Price – VAT

Britain’s uncompetitive price position was highlighted twenty years ago and there have been consistent calls for reform. Two and a half years ago, we recognised that there was no early prospect of the introduction of a reduced level of VAT designed to stimulate the hospitality and tourism sector. The budget deficit was running at over 10% and the new coalition government had, after all, announced only four months earlier its intention to increase the standard rate of VAT to 20%.

With this in mind, we called for a reduced level of VAT ‘to be the subject of a detailed study on a jointly agreed basis’. A major analysis, commissioned by Bourne Leisure Group and Merlin Entertainments Group and undertaken by Deloitte/Tourism Respect, found that reducing VAT on visitor accommodation and attractions would create 80,000 jobs and generate a return to the Treasury of £2.6billion over 10 years. The BHA, together with Bourne, Merlin and BALPPA (the British Association of Leisure Parks, Piers and Attractions) joined forces and engaged with officials from the Treasury over the last eighteen months to undertake further research. We are appreciative of the fact that we have been able to use the Government’s Computable General Equilibrium (CGE) Model in our research.

The intellectual justification for a cut in VAT to 5% (the only reduced level that already exists) for hotel accommod ation and visitor attractions has been clearly established both in the Deloitte/Tourism Respect report and in the subsequent analysis undertaken by Professor Adam Blake of Bournemouth University (a Treasury advisor), using the Government’s CGE model. The key findings from this latest report are that the reduced VAT rate would be largely revenue neutral and boost GDP by £4billion a year, thus generating jobs. Indeed, in Professor Blake’s words, cutting tourism VAT is one of ‘the most efficient means of generating GDP gains at low cost to the Exchequer that I have seen with the CGE model’. Cutting VAT is the ‘big change’ required to put the hospitality and tourism economy on the higher rate of employment growth set out in this report. (Full details of the campaign and summaries of the Deloitte/Tourism Respect and Professor Blake reports can be found at the campaign’s website

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The table reveals that the UK’s hospitality and tourism sector continues to lag behind our key European competitors – France, Germany, Spain and Italy – in terms of price competitiveness. Our relative position remains the same as in 2010. (The EFTA countries – Iceland, Liechtenstein, and Norway - all have lower VAT rates on accommodation – 7%, 3.8%, and 8% respectively. Switzerland also has a rate of 3.8%). The fact that this has occurred against a background of governments across the EU cutting their budget deficits is revealing. Governments across continental Europe have broadly concluded that reduced VAT levels increase visitor activity and overall levels of revenue (indeed in recent years Germany has reduced VAT on accommodation from the standard rate and Ireland has further reduced tourism VAT rates). Although recent challenging economic conditions have led some countries to increase VAT rates on tourism services, in nearly all cases these rates remain substantially reduced from standard rates.

With the intellectual justification for a cut in VAT having been established, we are convinced that VAT should be cut now on accommodation and visitor attractions.

Whilst the VAT campaign has been focussed initially on accommodation and visitor attractions, we remain concerned at the level of VAT on restaurant meals – a key part of the visitor economy. We continue to believe that a compelling case can be made for reduced VAT on out of home meals due to the very large number of jobs that would be created and the growth in GDP. However, we recognise that the risk of losing VAT revenue is too high for the Government to contemplate in the present economic climate and we have suggested to HM Treasury that it makes sense to introduce reduced VAT on visitor accommodation and attractions first and to see these benefits accruing before an expansion of reduced VAT rates to other partsof hospitality and tourism.

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