1.          Executive Summary

The UK tourism industry is a major contributor to the UK economy, employing 10% of the UK workforce and generating 9% of UK GDP[1]. In Northern Ireland, tourism generates 4.9% of GDP, contributing £750 million to the local economy each year. The industry offers high numbers of entry level positions, provides training particularly for young people and is one of the few sectors where the majority of employees are women. It is a crucial source of income for many regions around the country providing economic sustenance to communities and businesses.

However, UK tourism is at a major competitive disadvantage compared to other EU countries, because VAT is applied at the standard rate of 20%, whereas nearly all other EU member states, including the Republic of Ireland, have implemented a reduced rate on visitor accommodation and, in many cases, on attractions too. High VAT rates artificially stunt the industry, putting job creation, economic growth and investment at risk.  The UK is ranked 140 out of 141 countries for price competitiveness in tourism,[2] yet the Government has taken no action despite the fact that the EU permits any member state to reduce tourism VAT without the need for any new legislation.

Having examined the impact of reduced rate of VAT on tourism using the Government’s own Computable General Equilibrium (CGE) model as well as our Dynamic Partial Equilibrium (DPE) model, the Campaign to Cut Tourism VAT is strongly of the view that reducing VAT on visitor accommodation and attractions will increase the UK’s competitiveness with the rest of Europe, create much needed jobs and grow GDP throughout the economy at a time of great need, with very low risk to Exchequer income.

This is not a call for preferential treatment for the tourism industry. Tourism is the only export subject to a domestic tax and, unlike other sectors, unnecessarily impeded by VAT.

The Campaign has gained widespread cross-party political support and has received recommendations from both the Culture, Media and Sports Affairs Select Committee and the Welsh Affairs Select Committee. But until now, the Government in Westminster has overlooked the Campaign and the benefits a reduction would have to the economy, and to the national tourism industry.

The Campaign is supported by all Northern Irish Parties, except Sinn Fein.  The Campaign is supported by the Northern Ireland Hotels Federation and Hospitality Ulster.

2.0.             What effect would a reduced rate of UK VAT have on the tourism and hospitality sector in Northern Ireland?

2.1. Job Creation: 2015 evidence based on the latest available ONS data suggests that a reduction in tourism VAT would create 2,600 new jobs in Northern Ireland alone, in turn providing an annual boost to the Northern Irish economy of more than £81 million.[3]

Second only to business services, the tourism and hospitality industry has made the greatest contribution to the UK’s private sector jobs recovery in every region of the country, accounting for 17% of all new jobs between 2010 and 2014.

The Nevin Model Associates outlines that across the UK, a reduction in tourism VAT will create more than 80,000 jobs in three years and over 123,000 new jobs in 10 years, many of which will be for young and low skilled workers. 

2.2. Training: A reduction in tourism VAT would create revenue for hospitality and tourism companies to invest in training. Training ensures staff have the skills to deliver a quality experience whilst raising the attractiveness of the industry.   Not only would training attract new people but it would also help retain staff, which continues to be an issue in the hospitality and tourism industry.   Hospitality and tourism employers continue to report skill gaps in the industry, therefore reducing tourism VAT provides the opportunity to provide tailored training to reduce this gap and increase productivity.

2.3. Investment in businesses: A reduction in tourism VAT would lead to further investment in the industry, improving overall quality in terms of staff training, accommodation and facilities, and therefore further improving the UK’s competitiveness.

2.4. Wages: One quarter of the tourism and hospitality workforce are on the minimum wage and a significant further proportion over of those over 25 earn between the National Minimum Wage and the new ‘Living Wage’ rate.

The introduction of the National Living Wage will have a considerable impact on the industry, especially for those smaller businesses with tight profit margins and limited price flexibility. A reduction in tourism VAT will enable employers to raise wages rather than reducing employment in response to the Living Wage.  This could lead to reducing employment for those over 25 in areas which will be most affected.  Not only would a reduction in tourism VAT support employers and employees but also the local economy.

