The current VAT regime for hotels and restaurants in the Irish Republic is "one of the worst in Europe" and is a barrier to tourism, according to the Irish Hotels' Federation (IHF).
The current rate of 13.5% is the second-highest in the euro zone, and hoteliers and restaurateurs aren't permitted to recover any of that tax on legitimate business expenditure, the IHF said.
Its representatives have appealed to Irish finance minister Brian Cowen to end this anomaly in next month's budget and to reduce VAT to 10%. The IHF warned that the sector was being put at a serious disadvantage, even to its nearest neighbour, Northern Ireland, when competing for business.
Official figures for August showed a 3.5% drop in overseas visitors to Ireland, compared with the same month last year. Tourism Ireland marketing director Joe Byrne expressed concern that numbers from the UK, Ireland's largest market, were down by 2.4% for the month, but claimed that cheap flights to low-cost destinations were a significant factor.
"Cheap flights from the UK have been an advantage for Ireland for several years, but that advantage is now being extended to our competitors," he said.
IHF chief executive John Power, who wants to see a g15m (£10.4m) increase in the tourism marketing budget as well as a cut in VAT, said the latest figures showed Ireland was facing "a major marketing challenge" in the UK. "We need to be cleverer and more innovative in our thinking," he added.