Implications of upcoming energy VAT hike for small businesses

In the 2025 Budget, the temporary VAT reduction on gas and electricity was extended to 30 April 2025.

This reduced rate of 9%, initially introduced in 2022, has been extended several times. This latest postponement further defers the increase to 13.5% that was originally slated for November 2024.

This article discusses the implications of the impending VAT increase for small businesses and whether these businesses will be able to cope with the increased financial outlay.

It covers:

• Increasing cost of doing business
• Rise in number of insolvencies
• Energy costs only going up
• Measures to help small businesses
• Don’t forget financial management
• Final thoughts

Increasing cost of doing business

The latest VAT deferral has kicked the can down the road for 6 months.

But come May 2025, the temporary reduction in VAT for gas and electric will cease. This will impact businesses that are not VAT registered, which is generally small businesses that are under the VAT threshold.

The VAT threshold (above which you’d need to register for VAT) is currently €40,000 turnover for services or €80,000 for goods within any continuous 12-month period, though there will be a slight increase in the threshold from January 2025.

Since such small businesses are not registered for VAT, they can’t claim it back. This means the VAT increase will be another added expense on top of a range of other costs that small businesses have been grappling with in recent years.

However there are additional complexities on who needs to register for VAT not covered in the scope of this article.

And there will no let-up in 2025.

As well as the VAT increase on gas and electric:

• There will be a further increase in the minimum wage in January (up by 80 cents to €13.50)
• There’s the introduction of pension auto-enrolment in September
• And, while still under consideration, there could also be an extension of statutory sick pay from 5 to 7 days.

Though the economy is considered to be in good health overall, there is a narrative that not enough is being done for small businesses and in particular for the retail and hospitality sector.

For instance, despite intense lobbying in advance of Budget 2025 to reinstate the lower VAT rate of 9% for tourism and hospitality, it didn’t happen.

David Broderick is Director of the Small Firms Association (SFA) and he believes that the rising costs are impacting small businesses.

For instance, the recent annual increases in the minimum wage are putting further wage pressure on companies as a whole.

He says: “It isn’t just about the employees on the minimum wage, it affects wages all the way up the chain, as an employee who is on a higher wage sees a narrowing gap with those on the minimum wage and in turn looks for a similar wage increase.”

Rise in number of insolvencies

Professional services firm PwC says insolvencies are up by 35% for the first 9 months to end of September 2024.

It also says retail is particularly impacted, with a spike of 77% in retail insolvencies during Q3 of 2024 over Q1 and Q2, with 1 in 4 insolvencies being in retail.

One factor that has contributed to the higher level of insolvencies is that the deadline for the repayment of warehouse debt was in May 2024.

This is the debt arising from the pandemic, when businesses were able to defer the payment of certain taxes, such as employer PAYE and VAT.

Energy costs only going up

It can be argued that since wholesale energy prices have fallen significantly since the peak in 2022, it is only fair to reintroduce the 13.5% VAT rate.

However, according to comparison and switching website Bonkers, energy prices are still around 70% to 80% above the level of 3 years ago.

And besides the upcoming energy VAT increase, other energy costs increased in October 2024, such as the Public Service Obligation (PSO) levy.

The PSO levy is a duty charged to all electricity customers to help finance renewable energy and while it was stalled since 2022, since October, a small business now pays €155 per year on energy bills and a medium/large business several thousand euro.

The carbon tax for petrol and diesel also increased from €56 to €63.50 per tonne and the increase will apply to all other fuels from May 2025.

Plus, to put this into context, Ireland already pays significantly higher energy costs than most other countries in Europe.

For instance, according to a recent report from BusinessEurope, 2025 energy prices are projected to be 13% higher in Ireland than in the UK and 36% higher than in France.

While Ireland has made significant progress in terms of developing renewables, Ireland’s low level of interconnection is a major disadvantage.

However, this is being addressed with the construction of the Celtic Interconnector cable between France and Ireland, which will provide Ireland with a direct link to Europe’s electricity supply.

Testing of the Interconnector is expected to start in 2026.

Measures to help small businesses

While there has been cost pressures on small businesses, efforts have been made to help.

Initiatives included the Temporary Business Energy Support Scheme, which was part of Budget 2023, and the Increased Cost of Business Scheme in Budget 2024.

In Budget 2025, the Power Up grant of €4,000 is available to businesses in the hospitality and retail sectors. This is in addition to a raft of other measures in the Budget designed to help businesses.

David from the SFA also points out that small and medium-sized enterprises (SMEs) had a big win in 2024. The government agreed on a new enhanced SME test, which examines how any new regulation or legislation will impact small businesses.

“If the proposed legislation or regulation does not pass the SME test, it needs to be relooked at or concessions must be given to SMEs, such as a deferral or exemption,” explains David.

New enhancements include increasing the prominence of the consultation step and a requirement to publish the findings.

Don’t forget financial management

Jane Cathcart runs an accountancy practice in Dublin, Jane Cathcart & Associates, which specialises in hospitality and she is well equipped for the job, having also run a restaurant herself for many years.

She agrees that the costs are mounting for hospitality and small businesses in general and for instance suggests that if the government is not prepared to reintroduce the 9% VAT rate for hospitality, then perhaps an 11% rate could be a compromise.

However, she also feels that many small restaurants are being badly managed financially and that any reductions in VAT rates are not going to save these businesses.

She herself has 50 restaurants and pubs on her books and 80% of them are doing very well.

Jane says: “Businesses need to remember the basics. The main thing to control in the restaurant business is your gross profit margin and wage margin.

“The rule of thumb when I started in the restaurant business many years ago was that wage costs should only be about 28% of your total turnover, whereas now it’s about 38%, but I have seen businesses where wages are as high as 63% of turnover. That’s not sustainable.”

Jane thinks that many people are going into the restaurant business with blinkers on, having a romantic notion about how it all works, and don’t realise the hard slog involved.

She feels that small business needs to use the tools available such as accounting software to understand and control costs.

Jane adds: “It is not complicated, the information is at your fingertips, and you just have to use it.”

Final thoughts

While the government is taking positive steps to alleviate the cost of energy, including significant investment in renewables and the construction of the Interconnector, the high cost of energy currently is a concern for small businesses.

Therefore, there may need to continue to be some form of subvention for small companies over the short term, especially in light of other increasing costs.

This may mean reconsidering the upcoming hike in the VAT rate.

While the VAT hike itself may not break the bank, it may be a step too far for a small business in this current high-cost environment.

However, companies also need to be proactive and access whatever supports there are.

The Local Enterprise Office offers a wide range of services, including grants and training programmes. The SFA is also a good resource and can offer advice on regulation, as well as free mentorship.

“There is help out there, but you have to take your head out of the day-to-day and make time to work on your business, as opposed to in your business,” says David.

Also, in terms of energy costs, it pays for businesses to shop around and there are several comparison websites that compare business energy prices, such as Bonkers.ie, Cost.ie, and procure.ie.