Nobody in their right mind would contest the vitality of tourism to the health of the wider UK economy, or question its considerable contribution. As the fourth-largest service industry in the country, it is responsible for employing an estimated 3.1 million people, or 9.6% of the workforce, and accounts for around 9% of the UK’s entire gross domestic product (GDP). From an export point of view, the value of travel expenditure by foreign visitors to the UK totalled £24bn in 2013, representing 12.4% of UK service sector exports and 4.7% of total UK exports. So, while its credentials are secure and generally well-known, what’s perhaps less prevalent on public consciousness is that, in one important regard, the tourism sector in the UK suffers a relatively more cumbersome burden than that of many of its European counterparts.
Comparison with Europe
Across the 28 Member States of the EU, the UK is at present one of only two (the other being Denmark) which levies the full rate of value-added tax (VAT) across the tourism industry. 19 countries have reduced rates for admissions to cultural attractions, while 13 have reduced rates for admissions to amusement parks. In total, 15 members have reduced rates for restaurant meals, while 25 have reduced rates for visitor accommodation.
Now, admittedly, the number of holidaymakers with knowledge of the VAT rates and various tax reductions and exemptions levied by European destinations is minimal, but the variations between member states can be anything but. Take for instance France, the world’s leader in international visitor arrivals, which levies a 10% rate for hotel accommodation, admissions to cultural services and restaurant meals, and a 5.5% rate for admission to cultural services — all generous deductions from its 20% headline rate. Other countries popular among British tourists, such as Italy and Spain, also offer 10% rates for hotel accommodation and restaurants, again favourable to their headline rates of 22% and 21%, respectively. Conversely, while Britain’s decision to charge its full 20% rate across the board may seem harsh, visitors to Denmark — where, like Britain, tourism VAT does not deviate from the headline rate — must pay 25%. Visitors to Hungary, which has the highest EU headline rate at 27%, face an even heftier cost, where for tourism purposes the only sector receiving reprieve is for hotel accommodation, at 18%. Luxembourg on the other hand levies a VAT rate of just 3% on the tourism sector. When comparing that to the UK rate of 20%, it should come as no surprise that we rank a miserable 140 out of 141 for price competitiveness relating to tourism.
Possible Effects of Reduced Tourism VAT Rate
The envious sorrow of some of the UK’s tourism bosses when comparing their hand with most of the rest of Europe has manifested to create the Cut Tourism VAT lobby group, which campaigns for a reduced rate of 5% on visitor accommodation and tourist attractions.
The group concedes that of course the move would result in tax revenues taking a hit, temporarily at least, but they also contend — arguably with embellished optimism — that in the longer-term, Treasury revenues from tourism would actually increase in the aftermath of such a cut, with an estimated additional £3.9bn raised over 10 years, attributing such growth to an expected rise in visitor numbers. In addition, the supposed greater level of spending in tourism and the wider economy would produce estimated GDP gains of up to £4bn annually, not to mention an anticipated 123,000 new jobs.
All good news for the economy, but made under the perhaps hopeful assumption that the vast majority of establishments will pass on all or most of any cut to consumers. Of course, in all likelihood, with visitor numbers already strong, there would be no such rush to pass massive savings onto consumers, with the money saved by tourism establishments instead being spent elsewhere, namely increased investment in their operations and profit maximisation, the first of which would be no bad thing.
Naturally, a reduction in VAT for tourism has been a goal of the industry for years, despite successive Governments rebuffing this quest. Indeed, the Treasury’s reluctance to suffer a temporary fall in revenue from the tourism sector is understandable, from a political point of view at least. In the drive for fiscal consolidation and a balanced budget, would questions not be asked regarding the Government’s priorities if a generous stimulation was given to the tourism sector, while, simultaneously, public-sector spending cuts endured and similar concessions were refused to other perhaps more worthy sectors? It is worth noting, of course, that the promise of additional jobs and economic growth in the event of tax cuts is hardly a characteristic exclusive to only the tourism industry.
As a final consideration, given the relative strength of the UK tourism sector, and with the number of tourists typically increasing year-on-year, the Government can hardly be said to be under any immediate pressure to alter the status quo and take a hit on vital tax revenues, even if only temporarily. Therefore, is it not the case that the tax cut dreams of the industry might seem to be, at least for now, quite some distance on the horizon?
Tom joined the company in January 2014 as a Writer & Analyst, and specialises within the travel, transport & motor goods sectors.