Cut Tourism VAT

Cut tourism VAT, boost british jobs


Some quick answers to frequently asked questions about the campaign.

What is different about VAT?

Unlike most aspects to do with taxation, VAT is regulated by the EU. Reduced rates can only be applied to a limited range of goods and services specified in the regulations.

So hotels and attractions are included amongst those services that can have a reduced rate?

Yes. The permitted goods and services include:

• Accommodation provided by hotels and similar establishments including the provision of holiday accommodation and the letting of camping sites and caravan parks,

• Admissions to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities

• Restaurant services

Why have most countries applied reduced rates of VAT to tourism?

Most EU governments recognise that:

1. Tourism is highly price-sensitive and subject to intense international competition; reducing VAT leads to lower prices which increases tourism demand, and this can stimulate other parts of the economy

2. Increasing tourism in this way is a highly cost-efficient way of creating jobs, and these jobs span the socio-economic spectrum.

3. Direct revenues foregone because of the reduced VAT rate by government treasury departments can be more than made up by tax income from increased employment and company profits and by reduced social security payments for the unemployed.

So how would you summarise the impact of a VAT reduction?

In short, a reduced rate of VAT would:

1. Generate higher levels of employment, with increased wage levels and training. These benefits would occur throughout the age and socio-economic spectrum and throughout the UK.

2. Increase additional tax receipts as a result of this additional employment with consequential savings on social security payments.

3. Increase profits, corporation tax payments and shareholder dividends.

4. Lead to further investment in the industry, improving overall quality and therefore further improving the UK’s competitiveness.

5. Feed through to higher expenditure in other sectors of the economy, which in turn will generate further tax receipts – the ‘tourism multiplier’. Every additional £1 of tourism expenditure generates 70p of extra expenditure in other sectors of the economy,

Why should tourism be singled out for preference by the UK government?

On three main counts:

1. The higher rate of VAT in the UK makes the UK uncompetitive with nearly all other European competitor countries.

2. Tourism is the only export which is subject to a domestic tax.

3. The independent study by Deloitte/Tourism Respect forecasts that if VAT were reduced to five per cent for visitor accommodation and attractions, 78,000 full time equivalent jobs will be created in the accommodation and attractions sector.

But what will happen if VAT is not reduced on hotel accommodation and visitor attractions?

If VAT is not reduced, it’s likely that:

1. The UK’s share of international tourism receipts will continue to fall in comparison with European competitor countries.

2. The decline in domestic tourism expenditure by UK residents will continue (inflation adjusted domestic tourism expenditure fell by four per cent per annum between 2000 and 2008, before recovering slightly in 2009).

3. The decline in the proportion of total UK tourism expenditure spent on holidays at home relative to holidays abroad will continue. This has fallen from 50 per cent of total UK tourism expenditure in 2000 to 36 per cent in 2008.

All three scenarios conflict with the prime minister’s stated aims for UK tourism and the aim of the government’s tourism strategy.

Doesn’t reducing VAT just mean that operators will make more profits?

In a survey of BHA members in January 2012, over 95 per cent of over 200 respondents said that if a five per cent VAT rate was achieved some or all of it would be passed on. 82 per cent said they would invest more in their product/facilities, 67 per cent would employ more people, 57 per cent would invest more in training and just under half (48 per cent) would increase staff wages.

Competition within the sector eventually compels operators to lower prices. The Copenhagen Economics study analysed six case studies where a VAT rate reduction had occurred. The report concluded that: ‘…there is little doubt that permanently lowering the VAT rate on particular goods (or services) sooner or later will lead to a reduction in the price of the goods more or less corresponding to the monetary equivalent of the lower VAT rate … In economics jargon, there will be a strong tendency towards full pass-through.’

(‘Pass through’ here means that the full impact of the reduction in VAT is reflected in lower prices equivalent to the reduction in VAT.)

Similarly, there is little doubt, according to Copenhagen Economics, that the price cuts that result from a permanent lowering of VAT rate will lead to increased consumption and consequently to increased production and employment. Such increases will occur more rapidly and be more significant in sectors with high price elasticity, strong competition and labour-intensive sectors. Tourism displays all three of these characteristics. It can typically take two to three years for this full effect to be realised.

So, would a guarantee by the hospitality and attractions industry to reduce prices be effective?

Rack rates exist but many hotels operate yield management systems which use flexible pricing strategies which increase or reduce prices according to demand, similar to the airlines but unlike manufactured goods which normally have a standard price. A room selling at £100 at a time of slack demand may well rise to £200 at peak demand; as a result it may appear that the level of VAT has had no impact when, in fact, the benefit will be there but not obvious.

What about bed taxes?

In Europe and North America, bed taxes have been contemplated or initiated mainly at the city rather than at national level, so the impact on overall national or pan-European tourism has been limited. In some cases the experience has been that bed taxes have been counter-productive in that they increase overall price, making destinations uncompetitive – in exactly the way that occurs with high rates of VAT. Examples of where a bed tax has been introduced and subsequently removed include Rotterdam and the Balearic Islands.

How much will it cost the government to reduce VAT on hotels and visitor attractions?

According to the estimates in the Deloitte/Tourism Respect, report, the government will lose up to £1.2bn in foregone VAT per annum. However, as soon as the VAT reduction measure is introduced, it will set off a virtuous growth cycle – prices will come down, stimulating increased demand, leading to recruitment, investment and expansion in the sector. According to our detailed fiscal model, income will be generated for the Treasury that more than compensates for the foregone VAT revenue. HMT begins to recoup its investment within three years and, over a ten year period, this would become a net gain of £2.6bn.

But if London hotels are operating at 80 per cent plus average year-round occupancy, why do they need a reduction in VAT?

It’s not just London hotels that will benefit. Provincial hotels, which operate at ten per cent lower occupancy, will also gain. The major factor keeping London hotel occupancy high is the rate of exchange which has greatly encouraged overseas visitors to the UK. This benefit has over-ridden the negative impact of the rise in VAT to 20 per cent but it reinforces how competitive international tourism is.

And it is not only hotels. Visitor attractions and all other forms of visitor accommodation will benefit including self-catering, B&Bs, holiday camps, caravan and chalet parks, camping sites.

In any case, if exchange rates stay as they are and London hotels continue to trade at high occupancy levels, this will stimulate further hotel construction which, in turn, will create jobs in construction as well as jobs in the new hotels – all the time increasing London’s capacity to host visitors.

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