VAT reduction campaign gathers pace

Also featured in The Courier Business Matters magazine on 27 October 2015

Since 2012, there has been a growing campaign by the hospitality industry advocating the introduction of a lower rate of VAT for tourism related services. Supporters of the cut argue that this would allow hotels, restaurants, pubs and visitor attractions to cut prices, and in turn boost sales and employment in this sector, the result of which would encourage growth in the economy as a whole.

While the UK government’s ability to change VAT rates is largely restricted by the EU, there are a limited number of areas where EU rules allow governments to implement a reduced rate of VAT. One of these is certain supplies associated with tourism; specifically hotel accommodation, certain restaurant services, and some types of admission charge, including charges for entry to amusement parks. Several EU member countries take advantage of this rule to charge a lower rate of VAT on these supplies, including Ireland, which introduced a 9% rate in July 2011. This was initially introduced as a temporary measure that was due to expire in 2013, but this has been extended indefinitely.

The UK is one of only four countries not to take advantage of a reduced rate for tourism, which means that British families and international visitors are paying more than double the level of VAT than those visiting our nearest neighbours, and almost three times as much as those visiting France or Germany. As a result of the UK failing to adopt a reduced rate in the sector, British businesses in the tourism sector are continuing to lose out to other European nations in attracting both domestic and international holidaymakers.

One proposal being put forward calls on the UK government to cut the level of VAT on food and drink in the hospitality sector from 20% to 10%. One survey states that a cut to 10% would result in around 425,000 new jobs being created across the UK in the pub, restaurant, catering, and visitor accommodation sectors in the next three years.

As a labour-intensive industry, the tourism and leisure sector is a leading employer. It frequently appeals to younger people at the start of their careers, and more than 44% of people employed in the sector are less than 30 years old. It is believed that a reduction in the rate of VAT would create demand, as custom would increase across the sector as a result of lower prices, and this increase in demand would result in increased job creation. A similar situation was proven in Ireland, where the introduction of the reduced VAT rate for tourism produced an extra 10,000 jobs in the first 12 months since the reduced rate began.

As well as creating jobs, a reduction in the VAT rate would arguably actually increase overall revenue to the Government rather than reduce it. Research by Deloitte/Tourism Respect calculated that lowering the rate of VAT on tourism related services to 5% could contribute as much as £2.6bn net to HM Treasury over 10 years, from higher tourism, increased personal taxes, and increased corporation tax as a result of improved profit in the sector. It is still unclear whether the UK government will adopt such a proposal, but with names such as JD Wetherspoon, the British Hospitality Association, The First Minister of Wales and the Liberal Democrats backing the reduction, the campaign for change is growing in strength.