The Tax Strategy Group (TSG) has said that reducing the VAT rate on food, accommodation and similar goods and services may not be the most appropriate approach when capacity of restaurants and pubs is reduced.
The TSG says the call for a reduced rate from the sector is understandable as it has been tried and tested and is associated with what is perceived as the successful implementation of the lower rate from 2011 to 2018.
But it says a review carried out in 2018 found the VAT rate is particularly sensitive to income growth and to the economic cycle.
"The purpose of reducing VAT rates is to lower prices and stimulate demand," it says.
"Providing for a reduced rate of VAT in circumstances where restaurants and pubs are subject to considerable restrictions around social distancing, hygiene measures, continued limitations on travel, etc may not be the most appropriate approach when capacity is reduced to a proportion of pre-crisis levels at a time when there is likely to be pent up demand."
"In other words, the binding constraint on firms' revenue generation capacity is likely to be derived from public health restrictions, rather than a lack of demand."
It also says that while a group of representative bodies has called for a reduction in the VAT rate applied to hospitality, and its extension to sales of alcohol in the on-trade, this could give rise to different rates of VAT applying to the 'on' licence and 'off' licence sales by traders engaged in both.
"This would create substantial scope for abuse and unfair competition on the part of non-compliant traders," it says.
The report says that last year VAT accounted for approximately €15,120 million or approximately 25% of the overall tax yield to the exchequer.
However, this year, total taxation revenue is expected to decline to pre-2017 levels in 2020 and in this context, the estimate for the VAT yield in 2020 is €12,305 million.
Ireland has the joint fourth highest standard rate of VAT in the EU, at 23% it says and the 13.5% rate is the fourth highest reduced VAT rate in Europe.
It estimates that the cost of reducing or increasing the 9% rate by 1% would be €+/-7m. The cost of increasing or decreasing the 13.5% rate by 1% would be €+/-281m, while the cost of increasing or decreasing the 23% rate by 1% €+/-436m.
Zero rated goods could raise €497m if put on a 5% rate, €894m if allocated a 9% rate, €1.342bn if given a 13.5% rate or €2.286bn if placed on the 23% rate.
If the 0%, 9%, 13.5% and 23% rates were merged into one composite rate without generating any more or any less tax, that rate would be 16.87%.
Streamlining the rates to new rates of 0%, 5%, 15% and 25% would yield €1.286bn, but if the 0% rate was dropped the yield would be €1.834bn.
However, the group warns that increasing VAT rates could negatively impact on inflation, employment, the less well-off and cross-border trade.
To help smaller businesses, the group says a rise in the threshold under which firms do not need to pay VAT until payment for the supply is received, would cost €27m if increased to €2.25m from the current €2m and €95m if increased to €3m.
In the first scenario, 457 businesses would benefit, while under the second 1,436 would benefit.
The report also says that other EU member states adopted a range of actions to support businesses and people through the Covid-19 emergency, including reducing VAT rates in respect of goods and services required to combat the virus, delaying VAT return deadlines and/or relief on interest on late payment of VAT returns and increasing frequency or speed of VAT refunds.
The group suggests Ireland could consider increasing the frequency of filing from bimonthly to monthly in orderly to enable faster returns.