2.5. Rural and Coastal markets: Unlike some industries, tourism benefits communities and economies which have not yet recovered from the 2008 recession. A reduction in tourism VAT would benefit those rural and coastal communities that depend on tourism the greatest, with the wider positive social benefits including reduced unemployment, a larger skilled workforce and local regeneration.

As in England, DCLG’s Multiple Deprivation Measure 2010 highlighted that many of the most deprived areas of Northern Ireland were coastal towns. Coastal communities and their economies face distinctive challenges. They are towns and communities very often on the geographical periphery, at the end of the country’s travel infrastructure, and must balance retaining their traditional tourist markets alongside embracing new economic and technological trends.

These communities also traditionally suffer from social and economic deprivation, experiencing high levels of unemployment and a high proportion of poor quality housing.

3.0.               To what extent would reducing the rate of VAT encourage tourists to visit Northern Ireland?

3.1 Many of the Campaign’s key supporters including Butlins, Merlin Entertainments and Premier Inn have pledged to pass on every penny following a reduction.  Competition within the tourism industry will compel other operators to lower prices in line with these industry leaders. This will increase consumer demand, leading to further investment and increased employment.

3.2 In May 2011, the Republic of Ireland reduced its rate of tourism VAT from 13.5% to 9%. The onset of the global economic crisis in 2007/2008 had contributed to a 25% decline in inbound tourist visits to the Republic of Ireland between 2007 and 2008. This reduction in VAT is widely credited with helping to arrest this decline and aiding the subsequent recovery. From the point of introduction, a lower rate of tourism VAT led to an increase in the number of inbound tourists to the Republic of Ireland.

Following the reduction, visitors from Northern Ireland to the Republic of Ireland grew by more than 21% from around 1.3 million in 2012 to 1.6 million in 2013. The growth in visitors from Northern Ireland has continued, totalling close to 1.7 million in 2014.[4]

A lower tax rate could encourage Northern Ireland residents to take holidays in the UK rather than traveling South to the Republic of Northern Ireland.  This would benefit the wider economy and provide residents with a larger variety of choice.

3.3 A reduction in tourism VAT and the pass through in the form of lower prices, will encourage tourists to stay longer and travel further from London, benefitting regional areas including Northern Ireland.

4.0.              What effect has there been in other countries that have implemented a reduced rate of VAT in their tourism and hospitality sectors?

4.1              The Government has not taken into account evidence from other EU states that have implemented successful VAT reductions.  At present 25 out of the 28 European Countries have at least one reduced rate of tourism VAT.  The UK, Slovakia and Denmark are the only three European countries not to apply a reduce rate.  Lithuania was the latest European state to reduced tourism VAT on 1st January 2015.

4.2              The rate of VAT on accommodation in the Isle of Man has been 5% since 1994 after the Conservative government at the time recognised that lowering VAT would help the tourism sector in the Isle of Man to compete more effectively. In particular, the low rate helps hotels in the Isle of Man remain competitive with those in the Channel Islands, which are not part of the EU and where VAT does not apply (though a 5% Goods and Services Tax does apply).

4.3              In France, VAT has been reduced on accommodation, attractions and restaurants. In 2009, following the reduction of VAT on restaurants, the French government, the industry and the unions, entered into a collaborative agreement called the ‘Contrat d’avenir’. The agreement stipulated that the top priority of the VAT cut was to improve wages and working conditions, with a second priority of increasing investment in the sector. The reduction of prices was only the third priority.

According to INSEE –France’s official office of national statistics – employment in the hotel and restaurant sector increased from 898,100 to 973,100, or by 75,000, between June 30th 2009 and September 30th 2011, which were the first nine quarters following the VAT reduction on restaurant meals from 19.6% to 5.5% on July 1st 2009. In addition to the net impact on job creation, President Nicolas Sarkozy declared on television in early 2012 that the VAT decrease had saved 30,000 cafés and restaurants that were struggling financially. The minimum monthly wage in the restaurant industry has been increased from €1,350 to €1,620, and annual staff turnover has fallen from 80% to 40%.

