International Tax Review Article on UK Tourism VAT
This article originally appeared on the International Tax Review on 18 February 2014. The original article can be accessed here.
By Aaran Fronda, ITR.
David Gauke, Exchequer Secretary to the Treasury, has rejected a 15 percentage point cut in VAT for the tourist sector, despite evidence it will boost GDP, create jobs and increase fiscal revenue.
The proposal was brought to the government’s attention by campaign groups and members of Northern Ireland’s Social Democratic and Labour Party (SDLP).
Northern Ireland has been hit hard by the UK’s high VAT rate of 20% – the third highest in Europe – because it competes directly with the Republic of Ireland, which cut its VAT rate for the tourism sector to 9%.
Sammy Wilson, member of Parliament for the Democratic Unionist Party, told the Belfast Telegraph: “A reduction in VAT rates for our pubs, restaurants and hotels is something I have been in support of since my time as finance minister in Northern Ireland.
“I will continue to lobby for this reduction at Westminster so that businesses in Northern Ireland are given a fighting chance to stay afloat and compete with their counterparts in the Republic of Ireland.”
The Republic of Ireland also plans to scrap air passenger duty, as well as a reducing visa charges.
Twenty-four out of 28 EU member states have chosen to reduce tourism VAT, but the UK remains reluctant to follow suit.
“The government seems to agree that a lowering of the tourism VAT rate will create growth, but they are concerned there will be a small dip in fiscal income in the first year, and to cover that dip, the government would have to partake in further borrowing, something it is keen to avoid, said Graham Wason, chairman of Cut Tourism VAT.
“However, it is going ahead with other measures, such as incentives for North Sea oil exploration, reducing corporation tax and reducing income tax bands, all of which cost them more per pound than reducing tourism VAT, according to their own treasury model.”
The UK already has a reduced VAT rate of 5% applied to a small range of goods and services, such as insulation materials, domestic fuel, and hotels in the Isle of Man.
However, despite pressure being mounted on Westminster, it is unlikely that a regional cut could be made in Northern Ireland, because under EU VAT law, any cut must be applied uniformly across the UK.
“The UK government is not convinced of a causal link between the VAT rate and tourism activity, although there is a clear VAT differential between operators in Northern Ireland and those south of the border, said Mark Agnew of Baker & McKenzie.
“The only option currently available for the UK is the single reduced rate of 5%, which is a large drop from 20%. It is possible that a new rate of, say, 10% or 12% could be implemented which would require Parliament to legislate for this additional reduced rate. Some other countries operate a two-tier reduced rate system with the higher of the reduced rates applying to hotels and restaurants.”
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