Revenue has confirmed a permanent reduction in VAT rates for food, catering and hairdressing services from 1 July 2026. It is designed to alleviate some of the pressure on SMEs, such as rising energy costs, higher wages and insurance, and declining sales, while also helping to maintain jobs and sector stability. The lower rate is also intended to help households manage cost‑of‑living pressures.
What’s Changing
According to the new guidance, the VAT rate will be reduced from 13.5% to 9%. A VAT rate of 9% was first introduced as a tax subsidy during the Covid-19 period, with the current rate of 13.5% re-established in September 2023. Unlike the previous 9% rate, which was more general and applied to hotel or similar holiday accommodation, it is more targeted and specifically applies to:
- Restaurant and café catering services (excluding alcohol, soft drinks, and bottled water)
- Takeaway food
- Hairdressing services
What’s Unchanged
Households and businesses will continue to benefit from the reduced 9% rate on electricity and gas bills until 2030. VAT rates on qualifying new build apartments will remain at 9%, effective from 8 October 2025 to 31 December 2030. This intervention aims to increase housing supply by making building apartments more viable to developers grappling with rising construction costs.
What it Means for Businesses
To prepare for the VAT reduction, businesses in hospitality, catering and hairdressing sectors should focus on the following:
- Update your pricing systems:
Businesses must update their Point-of-Sale (POS) and accounting systems to correctly apply the 9% rate to relevant items from July 1st, while ensuring items that don’t qualify (like alcohol or, in some cases, hotel accommodation) remain at the 23% or 13.5% rate. Miscalculating this can lead to penalties or unexpected tax debts.
- Improve Margins Transparently:
Businesses will need to decide how they intend to reflect the VAT reduction in their pricing, whether by passing savings on to customers or retaining some profit margin. All menus and service prices should be updated before 1 July 2026.Some businesses will understandably see an opportunity to offset increased energy, labour and operational costs. However, businesses should be mindful that if VAT drops from 13.5% to 9% and prices remain unchanged, customers may see this as unfair or opportunistic.
- Adjust Cash Flow Forecasts:
Businesses should be aware that the lower rate will mean slightly less VAT to pay to Revenue, which may affect cash flow timing. Because of the delay between collecting VAT from customers and paying it to Revenue, many businesses effectively use this as short-term working capital. A reduced VAT rate means less of this cash on hand, increasing the need for accurate cash flow forecasts to cover day-to-day operations.
Next Steps
With the 1 July implementation date approaching, businesses should take the following steps to prepare:
- Review product/service catalogues to identify which items will be affected by the reduced rate and update accordingly.
- Update internal systems, pricing labels and menus well in advance of 1 July.
- Ensure staff are aware of the changes and can clearly explain any pricing changes to customers.
How We Can Help
Our Accounting & Financial Advisory team are supporting clients in preparing for the upcoming VAT changes. Whether you need assistance reviewing VAT treatment, updating systems, or assessing the wider impact on pricing and cash flow, we can help ensure a smooth and compliant transition.
If you would like to discuss how these changes may affect your business, please contact us.
