge risk to marginal businesses.
Factors that should be considered:
1. The food business is not a business model where there is a tradition of passing on price increases based on budget changes – this is long-term accepted by the public in the pub trade.
2. There has been a huge number of businesses who opened up during the 9% vat regime so their business models were based on their current prices.
3. A large part of the food market in Ireland is the café/sandwich lunch market. This is an incredibly price sensitive part of the market and cannot be compared to the evening restaurant trade.
4. It’s important to remember that a large proportion of the food Industry is functional feeding of our domestic economy. I don’t consider myself a tourist as I grab my morning coffee on the way to work, so comparison to hotel prices and the larger hospitality market may be irrelevant.
5. Cork for example has 24 new food and beverage businesses opened in the city in 2017, whereas there hasn’t been a new hotel in Cork in 10 years with the first new hotel to open in Dec 2018. Competition will make passing on vat increases a very nervous time for business owners.