Looming Energy VAT Hike: A Perfect Storm for Irish Small Businesses?

The Irish government's decision to extend the reduced VAT rate on gas and electricity for small businesses until April 2025 offers a temporary reprieve. However, the looming increase to 13.5% in May 2025 threatens to deliver yet another blow to already struggling small businesses. Here's a comprehensive look at the situation, its implications, and how businesses can navigate the challenges ahead.

Double Whammy: Rising Costs and Shrinking Margins

While the VAT deferral provides short-term relief, it doesn’t address the core issue: the rising cost of doing business. Non-VAT-registered businesses—typically those under the €40,000 threshold for services or €80,000 for goods—will feel the pinch most acutely. Unlike VAT-registered businesses, they cannot reclaim the VAT they pay on energy bills, further squeezing their already thin margins.

This VAT hike arrives amidst other cost increases in 2025:

• Minimum Wage Hike: From January, the minimum wage will increase by 80 cents to €13.50 per hour, putting additional pressure on payroll budgets (click here for further detail).

• Pension Auto-Enrolment: The rollout in September introduces another layer of expense for employers.

• Statutory Sick Pay Extension: The number of statutory sick days could increase from 5 to 7 in 2025, with plans to expand further by 2026 (click here for further detail).

The Toll It Takes: Rising Insolvencies

Growing operational costs are already reflected in the alarming rise in business insolvencies. According to PwC, insolvencies increased by 35% during the first nine months of 2024, with retail businesses being hit hardest. The sector reported a staggering 77% spike in insolvencies during Q3 of 2024 compared to the first half of the year (click here for further detail).

Energy Costs: Still High Despite Wholesale Price Drops

While wholesale energy prices have declined since their 2022 peak, retail prices remain stubbornly high. According to Bonkers.ie, energy costs are still 70% to 80% higher than three years ago. Further compounding the issue, October 2024 saw increases in the Public Service Obligation (PSO) levy and the carbon tax on petrol and diesel.

Irish Energy Costs: A European Outlier

Ireland continues to contend with some of the highest energy costs in Europe. A report by BusinessEurope estimates that Irish energy prices in 2025 will be 13% higher than those in the UK and 36% higher than in France. This disparity is partly due to Ireland’s limited interconnection with the European electricity grid. The construction of the Celtic Interconnector cable aims to address this issue, but its completion is still years away.

Government Support Measures: A Case for Continuance?

To alleviate the burden, the government has introduced several measures:

• Temporary Business Energy Support Scheme and Increased Cost of Business Scheme provide direct assistance.

• Power Up Grant: A €4,000 grant for businesses in hospitality and retail was introduced in Budget 2025 (click here for further detail).

While these initiatives offer some relief, many argue that additional support—such as extending subsidies for small businesses—will be essential as costs rise and energy prices remain high.

Reconsidering the VAT Hike: A Step Too Far?

The reintroduction of the 13.5% VAT rate in May 2025 may not, on its own, spell disaster. However, combined with other financial pressures, it could prove to be the tipping point for many small businesses. Policymakers may need to reconsider or delay the VAT increase to provide much-needed breathing space.

Proactive Measures: Business Owner Responsibility

While government support is crucial, business owners can take proactive steps to mitigate rising costs:

• Utilize Available Resources: Organizations like the Local Enterprise Office and the Small Firms Association (SFA) offer grants, training, and expert advice.

• Shop Around for Energy Suppliers: Comparison tools like Bonkers.ie, Cost.ie, and procure.ie can help identify competitive energy deals (click here for further detail).

The looming VAT hike, coupled with increasing costs, creates a challenging environment for small businesses, especially in retail and hospitality. While government measures such as the Power Up Grant and energy subsidies help ease some of the burden, the long-term viability of these businesses may depend on continued support and proactive cost-saving strategies.

The completion of the Celtic Interconnector and further renewable energy investments offer hope for reducing energy costs in the future. However, a coordinated effort from both the government and businesses is required to navigate this perfect storm and ensure the survival of these critical contributors to the Irish economy.