4.4              In the Republic of Ireland, the rate of VAT applied to certain tourism services reached a peak of 23% in the mid- 1980s, the second highest in Europe at the time. In 1986, the VAT rate on hotels was reduced from 18% to 10% and on restaurant meals from 23% to 10%. This stimulated a period of strong growth in the Irish Tourism industry after a period of stagnation. This rate was raised to 12.5% in 1990 and to 13.5% in 2004.  Despite a deficit far worse than that faced by the UK, Ireland further reduced its tourism VAT from 13.5% to 9% in May 2011.  The reduction, originally for only 18 months, was extended indefinitely in 2013 due to proven economic benefits.

The Irish government significantly overestimated the fall in VAT receipts caused as a result of the reduction to 9%. Actual VAT receipts in the 9% categories fell by €107 million in the first 12 months following the introduction of the reduced rate, and have been broadly flat since then. This compares favourably with the initial estimates that the rate reduction would cost €120 million in the final 6 months of 2011 and €350 million in a full year.   Professor Alan Ahearne, head of economics at the National University of Ireland, said the measure had proved to be a highly cost-effective way of boosting competitiveness and employment. He added that the cost to the Exchequer would have been recouped in other taxes.

Analysis of the impact of the VAT Reduction by Fáilte Ireland found that employment increased by 30,000 with direct tourism employment up by more than 20,000 and that pass through of the rate reduction to consumers is evident across nearly every category.  This provided renewed and sustained growth in overseas tourism numbers and earnings, whilst increasing activity levels across the industry. Conversely Northern Ireland came bottom of the UK job creation league in 2014.

4.5              At 20%, the UK’s rate for tourist accommodation is almost twice the European average of 10.8% and its rate for tourism attractions is a third higher than the current European average of 15.7%.  As a result the UK is ranked 140 out of 141 for price competitiveness.   It is testament that 25 European Member states have seen the benefit in reducing tourism VAT.

5.0.              What impact has the Republic of Ireland’s 9% VAT rate on tourism had across the border in Northern Ireland?

5.1              Following the introduction of a lower rate of tourism VAT in the Republic of Ireland in 2011, domestic tourism in Northern Ireland faced a continuing downturn. In 2012, the number of Northern Irish tourists remaining in Northern Ireland as a holiday destination decreased by 18,000. This decline continued into 2013, as domestic tourism rates fell by a further 38,000 trips.

The decline in domestic tourism in Northern Ireland in the years following 2011 mirrors the increase in inbound tourism in the Republic of Ireland. This is likely reflective of more Northern Irish tourists choosing to travel south in search of more affordable holidays.[5]

What specific services should benefit from a reduced rate of VAT? What should be excluded?

6.1 The Campaign to Cut Tourism VAT is calling for a reduction in visitor accommodation and attraction VAT rates. The power for EU Member State governments to reduce tourism VAT is designated in Annex III of EC VAT directive (2006/112/EC).

6.2 The permitted goods and services annex also allows a reduction of tourism VAT for restaurant services.  The Campaign is currently not campaigning for a reduction in VAT in restaurants.

6.0.              Would a reduction in the rate of VAT lead to a loss of tax revenue and, if so, how should this be paid for?

6.1. In 2012, Professor Adam Blake of Bournemouth University used the Computable General

Equilibrium (CGE) model owned by HMRC and used by HMT to compare the impact of reducing VAT on tourism with other measures aimed at boosting the economy. These included: 2p reduction in the standard rate of corporation tax, a 20% reduction in rates for employers’ national insurance contributions and a 1p reduction in the standard VAT rate.

He concluded that a tourism VAT reduction was “one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer that we have seen with the CGE model”.

