A parliamentary debate took place this morning in which various MPs lobbied for the reduced rate of VAT of 5% to be introduced for certain travel services in the UK, initially hotel accommodation and visitor attractions and later for pub and restaurant meals. This is a subject regularly commented on and there appears to be a strong body of evidence to suggest that, over a relatively short period of time, the upside across a number of areas would outweigh the initial dent in revenues.
The following key points were made in support of a reduction:
• The UK is one of only 4 EU Member States applying the standard rate of VAT to hotel accommodation
• According to a report written by a treasury advisor, Professor Blake, whilst the reduction would create a deficit in tax revenues in year one of around £640m, this would be offset in years 2 and 3 by an increase in tourists visiting the UK and spending more, adding £2.6bn to treasury coffers in 10 years. These figures are calculated using the Treasury’s own economic modelling methodology
• In addition to VAT revenues eventually increasing there would also be a significant benefit to the economy in the shape of job creation (particularly for the young), the ability to pay higher wages within the sector, a reduction in benefits payable to those currently unemployed, and an increase in corporation tax from more profitable businesses
• The current high VAT rate for hotels and visitor attractions means that businesses operating just below the VAT registration threshold (£79k) are not incentivised to grow their business in excess of the threshold
• In addition to applying the standard rate of VAT, the UK imposes high levels of APD and visa charges on visitors, meaning the UK loses out to more cost effective EU destinations when tourists are deciding where to holiday
• Business travellers e.g. those attending conferences, spend significantly more during trips to the UK but in deciding where to hold international conferences etc. are deterred by our higher VAT rate (albeit most business travellers can recover the VAT charged on hotel accommodation and venue hire)
The following points were made by the Treasury Minister against the proposal:
• The figures mentioned in the Blake report were brushed over and instead a deficit value in year 1 of £2bn on hotel accommodation alone was cited (this did not appear to take account of offsets mentioned in support)
• There is no evidence that the UK suffers from having higher VAT rates as it is still one of the most visited countries in the world
• The UK has the advantage of applying more VAT reliefs to passenger transport and to cultural activities than other EU countries
• France recently increased its relatively recently introduced 7% reduced VAT rate for restaurant meals to 10% – the suggestion being that the reduced rate had not increased overall revenues as anticipated
• The UK has the highest VAT registration threshold in the EU meaning many small businesses in the industry are not within the VAT net
In summary the Minister (supported by the shadow minister) made it clear that current strategy would simply not allow a deficit in VAT revenues to be created in the short term as this would increase the need for borrowing. This is an issue which will and should continue to be debated, the figures cited in the Blake report are convincing but in the current climate it is clear that there will be no progress whilst a reduction would create an initial deficit.
If you would like to discuss this area further or the impact of VAT on your travel business generally please get in touch with Julie Park on julie.park@thevatconsultancy.com or call on 0208 941 9200