Professor Blake’s conclusion was supported by an analysis undertaken by PwC in July 2014 which compared the effect on the economy and Treasury income of three measures, all using the same Government CGE model. Reducing tourism VAT was found to be significantly more effective than reducing corporation tax or reducing fuel duty, two measures proposed by Government.

7.2 A reduction of tourism VAT would increase the total revenue base on which VAT is levied as well as increasing corporation tax, national insurance and income tax receipts.  There will also be higher foreign exchange earnings and savings in benefits payments resulting from increased employment and expenditure in UK tourism by overseas visitors and domestic tourists

7.3 Initial Cost. Whilst the cost to HM Treasury of a reduction to 5% in VAT on accommodation and attractions is estimated to be between £0.5 and £0.75 billion in year one, research from Nevin Associates indicates that it will be revenue neutral in year two and fiscally positive thereafter.  By year 10, a reduction will generate £3.9 billion for the Exchequer.  Furthermore, we have been assured that the year one cost can be lowered because major businesses such as Premier Inn, Bourne Leisure and Merlin Entertainments are willing to pass through the whole benefit of the VAT reduction to the consumers, from day one.

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, there would be a net gain of £2.6bn.

7.4 Balance of Trade. Over a 10 year period the total improvement in the UK’s balance of trade as a result of a tourism VAT reduction would be £20.1 billion.[6]

7.5 Reduced shadow economy. While the UK’s VAT threshold increased in 2013/2014 to £79,000, it remains one of the highest in the EU. This increased to £81,000 in 2014/2015 with a deregistration threshold of £79,000.  Industry associations report that a large number of small B&Bs, guest houses and visitor attractions fall just below the VAT threshold as many of these businesses have an incentive to stay small enough to avoid the 20% VAT rate. If the rate were reduced to 5%, more companies would expand and move above the VAT tax threshold.

7.6 Higher direct and indirect economic growth. Greater spending in tourism and the wider UK economy will boost UK GDP by up to £4 billion per year. An economic boost to the tourism industry will also filter down to supporting industries; for every £1 spent in the tourism sector, another 70p will be spent in the wider economy.

7.7 Support a major export. Tourism is currently the UK’s sixth largest export earner, bringing in £24 billion annually, employing an estimated 3.1 million people and generating £127 billion for the economy (around 9.0% of the UK’s entire GDP in 2013)[7]. Yet, tourism is the only export subject to a domestic tax.

7.8 Immediate effect. The research shows that announcing a reduction in tourism VAT will have a significant positive effect before it becomes effective. This is because the industry will respond very positively to the announcement and will begin to invest immediately in decorative upgrades, taking on more staff and increasing wages. The HMT model shows that this impact will add £315 million to GDP and will add £77 million to fiscal income even before the VAT reduction is implemented.

If VAT is not reduced the UK’s share of international tourism receipts will continue to fall in comparison to other EU member states. Domestic tourism will continue to decrease as more people travel abroad for cheaper holidays. This will lead to lower revenues for businesses, meaning further redundancies, higher unemployment and lower tax receipts for the UK Government. Young and unskilled workers will find it increasingly hard to get a job and regions where tourism is a main source of income will be increasingly impoverished.

7.0.              What other tax changes could HM Government implement to support the tourism and hospitality industry in Northern Ireland, including the hosting of major international sporting events?

8.1 Any additional tax on top of the existing 20% VAT, such as bed tax, would directly discourage tourists from visiting. Additionally, 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.

8.2 With new major events such as the Open Championship coming to Northern Ireland, now is the opportune time for the Government to consider a reduction in tourism VAT for the UK. Reducing tourism VAT on accommodations and attractions would make hotel prices more affordable for visitors and will help towards boosting tourism.

18 November 2015

Annex A:

Rates of VAT in the Tourism Sector in EU Countries

Source: EC - VAT Rates Applied in the Member States of the EU and online sources situation at 21 August 2015

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